    [Senate Hearing 111-194]
    [From the U.S. Government Publishing Office]

                                                            S. Hrg. 111-194

      FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR FISCAL
                                   YEAR 2010

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

                                    HEARINGS

                                    before a

                              SUBCOMMITTEE OF THE

                COMMITTEE ON APPROPRIATIONS UNITED STATES SENATE

                         ONE HUNDRED ELEVENTH CONGRESS

                                 FIRST SESSION

                                       on

                               H.R. 3170/S. 1432

        AN ACT MAKING APPROPRIATIONS FOR FINANCIAL SERVICES AND GENERAL
    GOVERNMENT FOR THE FISCAL YEAR ENDING SEPTEMBER 30, 2010, AND FOR OTHER
                                    PURPOSES

                                   __________

                      Commodity Futures Trading Commission
                           Department of the Treasury
                        General Services Administration
                       Securities and Exchange Commission
                         Small Business Administration

                                   __________

             Printed for the use of the Committee on Appropriations

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

                                   __________
                          COMMITTEE ON APPROPRIATIONS

                       DANIEL K. INOUYE, Hawaii, Chairman
    ROBERT C. BYRD, West Virginia        THAD COCHRAN, Mississippi
    PATRICK J. LEAHY, Vermont            CHRISTOPHER S. BOND, Missouri
    TOM HARKIN, Iowa                     MITCH McCONNELL, Kentucky
    BARBARA A. MIKULSKI, Maryland        RICHARD C. SHELBY, Alabama
    HERB KOHL, Wisconsin                 JUDD GREGG, New Hampshire
    PATTY MURRAY, Washington             ROBERT F. BENNETT, Utah
    BYRON L. DORGAN, North Dakota        KAY BAILEY HUTCHISON, Texas
    DIANNE FEINSTEIN, California         SAM BROWNBACK, Kansas
    RICHARD J. DURBIN, Illinois          LAMAR ALEXANDER, Tennessee
    TIM JOHNSON, South Dakota            SUSAN COLLINS, Maine
    MARY L. LANDRIEU, Louisiana          GEORGE V. VOINOVICH, Ohio
    JACK REED, Rhode Island              LISA MURKOWSKI, Alaska
    FRANK R. LAUTENBERG, New Jersey
    BEN NELSON, Nebraska
    MARK PRYOR, Arkansas
    JON TESTER, Montana
    ARLEN SPECTER, Pennsylvania

                        Charles J. Houy, Staff Director
                      Bruce Evans, Minority Staff Director
                                     ------

           Subcommittee on Financial Services and General Government

                     RICHARD J. DURBIN, Illinois, Chairman
    MARY L. LANDRIEU, Louisiana          SUSAN COLLINS, Maine
    FRANK R. LAUTENBERG, New Jersey      CHRISTOPHER S. BOND, Missouri
    BEN NELSON, Nebraska                 LAMAR ALEXANDER, Tennessee
    JON TESTER, Montana                  THAD COCHRAN, Mississippi (ex
    DANIEL K. INOUYE, Hawaii (ex             officio)
        officio)

                               Professional Staff

                            Marianne Clifford Upton
                             Diana Gourlay Hamilton
                           Melissa Zimmerman Petersen
                            Mary Dietrich (Minority)
                            Rachel Jones (Minority)
                           LaShawnda Smith (Minority)

                             Administrative Support

                                Molly Barackman

                                    Detailee

                               Richard P. Burkard

                                C O N T E N T S

                                  ----------

                             Tuesday, June 2, 2009

                                                                       Page
    Securities and Exchange Commission...............................     1
    Commodity Futures Trading Commission.............................    43

                             Tuesday, June 9, 2009

    Department of the Treasury:
        Office of the Secretary......................................    69
        Internal Revenue Service.....................................   123

                             Tuesday, June 16, 2009

    Small Business Administration....................................   161
    General Services Administration..................................   191
    Material Submitted Subsequent to the Hearings....................   225

      FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR FISCAL
                                   YEAR 2010

                                  ----------

                             TUESDAY, JUNE 2, 2009

                                           U.S. Senate,
               Subcommittee of the Committee on Appropriations,
                                                        Washington, DC.
        The subcommittee met at 10:33 a.m., in room SD-138, Dirksen
    Senate Office Building, Hon. Richard J. Durbin (chairman)
    presiding.
        Present: Senators Durbin, Tester, and Collins.

                       SECURITIES AND EXCHANGE COMMISSION

    STATEMENT OF HON. MARY L. SCHAPIRO, CHAIRMAN

                     statement of senator richard j. durbin

        Senator Durbin. Good morning. I'm pleased to convene this
    hearing on the fiscal year 2010 funding request for two key
    Federal regulatory agencies within the jurisdiction of this
    Appropriations Subcommittee on Financial Services and General
    Government, the Securities and Exchange Commission (SEC) and
    the Commodity Futures Trading Commission (CFTC).
        I also want to welcome my friend and my distinguished
    Ranking Member Senator Susan Collins. We have worked together
    in many venues, and I'm glad that we're going to share the
    responsibilities of this subcommittee.
        Joining us today to present testimony on the two budgetary
    proposals are the Honorable Mary Schapiro, Chairman of the SEC,
    and the Honorable Gary Gensler, Chairman of the Commodity
    Futures Trading Commission.
        Both of these agencies enjoy unique histories, hold
    specialized and independent responsibilities and take different
    approaches to markets that serve different purposes, yet the
    CFTC and SEC both occupy pivotal positions at the forefront of
    stimulating and sustaining economic growth and prosperity.
        We are enduring an extraordinary set of circumstances in
    our Nation today. We are beginning to slowly emerge from one of
    the greatest economic crises in decades. After years of
    struggle, countless families have lost their hard-earned
    savings, seen their dreams deferred and even denied.
        Some may view the subject matter of this hearing as dry as
    dust, how much money to give to two Federal agencies, but if
    you step back for a moment and translate their work into the
    real world, realize that their oversight and their regulation
    literally protects the savings and futures of American families
    and ensures that economies in countries around the world will
    view our economy and the way we run it with respect to as to
    whether or not the rule of law is going to be followed.
        The unprecedented price volatility of our markets for
    fiscal commodities, such as energy and grains, has hurt our
    economy, in addition to the previous mention I made of some of
    the problems that we've had with savings and the like.
        Now perhaps more than ever, we need our markets to function
    transparently and be insulated from manipulation and unfettered
    excessive speculation. Much remains to be done to stabilize and
    sustain our financial system.
        Chairman Schapiro and Chairman Gensler each bring vast
    experience to their new leadership posts in this administration
    and have undoubtedly identified in their brief tenure ways to
    improve the way we approach regulating securities and futures
    markets.
        As the subcommittee prepares to make difficult funding
    decisions, I look forward to hearing about the challenges their
    agencies will face.
        In the interest of time, I am going to ask that the
    remainder of my statement be made a part of the record so that
    we will have opportunity for testimony and for questions.
        [The statement follows:]
                Prepared Statement of Senator Richard J. Durbin
        The CFTC and the SEC enjoy unique histories, hold specialized and
    independent responsibilities, and take different approaches to markets
    that serve differing purposes. Yet the CFTC and the SEC both occupy
    pivotal positions at the forefront of stimulating and sustaining
    economic growth and prosperity in our country.
        Market users, financial investors, and the U.S. economy rely upon
    vigilant oversight by these two agencies in today's evolving--and often
    volatile--global marketplace.
        We are enduring an extraordinary set of circumstances in America
    today. We are beginning to slowly emerge from one of the greatest
    economic crises since the Great Depression. After years of sweat and
    struggle, countless families have lost their hard-earned savings,
    seeing their dreams daunted, deferred, and even denied.
        When a man named Bernard Madoff can, over the span of 10 or 20
    years, lure investors into what has turned out to be a Ponzi scheme,
    causing many of them to lose millions of dollars, and his wrongdoing
    goes unnoticed by major regulatory agencies, it is clear more has to be
    done.
        When some of the major ratings agencies that gauge whether a
    company is doing well basically ignore their responsibility and fail to
    make accurate reports, everyone loses as a result of it.
        The unprecedented price volatility of our markets for physical
    commodities, such as energy and grains, has hurt our economy. Now--
    perhaps more than ever--we need our markets to function transparently
    and insulated from manipulation and unfettered excessive speculation.
        The Obama administration recently announced a comprehensive plan to
    significantly regulate credit default swaps and other over-the-counter
    derivatives. Exempting these investments from regulation has proven to
    be a costly mistake--contributing to the $180 billion taxpayer bailout
    of AIG, the collapse of Lehman Brothers, and the demise of Bear
    Stearns.
        This proposal will require far more transparency and responsibility
    from derivatives traders that have long operated in the shadows.
        Things are still very fragile. Much remains to be done to
    stabilize, repair, and sustain our financial system on which we all
    depend. It will take time to redeem the lost faith of the American
    people in the government institutions they expected would protect them.
    But I believe we are moving forward with resolve toward a brighter
    economic course.
        I appreciate the fact that Chairmen Schapiro and Gensler have each
    accepted President Obama's call to be part of the economic leadership
    team to help craft a more reliable regulatory framework and guide us to
    a better future.
        Both Chairmen bring vast experience to their new leadership posts
    in this administration--and have undoubtedly identified, even in their
    brief tenures, ways to improve the way we approach regulating in the
    securities and futures markets.
        As the subcommittee prepares to make difficult funding decisions
    for the next fiscal year, I look forward to hearing about the
    particular challenges their respective agencies face in today's
    tumultuous economic environment. I welcome their input on how we can
    best help to address those needs.
        Before hearing from our panelists, I'd like briefly outline the
    missions of these agencies and their budget proposals:
        Turning first to the SEC, its three-prong mission is to protect
    investors; maintain fair, orderly, and efficient markets; and
    facilitate capital formation. The SEC is the investor's advocate.
        The SEC is responsible for overseeing more than 12,000 publicly
    traded companies, over 11,300 investment, nearly 8,000 mutual funds
    with $9 trillion in assets, fund complexes, 5,500 broker dealers with
    over 174,000 branches, 10 credit rating agencies, and close to $44
    trillion worth of trading conducted each year on America's stock and
    option exchanges.
        The strength of the American economy and our financial markets
    depends on investors' confidence in the financial disclosures and
    statements released by publicly traded companies. Investors expect the
    SEC to be the vigilant ``cop on the beat.'' Regrettably, in many
    respects, we let them down. I have faith in Chairman Schapiro's
    leadership and tenacity to turn things around.
        This subcommittee wants to make certain that the SEC has the
    necessary resources to effectively fulfill its obligatory singular
    mission: protecting shareholders.
        The SEC's budget request for fiscal year 2010 totals $1.026
    billion, an increase of $8.8 million, or 8.8 percent over the agency's
    fiscal year 2009 enacted level of $943 million. This proposed fiscal
    year 2010 budget would fund 3,692 FTE, just 40 more than the current
    year funding permits.
        Crucial to the SEC's effectiveness is its enforcement authority.
    Each year the SEC brings hundreds of civil enforcement actions for
    violations of the securities laws, such as insider trading, accounting
    fraud, and providing false or misleading information.
        Serious, thoughtful questions have been raised about whether the
    proposed enforcement budget is adequate to keep pace with the growing
    demands.
        Second, the CFTC: The CFTC is charged with protecting the public
    and market users from manipulation, fraud, and abusive practices. It is
    also responsible for promoting open, competitive, and financially sound
    markets for commodity futures.
        The CFTC helps ensure that the futures markets are equipped to
    better perform their vital function in the U.S. economy--providing a
    mechanism for price discovery and a means of offsetting price risks.
        The CFTC's oversight and enforcement mission becomes tangible when
    you consider that futures prices impact what we pay for the basic
    necessities of our daily lives: our food, clothing, shelter, fuel in
    our vehicles, and heat in our homes.
        This year--2009--marks the 35th year since the establishment of the
    Commodity Futures Trading Commission. At the time of its inception in
    1974, CFTC's 500 employees were tasked with the mission of ensuring
    fair practices and honest dealings on the commodity exchanges of
    America's then-$500 billion futures industry.
        Today it is a $22 trillion industry that looks vastly different.
    Yes, the traditional agricultural products like wheat, corn, soybeans,
    and the proverbial pork bellies are still part of the picture. But the
    landscape has been remarkably altered and diversified with novel and
    complex commodities . . . everything from grains to gold, currencies to
    carbon credits.
        In the past decade, trading volume has increased more than ten-
    fold--reaching well over 3.4 billion trades in 2008, and actively
    traded contracts have quintupled--from 286 in 1998 to 1,521 in 2008.
    CFTC oversees $5 trillion of trades--daily.
        Adding to this challenge is a significantly transformed globalized,
    electronic, and round-the-clock marketplace. Moreover, the emergence of
    derivatives and hedge funds have altered the regulatory environment.
        Layered on this are new authorities added through the 2008 farm
    bill, coupled with escalating public angst about record energy and
    agricultural commodity price hikes and fluctuations, and a growing
    influx of financial funds into the futures markets.
        Further complicating the picture are transactions that the CFTC
    currently has no power to presently regulate--the vast ``shadow'' world
    of over-the-counter derivatives--like credit default swaps.
        Surprisingly, what hasn't changed is the number of staff. Despite
    the phenomenal surge in volume and activity, CFTC staffing levels have
    simply not kept pace. In fact, staffing levels have dropped by over 20
    percent. CFTC's workforce--like its predecessor over three decades ago
    in the agency's fledgling years--presently numbers only 500.
        For fiscal year 2010, the President's budget request funding for
    the CFTC of $160.6 million. This represents an increase of $14.6
    million--a 10 percent hike--above the fiscal year 2009 enacted level of
    $146 million.
        Of the $14.6 million in increased funding for next year, $7.4
    million is slated for increased compensation and benefit costs for a
    staff of 572; $0.2 million will be devoted to increased operating costs
    for information technology modernization, lease of office space, and
    other services; and $7.8 million will support the salary and expenses
    of 38 additional full-time staff.
        Last August, I had the opportunity to visit the CFTC's Chicago
    Regional Office. I met with a group of dedicated staff committed to
    doing outstanding work under challenging circumstances. I learned
    first-hand just how thin the staffing is.
        The CFTC's Chicago market surveillance staff consisted of 10
    economists who conduct daily oversight of each actively traded market
    and 6 trading specialists who process the daily reports detailing
    traders' actual positions in each market.
        These economists are responsible for surveillance of over 1,250
    different commodity futures and option contracts, of which 325 are
    active, involving 13 different commodity types. The commodities
    underlying the futures contracts the staff must monitor are highly
    diverse--including grains, livestock, lumber, currencies, Treasury
    instruments, equity indexes, single stock future, and dairy. More
    recently, weather derivatives, real estate indexes, and environmental
    products such as carbon credits and emission allowances became part of
    their portfolio.
        A single staff economist must cover many markets. For example, one
    staffer is responsible for 10 grains, one for 90 currencies, and one
    for the surveillance of over 500 hundred single stock futures. Aside
    from supervision by the chief of the Chicago surveillance section and
    Washington, DC supervisory personnel, there is limited redundancy built
    into the system. As a consequence, each one of those economists is
    critical.
        The six trading specialists maintain an extensive daily data-
    gathering and verification system by collecting reports from exchanges,
    futures industry firms, and traders. As our energy debate in Washington
    throughout the last Congress demonstrated, this data collection is very
    important to the Commission's oversight and to market transparency.
        As I pledged since assuming the Chairmanship of this committee, I
    am serious about addressing the resource deficiency facing this agency.
        I will appreciate hearing from both Chairmen their honest
    appraisals about the resources they will require to achieve their
    missions, keep pace with change, and becomes as sophisticated as, if
    not more so, than the entities they monitor--while responsibly managing
    taxpayer dollars.

        Senator Durbin. And I now turn it over to my Ranking
    Republican Member, Senator Collins.

                       STATEMENT OF SENATOR SUSAN COLLINS

        Senator Collins. Thank you, Mr. Chairman.
        Let me begin by saluting you for your leadership on this
    subcommittee. I am just delighted to be your new ranking
    member.
        About two decades ago, I spent 5 years in Maine State
    government as a financial regulator overseeing the bureau of
    banking, insurance, securities administration, and I have a
    great personal interest in this area because I know that the
    decisions made by the SEC and the CFTC do, as you have pointed
    out, have such an impact not only on our economy but on the
    daily lives of most American families.
        So it's a great honor to serve with you as your ranking
    member and I very much look forward to working cooperatively
    with you throughout this Congress.
        As we begin to consider the fiscal year 2010 budget
    requests for the SEC and the CFTC, let me also salute the
    chairman for his leadership in securing significant increases
    for both of these agencies.
        Thanks to the work of this subcommittee and the chairman's
    leadership, the budget for the SEC is now nearly 9 percent
    above the fiscal year 2007 funding level and the budget for the
    CFTC is 49 percent above that year.
        These increases are extremely important, given that both of
    these agencies were woefully underfunded for years. I
    personally believe that they're still underfunded and that more
    work needs to be done.
        I want to congratulate the two chairmen for appearing
    before our subcommittee today with aggressive agendas for
    change and reform. I look forward to hearing the details about
    the budget requests.
        As the chairman has indicated, the current economic crisis
    has left our markets in turmoil and the loss of trillions of
    dollars of value in these markets has depleted family savings,
    shuttered small businesses and damaged retirement and pension
    funds.
        I am convinced that we not only need to make sure these two
    agencies have the resources necessary but that we need to
    proceed with regulatory reform, as well, in order to restore
    confidence in our markets and to prevent the root causes of the
    current financial crisis from springing up once again.
        Mr. Chairman, I am going to follow your lead and submit the
    remainder of my statement, as well, but I am delighted to be
    joining you to work on these critical issues.
        Thank you.
        [The statement follows:]
                  Prepared Statement of Senator Susan Collins
        Good morning. At this first hearing of our subcommittee, I want to
    thank you, Chairman Durbin, for your leadership. This Subcommittee has
    jurisdiction over a diverse group of agencies, many of which have a
    profound impact on the financial stability of our economy and on the
    lives of most Americans. So it is an honor to serve with you as Ranking
    Member of this subcommittee, and I look forward to working
    cooperatively with you during this Congress.
        Mr. Chairman, as we begin to consider the fiscal year 2010 budget
    requests for the SEC and the CFTC, I want to salute you for your
    leadership in securing significant increases for both these agencies
    during your chairmanship of this subcommittee. Thanks to your hard-
    fought efforts, the budget for the SEC is now 8.9 percent above the
    fiscal year 2007 funding level, and the budget for the CFTC is 49
    percent above the fiscal year 2007 level. These increases were
    extremely important, given that both of these agencies had been
    woefully underfunded over the years.
        Chairman Schapiro and Chairman Gensler: Congratulations and thank
    you both for appearing before our subcommittee today. I look forward to
    hearing the details of your fiscal year 2010 budget requests and the
    key efforts that you plan to undertake this year. You both have crucial
    roles in our economy: SEC, by protecting the public through enforcement
    of securities laws, and CFTC, by protecting market users and the public
    from fraud, manipulation, and abusive practices related to the sale of
    commodity and financial futures and options.
        Protecting investors is more compelling than ever since many first-
    time investors have turned to the markets to help secure their
    retirements, pay for homes, and send their children to college.
        Our current economic crisis has left our markets in turmoil. The
    loss of trillions of dollars in value in these markets has depleted
    family savings, shuttered small businesses, and damaged retirement and
    pensions funds.
        Chairman Schapiro, I am troubled by reports that an environment of
    lax oversight and enforcement at the SEC was a contributing factor to
    the current financial crisis. For example, some investment banks were
    allowed to become over-extended, which led to the collapse of several
    of Wall Street's largest banks. The Bernard Madoff ponzi scheme went
    undetected for decades, resulting in $50 billion in investor losses. So
    Madam Chairman, I am pleased that you have developed an ambitious
    agenda of management reforms for the Commission, and I am interested in
    hearing what resources you need to accomplish these reforms.
        Chairman Schapiro and Chairman Gensler: You both have challenging
    tasks in front of you. You must improve transparency in our securities
    markets and uncover fraud and deception, while not over-regulating our
    markets and hindering our economic recovery. I look forward to working
    with both of you, and with Chairman Durbin to ensure that you have the
    resources and the tools you need to ensure investors are protected and
    that markets are functioning properly.
        I look forward to your testimony and I thank you for your service
    to our Country.
        Thank you, Mr. Chairman.

        Senator Durbin. Thanks a lot, Senator Collins.
        Senator Tester, would you like to make an opening
    statement?
        Senator Tester. Thank you, Mr. Chairman.
        Just to welcome Mary and Gary to the subcommittee today. I
    appreciate the work that you have done and I appreciate the
    work you are about to do. I think it's critically important
    that we have good, solid, reasonable enforcement and I think
    both of you are up to that challenge.
        So with that, we'll move on. Thank you, Mr. Chairman.
        Senator Durbin. Thank you, Senator Tester.
        Chairman Schapiro, the floor is yours.
        Ms. Schapiro. Chairman Durbin, Ranking Member Collins, and
    Senator Tester, thank you very much for the opportunity to
    testify today.
        In the short time that I've been at the SEC, we have taken
    on an active agenda, all with the goal of protecting investors,
    revitalizing the agency, and restoring confidence in the
    markets. We are making great strides, yet recognize that we
    have quite a distance to go.
        In the area of enforcement, we have changed our policies so
    that our investigators do not have to jump over unnecessary
    hurdles before seeking penalties or launching investigations.
    We have hired a former Federal prosecutor to lead the
    Enforcement Division, someone who is focused on bringing
    significant cases with a meaningful impact as quickly as
    possible and ensuring that the Division is appropriately
    organized to do just that.
        We have begun to update our management systems, to upgrade
    our risk assessment capabilities so that we can better detect
    fraud, and we have expanded and improved upon our training so
    that our staff will be able to keep pace with the new financial
    products and strategies created on Wall Street.
        Already we are seeing results. Since the end of January, as
    compared with the same period last year, we have filed nearly
    three times as many temporary restraining order cases, issued
    more than twice as many formal orders and opened over 20
    percent more investigations into fraud.
        Although enforcement is central, it is still just one part
    of our agency. As you know, we are tasked with overseeing
    broker-dealers, investment advisors, and mutual funds, and we
    are taking steps to improve our ability to do just that.
        For instance, we are working on a risk-based initiative to
    improve our oversight methods so that we can better identify
    and focus resources on riskier institutions. We also are
    recruiting senior professionals with new skill sets, such as
    trading, risk assessment and financial analysis, and we have
    created an Industry and Risk Management Fellows Program to
    bring top talent into the agency.

                            SEC'S RULEMAKING AGENDA

        In addition to internal management directives, we also have
    engaged in an active rulemaking agenda. Last month, the SEC
    proposed significant changes to the rules governing investment
    advisors who maintain custody of their clients' assets.
        Should the proposals be adopted, advisors with custody will
    have to undergo a surprise exam by an independent public
    accountant once a year to verify client assets and any
    custodian affiliated with an advisor would also be subject to
    custody controls reviews by an independent accountant. The goal
    is to expose Ponzi schemes and other frauds earlier.
        In the area of short selling, the Commission unanimously
    voted to propose two distinct approaches to limit short
    selling. One would impose a permanent market-wide short sell
    price test, the other approach would impose temporary short
    selling restrictions upon individual securities during periods
    of severe price declines.
        Later this month, the SEC will consider proposals to
    strengthen the money market fund regulatory regime. We will
    focus on tightening credit quality, maturity and liquidity
    standards for money market funds.
        We're also exploring whether more fundamental changes are
    necessary, such as converting money market funds to a floating
    rate net asset value to better prevent abuses and avoid runs on
    the funds.
        Additionally, I have asked the staff to undertake a
    comprehensive review of rule 12(b)(1) which allows mutual funds
    to use fund assets to compensate broker-dealers and other
    intermediaries for distribution and servicing expenses.
        In the area of proxy access, the Commission already has
    proposed rules that would enhance the ability of shareholders
    to nominate company directors and next month we will take up a
    broad packet of corporate disclosure improvements around
    compensation policies, the use of compensation consultants, and
    the interplay between risk-taking and incentive arrangements.
        But there is still more to do in the regulatory arena. We
    have been working closely with other Federal agencies to bring
    the unregulated world of credit default swaps into the
    sunlight.
        Operating under the limitations of the current legislative
    structure, we recently issued temporary orders to facilitate
    the establishment of central counterparties for clearing credit
    default swaps.
        In the coming months, we will also tackle issues related to
    municipal market reform, stock lending, trading in non-
    transparent markets or dark pools, and hedge fund oversight. I
    look forward to working with Congress on these issues.

                       RESOURCES NEEDED FOR SEC'S MISSION

        The financial crisis has reminded us all just how large,
    complex and critical to our economy the securities markets have
    become. At the SEC, our 3,700-person staff now oversees more
    than 35,000 registrants, including about 12,000 public
    companies, 8,000 mutual funds, 11,000 advisors, and 5,000
    broker-dealers, and it is a number that is growing rapidly.
        Nonetheless, during this same period the SEC's resources
    have fallen. Between 2005 and 2007, the agency saw 3 years of
    flat or declining budgets and lost 10 percent of its employees.
    This has an impact.
        With support from this subcommittee during the last 2
    fiscal years, the SEC has been able to lift its hiring freeze
    and begin rebuilding its workforce, and I am very grateful for
    that support.
        But even with these important steps, the number of staff
    remains below the levels of only a few years ago. I believe
    additional resources are essential to restoring the SEC as a
    vigorous and effective regulator.
        The President has requested a total of just over $1 billion
    for the agency in fiscal year 2010, a 7 percent increase over
    this year's level. This budget request would permit us to fully
    fund an additional 50 staff positions over 2008 levels. These
    positions would help the SEC's Enforcement Program enhance its
    pursuit of tips and complaints and fully fund our new Fellows
    Program that brings in seasoned industry professionals.
        In addition to expanding our workforce, the President's
    request also would enable us to invest more in new technology,
    a budget item that has dropped by more than one-half in the
    last 4 years.
        Mr. Chairman, I came to the SEC to shape public policy in
    the interest of investors and to strengthen our Enforcement
    Program. The measures I have described today are important to
    those efforts, but what I have also discovered is that we
    cannot neglect the internal operations of the agency, the
    processes that guide our work and the agency's infrastructure.
        I am committed to a complete review of the internal
    operations to ensure that we meet the highest standards and
    that we are fully supporting the important work of our
    employees. To ensure that we do it right, I intend to bring in
    a chief operating officer to manage that process.
        I want to thank you for your continued strong support of
    the SEC and its critical mission. I believe that by
    strengthening our Enforcement Program, enhancing risk-based
    oversight, and leveraging technology, we can restore investors'
    confidence in both the SEC and in our Nation's securities
    markets.

                               PREPARED STATEMENT

        I look forward to answering your questions. Thank you.
        Senator Durbin. Thanks, Chairman Schapiro.
        [The statement follows:]
                     Prepared Statement of Mary L. Schapiro
        Chairman Durbin, Ranking Member Collins, Members of the
    Subcommittee, thank you for the opportunity to testify today. I
    sincerely appreciate the support this Subcommittee has shown the
    Securities and Exchange Commission, and I am pleased to have the
    opportunity to discuss with you the Commission's role in helping to
    address the financial crisis, and to discuss reforms to improve
    investor protection and restore confidence in our markets.
        The last year has been a wrenching time for the investors whom the
    SEC is charged with protecting. Trillions of dollars in wealth have
    been destroyed during the economic downturn, and millions of Americans
    have seen their retirement nest eggs and college tuition funds shrink
    dramatically as a result. The economic crisis has challenged faith in
    our system of capital formation and allocation--a system that has
    proved over the long term to be the greatest for creating wealth the
    world has seen.
        As an agency charged with protecting investors, maintaining fair,
    orderly and efficient markets, and facilitating capital formation, we
    are dedicated to understanding and learning from recent events and from
    the causes that were building in the system over the years, so that we
    can do our part to restore market integrity and investor confidence.
    The SEC must act promptly, decisively, and with resolve. We also must
    have a renewed commitment to protecting investors; they provide the
    capital used to fund the productive enterprises that create jobs and
    wealth. While we have a tripartite mission at the SEC, investor
    protection is the foundation upon which all our responsibilities are
    built.
        To that end, I've already announced several changes at the agency
    that will reinforce our focus on investor protection and market
    integrity and redirect our energies toward restoring investor
    confidence.
                         reinvigorating sec enforcement
        One of my very first actions as Chairman was to end the 2-year
    ``penalty pilot'' program, which had required the Enforcement staff to
    obtain a special set of approvals from the Commission in cases where
    the staff sought fines against public companies that violated the law.
    Some enforcement staff had complained that the procedures unnecessarily
    delayed the prosecution of cases, and discouraged the staff from either
    seeking a penalty or seeking an appropriately high penalty. At a time
    when the SEC needs to send a clear message that corporate wrongdoing
    will not be tolerated, and penalties for securities violations will be
    stiff, the penalty pilot program was an unnecessary hurdle to more
    active enforcement.
        Another change I implemented to bolster the SEC's Enforcement
    program was to provide for more rapid approval of formal orders of
    investigation, which allow SEC staff to use the power of subpoenas to
    compel witness testimony and the production of documents. In
    investigations that require the use of subpoena power, time is of the
    essence; delay can be costly to an investigation. To ensure that
    subpoena power is available to the staff when needed, the agency has
    returned to a policy of timely consideration of formal orders by the
    seriatim process or, where appropriate, by a single Commissioner acting
    as duty officer.
        In addition, I have hired a new enforcement director, a longtime
    Federal prosecutor who served as Chief of the Southern District of New
    York's Securities and Commodities Fraud Task Force, charged with
    focusing our enforcement efforts on bringing meaningful, high impact
    cases quickly. We are working together on management reforms--including
    harnessing technology, improving risk assessment, and improving
    training and supervision for our line law enforcement personnel--so
    that we can maximize our resources to combat fraud and wrongdoing in
    our markets. Our Division of Enforcement has been working diligently.
    Since the end of January,
      --We have filed at least 34 emergency temporary restraining orders.
            During roughly the same period last year, we filed 12.
      --We have opened more than 358 investigations. During roughly the
            same period last year, we opened 292.
      --The Commission has issued at least 188 formal orders. During
            roughly the same period last year, the Commission issued 74.
        Since January, we have brought a number of important and complex
    cases. For example, in the Reserve Fund matter filed in May, we charged
    certain operators of the Reserve Primary Fund, a $62 billion money
    market fund whose net asset value fell below $1.00 or ``broke the
    buck'' last fall, with fraud for failing to provide key material facts
    to investors and trustees about the Fund's vulnerability as Lehman
    Brothers Holding, Inc., sought bankruptcy protection. As part of this
    action, we are seeking to bring about an expedited, efficient, and
    equitable pro-rata distribution to shareholders of the Fund's remaining
    assets, including $3.5 billion originally set aside in the Fund's
    litigation reserve.\1\ We believe this will help Reserve Fund investors
    recover a larger share of their assets.
    ---------------------------------------------------------------------------
        \1\ SEC v. Reserve Management Company, Inc., et al., Lit. Rel. No.
    21025 (May 5, 2009).
    ---------------------------------------------------------------------------
        In March, we initiated a case alleging fraud in connection with a
    kickback scheme involving New York's largest pension fund. Namely, we
    charged New York's former Deputy Comptroller and a top political
    advisor with extracting kickbacks from investment management firms
    seeking to manage the assets of the New York State Common Retirement
    Fund. Since March, we have amended the complaint to add additional
    defendants, including a former New York State political party leader, a
    former hedge fund manager, a Dallas-based investment management firm
    and one of its founding principals, and a Los Angeles-based ``finder.''
    \2\
    ---------------------------------------------------------------------------
        \2\ SEC v. Henry Morris, et al., Lit. Rel. No. 20963 (March 19,
    2009), Lit. Rel. No. 21001 (April 15, 2009), Lit. Rel. No. 21018 (April
    30, 2009); Lit. Rel. No. 21036 (May 12, 2009).
    ---------------------------------------------------------------------------
        As committed as we are to vigorous enforcement of the securities
    laws, we are also mindful that the complexity of 21st century markets,
    as well as the varied nature of frauds and scams, require that the
    sophistication and tools available to our Enforcement and Examination
    programs keep pace. Important questions have been raised concerning the
    agency's handling of tips or whistleblower information related in
    particular to the activities of Bernard Madoff. Clearly this is
    something we must learn from, and I am committed to addressing it.
    Former Chairman Cox asked the SEC Inspector General to look into what
    happened, what failed to happen, and to report back to the Commission.
    We expect to receive the IG report this summer and will promptly take
    all appropriate actions and address any remaining shortcomings.
        It is clear that, regardless of any findings of the Inspector
    General, the agency must improve its ability to process and pursue
    appropriately the hundreds of thousands of tips and referrals it
    receives annually. In February, we retained the Center for Enterprise
    Modernization which began work immediately on a comprehensive review of
    internal procedures to evaluate tips, complaints, and referrals. We are
    in the process of creating a system that will centralize this
    information so we can track it, analyze it and more effectively
    identify valuable leads for potential enforcement action and compliance
    exams.
                    strengthening examination and oversight
        In addition to these changes, it is essential that we work to
    improve our risk-based oversight of broker-dealers, investment advisers
    and mutual funds. Our Office of Compliance Inspections and Examinations
    (OCIE), together with other agency staff in the Office of Risk
    Assessment, are presently working on an initiative to identify the key
    data points that would facilitate an improved risk-based oversight
    methodology to allow the staff to identify and focus on those firms
    presenting the most risk. OCIE has improved training and, under a newly
    authorized program, 268 examiners are now participating in the training
    and certification program offered by the Association of Certified Fraud
    Examiners, to identify the warning signs and red flags that indicate
    evidence of fraud and fraud risk. OCIE is also recruiting additional
    individuals with experience in different facets of the industry, such
    as trading, risk assessment and compliance. These steps taken together
    will expand the knowledge base of our inspections staff, better
    enabling them to conduct oversight of complex trading strategies and
    products that exist in our markets today.
        I have also launched an Industry and Markets Fellows Program in our
    Office of Risk Assessment. Through this program, we have begun
    recruiting fellows with extensive experience in such areas as equity
    and fixed income securities trading, structured products, complex
    derivatives, financial analysis and valuation, fund management,
    investment banking and financial services operations.
                 improving transparency and investor protection
        The agency is working hard in other areas as well. In the area of
    accounting standards, the SEC staff completed a congressionally-
    mandated study of fair value accounting. The staff issued guidance to
    financial institutions so that they can give fuller disclosure to
    investors, particularly with respect to hard-to-value assets. The staff
    has also continued to work closely with the Financial Accounting
    Standards Board to deal with such issues as consolidation of off-
    balance sheet liabilities, the application of fair value standards to
    inactive markets and the accounting treatment of bank support for money
    market funds. FASB recently took steps to clarify treatment of off-
    balance sheet items in a manner designed to increase market
    transparency.
        In the area of combating false rumors and manipulative activity in
    the marketplace, the agency initiated examinations of the effectiveness
    of broker-dealers' and investment advisers' controls to prevent the
    spreading of false information. When concluded, the results of these
    examinations will be used by regulators to assist firms in crafting and
    implementing robust policies and procedures to prevent the spreading of
    false information.
        In the wake of recent Ponzi schemes and other investment adviser
    abuses, the Commission last month proposed significant changes to the
    custody requirements for investment advisers. These proposals focus on
    the value of an independent public accountant serving as another set of
    eyes to better assure the safekeeping of investor assets. One proposal
    would require all advisers with custody or control of client assets to
    engage an independent public accountant to conduct an annual ``surprise
    exam'' to verify those assets exist. A second proposal would apply only
    to investment advisers whose client assets are not held by a firm
    independent of the adviser. In such cases, the investment adviser would
    be required to be subject to a review that results in a written
    report--prepared by a PCAOB-registered and inspected accounting firm--
    that, among other things, describes the controls in place relating to
    custodial services, tests the operating effectiveness of those controls
    and provides the results of those tests. These reports are commonly
    known as SAS-70 reports. The reports would include an opinion of an
    independent public accountant issued in accordance with the standards
    of the PCAOB, which will provide an important level of quality control
    over the accountants performing this review. In addition, advisers
    would be required to publicly disclose the name of the accountant
    conducting these reviews, so that our staff can better monitor
    compliance and assess adviser compliance risks. Accountants also would
    be required to disclose the reason for any termination or resignation
    from performing these reviews, which should highlight any ``red flags''
    for regulators and investors.
        At my request, our staff is also developing investor-oriented
    enhancements to the municipal securities area. It is time for those who
    buy the municipal securities that are critical to State and local
    funding initiatives to have access to improved quality, quantity and
    timeliness of information. On a related note, so called ``pay-to-play''
    practices by investment advisers to public pension plans must be
    curtailed. I have asked the staff to revisit the Commission's 1999
    proposal to address harmful pay-to-play practices, and I expect that
    the Commission will consider that proposal this summer.
                        combating abusive short-selling
        In my brief tenure as Chairman, the issue of short selling has
    outpaced any other in terms of the number of inquiries, suggestions and
    expressions of concern we have received. On April 8, 2009, the
    Commission unanimously voted to propose two distinct approaches to
    short selling restrictions. One approach would impose a permanent,
    market-wide short sale price test, while the other would impose
    temporary short selling restrictions upon individual securities during
    periods of severe declines in the prices of those securities. On May 5,
    2009, the Commission held a public roundtable to solicit the views of
    investors, issuers, financial services firms, self-regulatory
    organizations and the academic community on key aspects of these
    proposals. The Commission is committed to conducting a thoughtful,
    deliberative process to determine what is in the best interests of
    investors, including examining a variety of trading and market related
    practices such as securities lending.
        We also recognize that strong rules and vigorous enforcement are
    needed to curb abusive short selling and restore confidence in our
    markets. The Commission has been focused on the issue of abusive
    ``naked'' short selling since before my arrival in late January, and
    the Commission's regulatory actions have led to a significant decline
    in failures to deliver securities on time following a short sale.
    Moreover, our Division of Enforcement has a number of active
    investigations involving potentially abusive short selling in a variety
    of contexts.
                            filling regulatory gaps
        In an effort towards bringing the unregulated world of credit
    default swaps into the sunlight, the Commission, working in close
    consultation with the Board of Governors of the Federal Reserve System
    and the Commodity Futures Trading Commission (``CFTC'') and operating
    under the limitations of the current legislative structure, recently
    issued temporary orders to facilitate the establishment of central
    counterparties for clearing credit default swaps (``CDS'') by
    LCH.Clearnet Ltd., ICE US Trust LLC, and Chicago Mercantile Exchange
    Inc. The Commission is committed to increasing investor protection and
    reducing systemic risk by facilitating the development and oversight of
    central counterparties to clear CDS.
        We have also been working with the CFTC and Treasury Department to
    fill regulatory gaps in this area to help increase transparency and
    minimize risks associated with certain derivative products, including
    CDS, as well as market participants transacting in these products. I
    look forward to working with Congress to make the necessary legislative
    changes to ensure that these markets and market participants are
    appropriately regulated.
        In addition, we are closely examining the broker-dealer and
    investment adviser regulatory regimes and assessing how they can best
    be harmonized and improved for the benefit of investors. Many investors
    do not recognize the differences in standards of conduct applicable to
    broker-dealers and investment advisers. It is essential that comparable
    and effective protections be afforded to investors, whether they turn
    to a broker-dealer or an investment adviser for assistance in accessing
    the securities markets.
        Finally, hedge funds and other unregulated private pools of capital
    have flown under the radar for far too long. We are currently examining
    whether these funds, their managers or both should be subject to SEC
    registration and oversight, so that investors, regulators and the
    marketplace have more complete and meaningful information about the
    funds and their market activities. I look forward to working with
    Congress on this important issue.
                        strengthening shareholder rights
        We have launched an agenda of proxy reforms with a proposal
    approved by the Commission for public comment that would significantly
    support shareholders' rights to nominate company directors. Next month
    we will take up a broad package of corporate disclosure improvements,
    all designed to provide shareholders with important information about
    their company's key policies, procedures and practices, including
    compensation policies and incentive arrangements. With this additional
    information, shareholders will be better able to hold directors
    accountable for the decisions that they make. For example, the
    Commission will consider proposals to enhance disclosure of director
    nominee experience, qualifications and skills, so that shareholders can
    make more informed voting decisions. The Commission will also consider
    proposed disclosures to shareholders about why a board has chosen its
    particular leadership structure (whether that structure includes an
    independent chair or combines the positions of CEO and chair), so that
    shareholders can better evaluate board performance. Also, shareholders
    should understand how compensation structures and practices drive an
    executive's risk-taking. The Commission will be considering whether
    greater disclosure is needed about how a company--and the company's
    board in particular--manages risks, both generally and in the context
    of compensation. The Commission will also consider whether greater
    disclosure is needed about a company's overall compensation approach,
    beyond decisions with respect only to the highest paid officers, as
    well as about compensation consultant conflicts of interests.
               improving money market and mutual fund regulation
        Later this month, the SEC will consider proposals to strengthen the
    money market fund regulatory regime. The proposals will focus on
    tightening the credit quality, maturity and liquidity standards for
    money market funds to better protect investors and make money market
    funds more resilient to risks in the short-term securities markets,
    like those that unfolded last fall. In addition, we are exploring
    whether more fundamental changes are necessary, such as converting
    money market funds to a floating rate net asset value, in order to
    protect investors from abuses and runs on the funds.
        In addition, on June 18, the SEC and the Department of Labor will
    hold a joint hearing on target date funds. Target date funds and other
    similar investment options are investment products that allocate their
    investments among various asset classes and automatically shift that
    allocation to more conservative investments as a ``target'' date
    approaches. These funds have become quite popular, and growth in target
    date fund assets is likely to continue since these funds can be default
    investments in 401(k) retirement plans under the Pension Protection Act
    of 2006. However, target date funds have produced some troubling
    investment results. The average loss in 2008 among 31 funds with a 2010
    retirement date was almost 25 percent. In addition, varying strategies
    among these funds produced widely varying results. Returns of 2010
    target date funds ranged from minus 3.6 percent to minus 41 percent.
        These returns cause concern for investors and regulators alike. I
    can assure you that SEC staff is closely reviewing target date funds'
    disclosure about their asset allocations. In addition, in connection
    with our joint hearing with the Department of Labor, we will consider
    whether additional measures are needed to better align target date
    funds' asset allocations with investor expectations. Among other
    issues, we will consider whether the use of a particular target date in
    a fund's name may be misleading or confusing to investors and whether
    there are additional controls the SEC should impose to govern the use
    of a target date in a fund's name.
        I also have asked the staff to prepare a recommendation on rule
    12b-1, which permits mutual funds to use fund assets to compensate
    broker-dealers and other intermediaries for distribution and servicing
    expenses. These fees, with their bureaucratic sounding name and
    sometimes unclear purpose, are not well understood by investors. Yet in
    2008, rule 12b-1 was used to collect over $13 billion in investors'
    funds out of fund assets. It is essential, therefore, that the SEC
    engage in a comprehensive re-examination of rule 12b-1 and the fees
    collected pursuant to the rule. If issues relating to these fees
    undermine investor interests, then we at the SEC have an obligation to
    step in and adjust our regulations.
        In addition to these initiatives, the agency continues to annually
    review 5,000 corporate filings, over 1,000 SRO rules, and nearly 3,000
    new investment company portfolio disclosures. We establish the
    standards for 13 securities exchanges, 4 securities futures product
    exchanges, FINRA (a national securities association), the Municipal
    Securities Rulemaking Board, 10 nationally recognized statistical
    rating organizations, 10 registered clearing agencies, approximately
    600 transfer agents, and securities information processors. Despite the
    extreme volatility and uncertainty in the markets over the past year,
    transactions continue to trade at both record volumes and record speed.
                                 sec resources
        The financial crisis has reminded us just how large, complex, and
    critical to our economy the securities markets have become in recent
    years. Whereas the dollar value of the average daily trading volume in
    stocks, exchange-traded options and security futures was $10 billion a
    day in February 1989, over the last 20 years it has grown to over 25
    times that size, reaching approximately $251 billion a day in February
    2009. And not only has the size of our markets exploded, the number and
    size of its participants have jumped as well. For example, since 2005,
    the number of registered investment advisers has increased by 32
    percent, and their assets under management have jumped by over 70
    percent to reach more than $40 trillion as of the beginning of this
    fiscal year. Broker-dealer operations have expanded significantly in
    size, complexity, and geographical diversity, as exemplified by the 67
    percent rise in the number of broker-dealer branch offices. In all, the
    SEC's 3,652 staff now oversee more than 35,000 registrants, including
    about 12,000 public companies, 8,000 mutual funds, 11,300 investment
    advisers, 5,500 broker dealers, and 600 transfer agents. By comparison,
    other financial regulators often have close to parity between the
    number of staff and the number of entities they regulate. For
    additional detail, attached to this testimony is an appendix, ``SEC
    Staff Levels Have Not Kept Pace with Industry Growth.''
        Yet at the same time that the securities markets have undergone
    such tremendous growth, the SEC's resources have fallen further and
    further behind. Between fiscal year 2005 and fiscal year 2007, the
    agency experienced 3 years of flat or declining budgets, losing 10
    percent of its employees and severely hampering key areas like our
    enforcement and examination programs. In the context of rapidly
    expanding markets, I believe these reductions in the SEC's staff
    seriously limited the agency's ability to effectively oversee the
    markets and pursue violations of the securities laws.
        With support from this subcommittee, during the last 2 fiscal
    years, the SEC has been able to lift its hiring freeze and begin
    rebuilding its workforce. By increasing the SEC's appropriation for
    this fiscal year, approving a reprogramming of additional resources,
    and just recently supporting emergency supplemental funds for the
    agency, this subcommittee has expressed its strong support for the SEC
    and its mission. I am very grateful for that support.
        However, even with these important steps, the number of staff with
    which the SEC can detect fraud, prosecute wrongdoing, ensure proper
    disclosure, conduct strong oversight of the markets, and take other
    actions to protect investors, is still significantly below the levels
    of only a few years ago. Under the SEC's current funding level, the
    agency's workforce still will fall about 200 staff, or about 5 percent,
    short of the fiscal year 2005 level.
        I believe additional resources are essential if we hope to restore
    the SEC as a vigorous and effective regulator of our financial markets.
    The President is requesting a total of $1.026 billion for the agency in
    fiscal year 2010, a 7 percent increase over the fiscal year 2009
    funding level. This proposal would permit the SEC to fully fund an
    additional 50 staff positions over 2008 levels, enhance our ability to
    uncover and prosecute fraud, and begin to build desperately needed
    technology.
        Specifically, these positions would help the SEC's Enforcement
    program enhance its pursuit of tips, complaints and other leads, thus
    increasing the resources the SEC can dedicate to frauds that citizens
    bring to our attention. They would also allow us to hire more trial
    lawyers and staff with specialized skills that will help our
    Enforcement program's efficiency, expertise and success. The
    Examination program would hire market experts to strengthen risk-based
    oversight of the investment management industry and expand its
    inspections of credit rating agencies. Our Division of Trading and
    Markets would strengthen its oversight of entities that play critical
    roles in our markets, such as broker-dealers, exchanges, clearing
    corporations, and other self-regulatory organizations. And the
    President's Budget would allow us to expand our Office of Risk
    Assessment by fully funding our program to bring in seasoned industry
    professionals to help uncover hidden risks to investors.
        Although expanding our workforce is a critically important step, I
    believe we also must give our staff better tools to conduct oversight
    of vast financial markets. That is why the President's request for
    fiscal year 2010 also contains funds for additional investments in our
    information systems. Investments in new systems have dropped by more
    than half over the last 4 years, and as a result the SEC has a growing
    list of technology needs that have gone unfunded. With the additional
    IT funds provided under the President's Budget for fiscal year 2010, I
    would plan to focus on several key projects:
        First and foremost, we would use additional funds to enhance our
    systems for handling tips, complaints and referrals. Although the SEC
    has a number of different processes to track this kind of information,
    there is no central repository or system through which this information
    comes together to ensure it is handled consistently or appropriately.
    Nor is there any present capability to mine the data to find
    connections, patterns or trends that would enable us to more
    intelligently focus our enforcement efforts.
        The SEC also plans to improve our ability to identify emerging
    risks to investors. We have many internal data repositories from
    filings, examinations, investigations, economic research and other
    ongoing activities. But the SEC needs better tools to mine this data,
    link it together, and combine it with data sources from outside the
    Commission to determine which firms or practices raise red flags and
    deserve a closer look.
        Finally, we would invest in our multi-year efforts to improve the
    case and exam management tools available to our enforcement and
    examination programs. These systems would give our senior managers
    better information on the mix of cases, investigations, and
    examinations, so they can apply resources swiftly to the continually
    evolving set of issues and problems in the markets. In addition, these
    tools will provide better support for line staff in these programs, so
    they can be more productive and better able to match the sophisticated
    systems used by the financial industry.
        I came to the SEC to shape public policy in the interest of
    investors and to strengthen our enforcement program. The things I have
    described in this testimony are important to those efforts. But what I
    have also discovered in the past 4 months is that much attention needs
    to be focused on the internal operations of the agency, the processes
    that guide our work, the agency's infrastructure and how we are
    organized. I have been disappointed to find that in some areas of our
    internal operations, we fall short of what the taxpayer has a right to
    expect of us, and what our employees have a right to expect of a world
    class organization. I am committed to a complete review of areas large
    and small, including FOIA operations, call centers operations, records
    management, and others, to ensure that we meet the highest standards
    and that we are fully supporting the important work of our employees in
    these operations. Doing this will take time and energy and focus. To
    ensure that we do it well and thoroughly, I intend to bring in a Chief
    Operating Officer to manage the process. Federal agencies do not manage
    themselves; we must be actively engaged in that process everyday.
        In one area, we have already made progress: we are moving to build
    an internal compliance program that is second to none. The public
    appropriately holds the SEC to a very high standard for integrity and
    professionalism, and we hold ourselves to that very high standard as
    well. That is why I have initiated several steps to guard against
    inappropriate securities trading by SEC staff, as well as to avoid any
    appearance of inappropriate trading. Among other steps, the agency has
    drafted new internal rules that would prohibit staff from trading in
    the securities of companies under SEC investigation, regardless of
    whether an employee has personal knowledge of the investigation, and
    require preclearance of all trades. The SEC also is contracting with an
    outside firm to develop a computer compliance system to track, audit
    and oversee employee trades and financial disclosures in real time.
    Finally, I consolidated responsibility for this area within our Ethics
    Office and authorized the hiring of a new chief compliance officer. To
    further enhance the SEC's financial controls, the agency also will
    continue its multi-year efforts to build an automated, integrated
    financial management system.
        I want to thank you for your continued strong support for the SEC
    and its critical mission. I believe the steps I have outlined here--
    strengthening our enforcement program, enhancing risk-based oversight
    of the markets and leveraging technology--are essential for restoring
    investors' confidence in both the SEC and in our Nation's securities
    markets.
        I would be happy to answer any questions you may have.
       appendix: sec staff levels have not kept pace with industry growth
            (Tables show cumulative growth relative to 2003 levels)
        The SEC's staff of 3,652 FTE (estimate for fiscal year 2009)
    oversees more than 35,000 entities. These include:
      --11,300 investment advisers;
      --5,500 broker-dealers;
      --8,000 mutual funds;
      --About 600 transfer agents;
      --Clearance and settlement systems;
      --11 securities exchanges;
      --12,000 public companies;
      --10 credit rating agencies;
      --FINRA, MSRB, and PCAOB.
        The following charts display how various aspects of the markets
    have grown since 2003, relative to the SEC's staff:

                        BUDGET AND WORKFORCE OF THE SEC

        Senator Durbin. We'll have 5-minute rounds here, and I'm
    sure we'll have several questions.
        It seems to me that there are two things we're dealing with
    here just on the surface. First, the number of people working
    in your agency. It appears that over the years, as Senator
    Collins noted, we've allowed the number of professionals
    working there to decline in real terms and certainly decline
    precipitously in relation to the volume of trade that you have
    to keep an eye on.
        Between 2005 and 2007, the SEC lost 10 percent of its
    employees, if you can imagine at that moment in time,
    undermining the agency's ability to oversee the markets, and at
    the same period of time, the market ballooned in size and
    complexity.
        Registered investment advisors grew 32 percent, assets
    jumped by over 70 percent, and so we're seeing the caseload or
    at least the area that needs to be regulated is growing and the
    number of people to keep an eye on it is diminishing.
        So there is, in the first instance, the question of the
    right number of people working at the agency, and the second
    issue goes to--I don't know how to characterize it--I guess the
    internal culture of the agency.
        Bernard Madoff was a wake-up call. The fact that this man
    could swindle as many people as he did with impunity for so
    long to me is nothing short of amazing.
        According to SEC data, in fiscal year 2008, the SEC staff
    handled over 600,000 tips sent by individuals to your
    Enforcement Complaint Center. I did a calculation. I think
    that's more than 2,000 a day for every business day. People
    sending in items you ought to look at. Well, that to me is an
    overwhelming number and perhaps you could put it in some kind
    of perspective.
        Now, some have taken a look inside your agency and asked
    whether the enforcement function within the agency is a healthy
    one. Is there a risk-averse culture within the SEC to step up
    and say, you know, we ought to take a look at this Mr. Madoff
    or people like him?
        So let me ask you at the outset, number 1, what would be
    the optimal number of people that you believe you need to do an
    effective job at the SEC in light of the volume of business
    that you have to regulate, and second, do you perceive a
    cultural problem within the agency when it comes to
    enforcement?
        Ms. Schapiro. Thank you very much, Mr. Chairman.
        I think you've really summarized very well with respect to
    the staffing pressures on the SEC, the current situation.
        With over 35,000 regulated entities and 3,700 staff, it's a
    job that we really can't do in the way I think the public would
    like to believe we can do in the sense of routine onsite
    presence in many regulated entities. That's going to really
    require that we leverage third parties.
        So, for example, in the rules I discussed related to the
    custody of customer assets by investment advisors, a huge
    problem in the Madoff area, we're going to rely on PCAOB-
    registered accounting firms to leverage our capability to
    ensure the customer assets are being protected by the
    custodians and by the investment advisors, and we will look for
    every opportunity we can to leverage third party resources.
        But at the end of the day, we do need significantly more
    staff, I believe, over the next several years to keep up with
    the growth and the complexity of this industry, and if there
    are additional responsibilities as a result of regulatory
    reform that accrue to the SEC in the context of hedge funds,
    credit default swaps or other areas, that, of course, will
    require sufficient additional resources because we can't
    stretch any thinner than we already are.
        So I do believe--and if you look at our 2011 budget
    request, you will see we've asked for a significant ramp-up in
    the number of full-time equivalents (FTE), close to 400 FTE and
    1,000 new positions, and I believe that if we're able to
    achieve that number in 2011 or over the course of the next
    several years, that will go a long way toward getting this
    agency to the appropriate size to handle the job that's in
    front of it.
        I don't think there's any danger that we're about to become
    too big in any event.
        I think, with respect to your second question, the Madoff
    fraud is a tremendous tragedy. It's really a tragedy of epic
    proportions and I think it really will put the onus on this
    agency to prove that it is capable of managing the
    responsibilities that it has been given under the law and it's
    really critically important for us to ensure that both our
    culture, our operations, and our procedures, our staff and our
    skill sets are up to the task.
        You pointed out, for example, that we get somewhere around
    600,000 to, in peak years, 1\1/2\ million tips a year. We can't
    manage those that come into the organization through a wide
    variety of entry points. We don't have databases that are
    connected so that we can do a trend analysis of those tips and
    complaints or connect that data to external sources of data to
    see what might be developing more broadly in the marketplace.
        Right after I started, I brought in the Mitre Corporation's
    Center for Enterprise Modernization to do a complete review of
    how we handle tips and complaints. They've concluded the first
    round of their work and we're now in the implementation phase
    of some short-term and intermediate-term remedies and processes
    to help us manage tips and complaints.
        But it's also about leadership and it's about freeing our
    Enforcement Division to do the kind of job that I know they're
    capable of doing.
        I was at the SEC 15 years ago when the agency had a really
    first-class reputation for aggressive enforcement and I know
    we're capable of that again. We have a new Enforcement Director
    who's very committed to bringing large cases in a timely way
    that have the maximum investor protection impact.
        It's about enabling our enforcement staff through
    technology and the right skill sets to bring those kinds of
    cases, that when a whistleblower presents them with
    information, as had happened in the Madoff case, they have the
    ability to understand it and pursue it. It's about being a
    little bit humble about the information that comes to us and
    appreciating that there may be real value in what's being
    presented to us.
        We're also going to seek whistleblower legislation to
    enable us to reward whistleblowers, as the Internal Revenue
    Service (IRS) and other agencies do, when they bring us well-
    formed cases and documentation, a fraud that we can then
    pursue, and it's about filling the regulatory gaps, through
    such as the custody requirements I just spoke of, so that we
    are sure that the regulatory regime, coupled with aggressive
    enforcement, coupled with the tools and the skill sets, combine
    to create an agency that's absolutely committed and focused on
    investor protection.
        I'm sorry. That's a very long answer.
        Senator Durbin. No. It's a very good answer, and I thank
    you for it, and I'm going to turn to Senator Collins and return
    in later rounds.
        Senator Collins. Thank you, Mr. Chairman.
        Ms. Schapiro, you talked about the increased number of
    positions that you have requested as part of the fiscal year
    2011 budget, but in fact, the President's budget for this
    coming fiscal year does not allow you to hire any new
    positions, is that correct?
        Ms. Schapiro. That's correct, Senator. The increase in the
    2010 budget covers the annualized costs of the increases in the
    fiscal year 2009 budget that we were able to have as a result
    of the approval of our reprogramming requests and taking $17
    million of unobligated funds from prior years, dedicating those
    to staffing, additional staffing in 2009.
        The annualized costs of those additional 50 positions that
    we're bringing on this year are the increase in the 2010
    budget.
        Senator Collins. Do you need new positions for the upcoming
    fiscal year?
        Ms. Schapiro. Well, I would say that we're, first of all,
    extremely grateful to the President for the increase in the
    2010 budget and it's a meaningful increase for this agency, and
    as I pointed out, 2011 we sought a much greater increase.
        The opportunity to start to move toward that 2011 budget
    earlier would be a wonderful opportunity for us to bring that
    number of staff on over a 2-year period rather than all in
    2011, if Congress ultimately approves that number.
        Senator Collins. Because I am troubled that the current
    funding level supports a staff that is 5 percent lower than
    your peak level back in fiscal year 2005.
        If you look at the growth of regulated entities and if you
    look at the amount of money involved, if you look at the number
    of American families who now have savings in the stock market,
    the fact that these staffing levels are below what they were 5
    years ago is troubling to me.
        So are you saying that it would be helpful to be able to
    ramp up those staffing starting in the next fiscal year rather
    than waiting to fiscal year 2011?
        Ms. Schapiro. Absolutely, it would be helpful. The
    reprogramming request, in addition to allowing us to get a
    little bit of a jump on 2010, enabled us to do some technology
    investment.
        We need fundamentally more investment in technology at the
    SEC to support our Enforcement and Examination Programs and we
    can use more boots on the ground in Enforcement and
    Examination, absolutely.

                       INVESTOR PROTECTION AND EDUCATION

        Senator Collins. Aggressive enforcement is absolutely
    critical, but there's another way that's important for
    protecting investors, particularly smaller investors who may be
    less sophisticated in choosing their investments, and that is
    through a robust education effort.
        You've spoken a lot about the need to protect investors and
    I know that in my State, I've seen thousands of individuals who
    have seen their retirement nest eggs shrink, money set aside
    for their children's college education virtually disappear, and
    they're wondering what can be done about it. They're seeking
    more information.
        Several years ago, the SEC used to conduct very valuable
    educational sessions, town meetings, outreach to seniors
    groups.
        What are your plans to reach out to investors, particularly
    small investors or senior citizens, in two ways; one, to help
    them better understand risk and suitability requirements, but,
    two, to help them spot scams?
        Ms. Schapiro. It's a wonderful question, and I'm very
    committed and personally quite passionate about investor
    education and had a program at my former employer, FINRA, as
    Senator Tester knows, where we did investor forums which the
    SEC used to do years ago around the country and to great
    success and with tremendous participation all over the country.
        The SEC has a small program that does that now.
    Commissioner Walter in fact did an investor forum just last
    week with our Boston office in the State of Maine.
        My plans would be, given sufficient resources, that we
    dramatically increase that program, that we enable our offices
    around the country to provide local education in senior
    citizens centers, community centers, local high schools, and
    that we really take a leadership role in the Federal Government
    in educating investors about the kinds of questions they need
    to ask when they're being offered investment products, about
    the kinds of scams and pitfalls that they need to be on the
    alert to.
        I'm very concerned, given the current environment and the
    amount of money people have lost in their retirement plans and
    in their other investments, that they will be reaching to try
    to make that money back through some particularly risky
    investments. I have no doubt that the scam artists have already
    figured this out and are beginning to prey on people's real
    fears about their financial futures.
        I think the SEC can play a critical role here, bringing
    together other agencies of the Federal Government but also on
    its own, reaching out very directly as well as through the
    development of content put on websites and in investor forums.
        Senator Collins. Thank you. Glad to hear it.
        Senator Durbin. Senator Tester.
        Senator Tester. Thank you, Mr. Chairman.
        Chairman Schapiro, you come into an agency, the SEC, that
    has been around about 75 years and to be honest, from my
    perspective, probably come into it at a time when it's hit an
    all-time low as far as both morale and effectiveness. So you've
    got to rebuild this agency, I think, maybe not from the ground
    up but from the foundation up.
        We've talked about manpower levels. If you have the
    technology that you spoke about, do you have a figure in mind
    about what the right number of people are for this agency,
    considering the massive workload?
        Ms. Schapiro. I think it's very hard to give an exact
    number. As I said, our 2011 budget request seeks 1,000
    additional positions which would take us to just under 5,000.
    That would still be smaller, for example, than the Federal
    Deposit Insurance Corporation (FDIC) which regulates about
    5,000 to 6,000 banks.
        Senator Tester. Okay.
        Ms. Schapiro. I do think there's also practical limitation
    on how many people you can just bring on board and train----
        Senator Tester. Right.
        Ms. Schapiro [continuing]. At any given time. The faster
    that we can move toward a substantial increase like that I
    think the better.
        Senator Tester. Okay.
        Ms. Schapiro. It also depends largely on our ability of
    effectively utilized technology to save on human resources.
        Senator Tester. Right on. Consumer confidence is one of the
    things that everybody's concerned about. Nobody--you know,
    we've lost a bunch of money. People's confidence is shaken.

                         RESTORING INVESTOR CONFIDENCE

        What do you see as being two or three of the major things
    that you have to do in your agency to have consumer confidence
    back at a level that's reasonable, and, quite honestly, what do
    you see we need to do, the two or three things that we need to
    do to help re-establish consumer confidence with the groups
    that you regulate?
        Ms. Schapiro. I think it's a great question. I think
    enforcement is just a part of what we do, but it's a very
    visible part, and I think it's really critical for investors to
    see that there is a cop on the beat who's trying to ensure that
    the playing field is level, that the insiders aren't taking
    advantage of the rest of the participants in the marketplace.
        So we need to have a very timely enforcement response to
    the problems that arise in the marketplace and short of doing
    that, I think people won't have confidence. We can write all
    the rules we want, but if nobody's enforcing them, we're not
    going to restore investor confidence.
        I think investors also need to have complete confidence in
    the transparency of corporate disclosure. They need to believe
    that the companies in whose stock they are buying are getting
    then the accurate numbers and the accurate disclosure and
    information about that company's prospects so they can make
    informed decisions about where to put their money.
        And I think we have to have a focus on consumers issues, on
    mutual funds sales, on sales practices generally, on the issues
    around fees and fee structures and disclosures that investors
    really care about at the end of the day.
        We'll be announcing later this week the creation of an
    Investor Advisory Committee for the first time in many, many
    years at the SEC that will give investors a regular way to
    interact with the Commission on policy issues that are of
    interest to them.
        I think we have to reorient everything we do toward
    rebuilding the investor confidence in both the agency and in
    the fairness of our markets.
        Senator Tester. What do we need to do, Congress?
        Ms. Schapiro. I think supporting the agency, quite
    honestly, as the appropriators with sufficient resources to
    accomplish what we need to do and hold our feet to the fire
    that we're delivering on the commitments that we're making to
    the American public.
        Senator Tester. Have you been able--I mean, there's been
    talk about the future roles of the SEC, the CFTC that we'll
    hear from shortly, after a regulatory modernization has been
    done.
        Assuming that that goes forward, can you talk about the
    challenges, opportunities, possible consequences of merging
    your two agencies?
        Ms. Schapiro. Sure. And, you know, I have the unique
    position of having been Chairman of the CFTC and now Chairman
    of the SEC. So in honesty, I can tell you I've argued both for
    and against merger over the years.
        I think it's obviously a decision that's ultimately for the
    Congress about whether or not to combine the two agencies.
    Short of that, I believe that with Gary as Chairman of the CFTC
    that we can have an incredibly positive and constructive
    working relationship, to ensure that products and practices
    don't fall between the cracks of the two agencies and that we
    don't leave large swaths of the financial markets unregulated
    and unaccountable to the American public----
        Senator Tester. Do you think that would be--excuse me. Do
    you think that would be done better if you were combined?
        Ms. Schapiro. I think--in my personal view, there is a
    logic and an efficiency that can be achieved from the merger of
    the two agencies, but short of that, I also think that the two
    agencies can do a better job of working together to ensure the
    protection of investors.
        Senator Tester. My time is up, but we'll be back.
        Senator Durbin. I was just advised by my colleague that
    there's a vote on and I'm going to try to continue asking until
    someone returns, but I ask the indulgence of our witness and
    those in the audience as we try to balance a few things here.

                        ADDRESSING RESOURCE CONSTRAINTS

        The numbers of investigative attorneys at the SEC decreased
    11.5 percent between fiscal years 2004-2008 and some believe
    that that's resulted in delayed cases, reducing the number that
    can be brought to trial and potentially undermining the quality
    of cases that are pursued.
        How have resource constraints impacted the effectiveness of
    the SEC?
        Ms. Schapiro. There's no question but that--and there's a
    recent Government Accountability Office (GAO) report that
    suggests this, as well, that the resource constraints have
    hindered the ability of the Enforcement Division to pursue as
    many cases in as timely a way as I would like to see.
        In addition, there are some procedural difficulties placed
    in the path of the Enforcement Division over the last several
    years that slowed cases down and discouraged, if not
    explicitly, implicitly seeking penalties from corporate issuers
    in certain kinds of cases, and we've eliminated those hurdles
    and cases can be started much more quickly now. Investigations
    can be pursued with the approval of one commissioner, not the
    full Commission sitting in a meeting.
        We've eliminated what was called the Penalty Pilot Program
    completely and we are reorganizing the Enforcement Division
    under the leadership of our new Director in a way that we hope
    will eliminate some layers of management and some of the
    stovepiping that's existed over the years and allow us to be
    more nimble and more aggressive, pursuing much larger cases,
    particularly those arising out of the financial crisis.
        Senator Durbin. On another issue, there was a mindset for a
    long period of time that as long as the economy was expanding
    and wealth was being created, we didn't dwell and ask a lot of
    embarrassing questions, but with the downturn in the economy,
    downturn in the fortunes of many families and the investment of
    our Federal Government into many of the largest businesses in
    America, there appears to be an awakening on the part of the
    average person about how many corporations are being managed
    and particularly in the area of executive compensation.

                              CORPORATE GOVERNANCE

        I won't go into chapter and verse about bonuses given to
    executives who have nothing to show for it, other than failure,
    but let me ask you, what is the SEC currently doing to improve
    the accountability of corporate directors and enhanced
    disclosure of executive compensation?
        Ms. Schapiro. Mr. Chairman, I've made corporate governance
    one of my highest priorities in the last 4 months. We are
    engaged in a couple of things.
        First of all, in May we approved for comment a proposal
    that will facilitate the ability of shareholders to nominate on
    the company's proxy directors to serve on the corporate--on the
    company's board and it's out for comment now. It will be highly
    controversial, but if ultimately approved and not challenged in
    court, it will greatly facilitate the abilities of shareholders
    to elect nominees to corporate boards and thereby hold
    directors more accountable for their oversight of the
    corporation.
        With respect to compensation in particular, as you know, we
    already require disclosure of all plan and non-plan
    compensation by the senior-most officers of a company.
        Next month we will be considering amendments to the
    compensation disclosure rules that will simplify something
    called the summary compensation disclosure table to provide
    more information there about compensation.
        It will require disclosure about the overall compensation
    approach within the company. There will be enhanced disclosure
    about the use of compensation consultants who are sometimes in
    a conflicted position in advising both the compensation
    committee and the company's management, and we're going to
    require disclosure about the linkage between compensation plans
    and risk-taking by executives, traders and others within the
    company, so that investors will be able to understand how risk-
    taking which was such an important component of the financial
    crisis has been potentially incentivized in some companies.

                             CREDIT RATING AGENCIES

        Senator Durbin. On another issue, in late 2006 the Credit
    Rating Agency Reform Act gave the SEC exclusive authority over
    rating agency registration and qualification. In the less than
    3 years since enactment the SEC has undertaken no fewer than
    five rulemakings to implement the law. These rules, which are
    all still relatively new, extend from registration and
    recordkeeping to disclosure and managing conflicts of interest.
        Yet, even though the credit rating agencies were under
    SEC's purview, rating agency performance in the area of
    mortgage-backed securities backed by residential subprime loans
    and the collateralized debt obligations linked to such
    securities has shaken investor confidence to the core.
        It used to be that credit ratings were kind of like the
    gold standard in terms of whether you could trust a business to
    be in solid financial shape. Well, I think a lot of questions
    have been raised.
        What are you doing at the SEC now to restore consumer and
    investor confidence, and what improvements are needed in the
    way that you monitor credit rating agencies?
        Ms. Schapiro. There's no question but that credit rating
    agencies played a significant role in facilitating, I guess, in
    some ways the financial crisis.
        The agency has engaged, as you point out, in many
    rulemakings, most recently the rule in 2008 which required a
    series of disclosures about performance statistics, the
    different kinds of models that were used for initial ratings
    versus surveillance ratings, documentation, disclosure of
    conflicts and so forth.
        The Credit Rating Agency Reform Act, which Congress passed
    in 2006, specifically does not allow the agency to regulate the
    substance or the procedures or the methodologies of the rating
    agencies and something we're looking at is whether we need to
    ask Congress to reopen that legislation to provide greater
    authority.
        Senator Durbin. Who does?
        Ms. Schapiro. Nobody. But nonetheless, despite the
    limitations in the law, we are looking at doing a couple of
    things.
        One is my perhaps my greatest concern in this area is
    something called ratings shopping which allows the creator of a
    structured product to get preliminary ratings from multiple
    rating agencies and then select the one they want to rate the
    product, presumably that being the highest rating they've
    gotten.
        Senator Durbin. Wish I could have had that for my report
    card in grade school.
        Ms. Schapiro. Don't we all?
        Senator Durbin. Shopping teachers.
        Ms. Schapiro. Exactly. If you'll give me an A, I'll take
    your class is what it amounts to.
        So we're looking at what we can do with respect to rating
    shopping. Removing references potentially to ratings in the
    Federal securities laws and regulations which gives an air of
    credibility and respectability to ratings that perhaps they
    don't entirely deserve, looking at whether we should require
    different symbols for rating structured products versus rating
    plain vanilla corporate debt, and we're looking at more
    detailed disclosure about how ratings have performed over time.
        So there's some things the SEC clearly can do and we are
    doing. We held a roundtable with rating agencies just about 1
    month ago to explore some of the failures of the different
    business models and some of the--not the failures of the
    different business models but the different business models,
    some of the other failures that have become clear over the last
    year.
        We're moving ahead with what we can do and we will come
    back to Congress if we believe at the end of the day we need
    more authority.
        Senator Durbin. Thank you. I'm going to ask that the
    subcommittee stand in recess for just a few moments and as soon
    as Senator Collins returns, I'm going to ask her to resume the
    hearing. I apologize, but it just so happens we have a rollcall
    vote.
        The subcommittee will stand in recess.
        Senator Collins [presiding]. The hearing will reconvene.
        In Senator Durbin's absence, he's permitting me to continue
    the hearing. I'm certain he'll be back very soon. He's just
    voting.
        Ms. Schapiro, last September the SEC's inspector general
    issued a report on its investigation of the Consolidated
    Supervised Entity Program, the CSE Program, through which the
    SEC monitored the five major investment banks.
        This inspector general report found that the SEC has
    severely understaffed its CSE Program and thus could not
    effectively manage its responsibilities to monitor or question
    these investment banks.
        As you know, I'm particularly concerned that an investment
    bank like BearStearns was allowed to have a leverage ratio of
    30:1, truly astonishing, and yet it appears that there was not
    a system in place, other than a very loose voluntary system
    that the SEC had, to monitor these banks, and in many ways this
    report was truly prescient since just a few months after it was
    issued none of these investment banks existed anymore. They all
    had either failed, been acquired or merged into bank holding
    companies.

                      REGULATION OF LARGE INVESTMENT BANKS

        Let me ask you a number of questions about this. First,
    does the SEC have the right mix of staffs to conduct the kind
    of oversight of a large investment bank? A lot of the SEC's
    employees are attorneys which is obviously very useful and
    helpful on the enforcement side, but does it need more
    auditors, more economists to have the expertise to analyze
    complex financial data and risk models? So the first question
    is the mix of expertise.
        Ms. Schapiro. I believe that we haven't historically had
    enough financial analysis experience, experience with
    structured products and complex derivative products.
        In the last couple of months that's been an area of focus
    for recruitment, not just in the Enforcement Program but also
    in the Trading and Markets Division which has responsibility
    for broker-dealer risk oversight. So that even though the CSE
    Program is discontinued, there are still a large number of--not
    maybe a large number but a number of large investment banks and
    broker-dealers for whom the SEC still has responsibility.
        That's an area that we are building and increasing our
    capability in in a very conscientious and sort of directed way
    and have been working on over the last couple of months. It's
    really important for us to have that capability.
        Even with the presence ultimately of a systemic risk
    regulator, that's the result of regulatory reform, it will be
    important for the SEC, as the day to day regulator of over
    5,000 broker-dealers, to have the capability to really
    understand the financial and operational status and condition
    of those brokerage firms.
        Senator Collins. Second, how should--I realize these large
    investment banks don't exist any more but they could reappear.
    How should they be regulated for safety and soundness?
        I cannot imagine a federally or State-chartered bank being
    allowed to have a leverage ratio of 30:1.
        Ms. Schapiro. I think the answer is they need to be
    regulated on a consolidated basis. So that, as you know, the
    securities laws are generally geared toward the protection of
    customer assets within the broker-dealer, but there are
    affiliates of the broker-dealer, there's a holding company
    structure, there are a lot of other entities where significant
    risk can be taking place, and it's important that the regulator
    of the entire entity have a view into what's going on in all of
    the related parts of the operation, so not just in the broker-
    dealer but also in the holding company affiliates and
    subsidiaries.
        It is that consolidated view that will allow our regulator
    to make a judgment about whether leverage is excessive, capital
    is sufficient, the quality of management across the enterprise
    is up to the task.
        Senator Collins. Another reform that we need is the ability
    to identify and prevent what I refer to as regulatory black
    holes, and the emergence of credit default swaps or other
    exotic and poorly disclosed derivatives certainly indicates
    that the current system has not been sufficient to prevent gaps
    in regulation of products or practices that can have
    consequences for the entire financial system. That's why I
    support having a council of regulators to look at systemic
    risk.

                       ROLE OF A SYSTEMIC RISK REGULATOR

        What do you think are the advantages and disadvantages of a
    council approach versus vesting in the Federal Reserve the
    authority to be the systemic risk regulator?
        Ms. Schapiro. Well, I'm very much in agreement that the
    existing regulatory regime is riddled with holes and that there
    are large parts of the financial marketplace that were really
    not under the regulatory umbrella at all or in any meaningful
    way and credit default swaps is an example. Hedge funds and
    some other private pools of pooled funds would fall into that
    category, as well.
        As you know, I like the concept of a council, whether it's
    a stand-alone council or in conjunction with a systemic risk
    regulator, because it brings a diversity of perspective that I
    think is really important to identifying where gaps may be
    arising, where new products may be being created in the
    intricacies between regulatory authorities, so that we can
    avoid those potentially harming the system.
        And when you have a council of regulators, where you've got
    securities regulators, for example, which is very much focused
    on investor protection and transparency and bank regulators
    very much focused on prudential standards and safety and
    soundness, and insurance regulators with yet another
    perspective, I think you have a better chance of capturing the
    entire financial landscape and the potential places where those
    new products are arising, where those new gaps are being
    created.
        At the same time I think there needs to be the ability,
    whether it's a council or a single system risk regulator or a
    combination, to step in and raise standards when necessary,
    where the functional regulator may not be aggressive enough in
    requiring higher capital standards or reining in leverage, that
    there be the ability ultimately to protect the system, to force
    those kind of changes.
        Senator Collins. Thank you. Senator Tester. It's nice being
    temporarily chairman.
        Senator Tester. Thank you. Thank you, Senator Collins, and
    you're doing a fine job, I might add.

                       ENFORCEMENT OF THE SECURITIES LAWS

        Secretary Schapiro, I'm sure you read the article yesterday
    in the Washington Post that dealt with enforcement actions of
    the SEC over the past few years. If that article's true, it is
    more than just a little bit distressing.
        You have stated the imperative to take the handcuffs off
    the Enforcement Division. That article yesterday would imply to
    me that I don't care how much money we put at the agency, if
    people on top are making arbitrary decisions about how to not
    do their job appropriately, no amount of money is going to make
    it work correctly.
        You're not going to do that, I know that. I've met you and
    long before when you were in FINRA, as you stated in your
    opening statement, in Montana and did a fine job education-wise
    and you have done a fine job in this position.
        But could you just give me a little bit of insight on how
    this budget would help you accomplish the goal of taking the
    handcuffs off the Enforcement Division?
        Ms. Schapiro. I'd be happy to. I should say that in my 4
    months at the agency, I talk a lot about enforcement. I've done
    some town halls with the staff. I e-mail with the staff.
        I will tell you that the response has been tremendous
    eagerness and enthusiasm on the part of employees to get back
    to what we do and what we can do so well and----
        Senator Tester. Good.
        Ms. Schapiro [continuing]. Particularly in the enforcement
    context.
        I think what the budget will enable us to do is have more
    people to bring the cases that need to be brought. We are not
    in danger of running out of cases. So on a very simplistic
    level, more people will enable us to do that.
        Bringing in the right skill sets so that we're not risk
    averse, so that we're not afraid to tackle the most complex
    trading strategies or the most complex products or the most
    complex frauds will be important. So we need to train our
    people better in more sophisticated methodologies. We need to
    bring in the right kinds of skill sets, as well, and we need to
    support our people with technology.
        The amount of data that comes into the agency that is
    unmanageable, even in the course of one major litigation, is
    extraordinary and we have our people wasting their times
    archiving e-mails and dealing with millions and millions of
    records when we should be able to rely almost solely on
    technology to do that.
        We need technology to help us sort out the tips and
    complaints that we get, as I spoke about earlier.
        Senator Tester. The ranking member talked about potentially
    inadequacies of this budget. In a previous line of questions,
    you said you can't bring on everybody you need because it's
    simply impossible to manage that influx of people.
        Is the budget adequate to get to where you need to go? I'm
    sure you have goals, either written or mental, where you want
    this agency to go. Is this budget adequate to get you where you
    need to be a year from now?
        Ms. Schapiro. As I said, we are genuinely grateful to the
    President for the increase the 2010 budget represents over 2008
    and 2009. We've asked for a very significant increase in 2011
    and the ability to get to that number sooner, we could handle,
    and I think it would make a difference in our ability to do our
    job.

                          REGULATION OF SHORT SELLING

        Senator Tester. Okay. Uptick rule. Can you discuss the
    Commission's effort to reinstate the Uptick rule, what's the
    likelihood, timing and opposition to that?
        Ms. Schapiro. I would be happy to do that. This is an issue
    of enormous, enormous public interest, and it's an issue of
    investor confidence, as well.
        As you know, the SEC took the Uptick rule off a couple
    years ago after careful study and evaluation. In some ways it
    was a model rulemaking to eliminate it.
        Nonetheless, that coincided with dramatic increases in
    volatility in the marketplace and investors have been clamoring
    for us to revisit this issue. In April, the Commission voted
    unanimously to seek public comment on two different approaches
    to short selling.
        One is essentially the reinstatement of the Uptick rule as
    we used to know it, with some variations. The other is a short
    sale circuit-breaker that would be kicked into effect if the
    price of a stock declined by, say, 10 percent in a day, no
    short selling thereafter for a period of time.
        We've already gotten 3,000 comment letters. The comment
    period closes in about 2 weeks, and then we will wade through
    those comment letters and hopefully bring back to the
    Commission a proposal for consideration.
        At the same time we're looking at a couple of other issues.
    There's a rule, it's a temporary rule that expires in July
    that's had a very, very positive effect on eliminating or
    diminishing the fails to deliver in securities and short sales,
    requiring them to be closed out the next day. I expect the
    Commission will make that a permanent rule this summer, and
    we're looking at some other issues, like the potential for pre-
    borrow requirement.
        So we are actively focused on short selling and will
    continue to do so.
        Senator Tester. Do you anticipate that the proposal you're
    going to take back to the Commission will be voted on when?
        Ms. Schapiro. I think we're looking at August for a vote.
    The comment period closes toward the end of June. With 3,000
    comment letters at this point, I expect significantly more and
    we'll have to evaluate those, so some time this summer.
        Senator Tester. After the Commission votes on the rule, is
    it typically an immediate effective date?
        Ms. Schapiro. Generally not, if it requires technology
    changes at either exchanges or brokerage firms.
        Senator Tester. Would this?
        Ms. Schapiro. Yes, the reinstatement of the Uptick rule
    requires significantly more technology work than the circuit-
    breaker would.
        Senator Tester. Okay.
        Ms. Schapiro. So it could be quite dependent upon which of
    the two approaches.
        Senator Tester. One last and it has to do with this. Who's
    opposing the Uptick rule from going back into effect?
        Ms. Schapiro. I haven't been through the comment letters,
    to be honest, but I would say historically there's certain
    kinds of algorithmic traders, some kinds of hedge funds that
    are large short sellers that oppose it. There are----
        Senator Tester. That are for the most part unregulated at
    this point in time, right?
        Ms. Schapiro. That might be right.
        Senator Tester. Okay.
        Ms. Schapiro. There are others who believe that short
    selling plays a very legitimate role in the marketplace in
    terms of adding liquidity. It has impacts on options market-
    makers and others. So there is opposition to reinstatement.
        I think the pure weight of the comment letters will tell us
    that there is much more support for doing something, whether
    it's the Uptick rule or the circuit-breaker.
        Senator Tester. Thank you.

                   FEE COLLECTIONS BY AND FUNDING OF THE SEC

        Senator Durbin [presiding]. Thank you. Chairman Schapiro,
    just for some perspective here, the SEC is fairly unique in
    that it collects a lot of money in fees and if I'm not
    mistaken, that number is somewhere a little north of or around
    $1.4 billion, is that correct?
        Ms. Schapiro. The 2009 expectation is, yes, about $1.35
    billion.
        Senator Durbin. Okay. And the appropriation for your agency
    is around $1 billion, a little over $1 billion.
        Ms. Schapiro. Yes, 2009 $916 billion, including the
    reprogramming request.
        Senator Durbin. So you are a cash generator----
        Ms. Schapiro. We are.
        Senator Durbin [continuing]. In terms of the revenues into
    the Treasury.
        Ms. Schapiro. And historically a very significant cash
    generator.
        Senator Durbin. And if the argument can be made that the
    industry is paying your agency to do its job and we've started
    this testimony here today arguing that you needed more people
    to do your job, it might be fair for those who are being
    regulated saying we're doing our part, in fact we're sending
    you about 40 percent more than you're actually spending in this
    agency.
        Would that be a fair comment?
        Ms. Schapiro. It might be.
        Senator Durbin. Okay. Well, this concerns me because if we
    were going in the other direction, we'd be arguing, well, we
    need to come up with some revenue source here to provide the
    regulatory structure to make sure that the Government's doing
    its job, but in fact the marketplace that you regulate is
    creating the revenue opportunity.
        Ms. Schapiro. That's correct, and actually that doesn't
    include penalties and fines that are paid into the Treasury in
    those instances where we don't create a fair fund to distribute
    back to investors. So there's actually additional funding over
    the fee generation.
        Senator Durbin. Okay. Let me go to a few more specific
    questions.
        Broker-dealers who sell stocks and bonds on commissions and
    investment advisors who offer advice are regulated under
    different Federal laws. The key difference is the rules
    governing their standard of conduct. Investment advisors held
    to a fiduciary standard which requires them to make investment
    decisions in the best interests of their clients. Brokers, in
    contrast, are held to something called a suitability standard
    under which they can sell securities as long as they are
    suitable to their clients.
        Interesting little distinction there, but the variations
    between brokers and advisors has been blurring in recent years
    and it's raised concern among some regulators that customers
    won't be able to tell the difference.
        I understand that you're taking a look at this.
        Ms. Schapiro. Absolutely. There's really no good reason for
    people not to get the same fiduciary protection and the same
    standard quality of regulation from people who are essentially
    giving them the same service but are called by different names.
        Senator Durbin. Let me ask you a question. First, let me
    preface it by saying I asked my staff this. I said, now is this
    for Chairman Schapiro or Chairman Gensler. They said, well, you
    better ask her. So here's a hedge fund issue for you.
        The Pension Protection Act of 2006. Would this be your
    jurisdiction?
        Ms. Schapiro. The Pension Protection Act is largely
    administered by the Department of Labor, but there are elements
    that intersect with the SEC.
        Senator Durbin. Okay. Let me give you the situation. You
    tell me if this is something that you think falls in your
    jurisdiction.
        This Pension Protection Act made it easier for hedge funds
    to take pension money without registering it as an ERISA
    fiduciary, meaning they don't have disclosure and other
    requirements of other pension plan managers. Is this your
    field?
        Ms. Schapiro. This is the Department of Labor, I believe.
        Senator Durbin. Okay. Let me stop at that point and save
    this for the Department of Labor then.

                           REGULATION OF DERIVATIVES

        Derivatives, contracts between two investors, betting on
    whether a stock, bond or other security will go up and down in
    value have ballooned into one of the world's largest trading
    markets, estimated to be tens of trillions of dollars, yet it's
    largely outside the regulatory umbrella. Losses, as we know, at
    AIG have led to a Government bailout of $170 billion or $180
    billion.
        On May 13, President Obama unveiled a plan to regulate this
    market which had four stated goals.
        What do you consider to be the role of the SEC in this
    regulation?
        Ms. Schapiro. This is such an important area for both the
    SEC and the CFTC and, as you point out, the Treasury letter of
    May 13 lays out some requirements that we hope will be embodied
    in legislation with respect to credit default swaps and other
    standardized over-the-counter derivatives.
        It will be very important to have standardized clearing
    mechanisms, potentially exchange trading of standardized
    contracts, promote transparency, have adequate margin and
    collateral requirements in place for these transactions and
    subject the dealers in these instruments to regulation.
        Exactly where the lines between the SEC and the CFTC fall,
    I think, are something we'll be discussing certainly over the
    next several weeks, but it is clearly my view, and I believe
    Chairman Gensler's view and the Treasury's view, that we need
    to work together to ensure that we bring credit default swaps
    and other OTC derivatives firmly under the Federal regulatory
    umbrella and how we exactly draw those lines will be something
    we'll be discussing and obviously Congress will have a deep
    interest in, as well.
        Senator Durbin. I'll ask a question that relates to last
    week it was reported that two attorneys from SEC's Enforcement
    Division engaged in suspicious trading in stocks of companies
    under SEC investigation, according to a March 3 report by the
    SEC Inspector General David Kotz.
        Mr. Kotz concluded that the SEC previously had essentially
    no compliance system in place to ensure that its employees did
    not engage in insider trading themselves. On May 22, the SEC
    issued a press release outlining how the agency would increase
    accountability.
        How will this new process impact the current SEC workload?
    Will it require additional resources or staff to implement?
        Ms. Schapiro. Thank you for asking that question. It's
    really an important area.
        When I learned about this inspector general report in
    March, I immediately set in motion--and some things were
    already underway, I should say--a number of changes to our
    process which was acceptable under the Office of Government
    Ethics rules but clearly not sufficient in my view.
        We now require all trades by employees to be pre-cleared.
    We've created a restricted list that prohibits an employee from
    trading in any stock of a company that's under investigation by
    the SEC, whether they know anything about the investigation or
    its existence or not.
        We prohibit any ownership in stocks of broker-dealers,
    investment advisors, publicly traded exchanges, and we're
    requiring employees to authorize that their brokers in
    duplicate trade confirmation statements to the SEC where they
    will be incorporated into a computerized system that will make
    monitoring compliance with all of these new rules much more
    effective, and we'll be hiring a chief compliance officer. I
    expect we'll sign the contract for the new system in the next
    several days and it should be operational in 1 to 3 months.
        The new rules requiring pre-clearance of all trades by the
    Ethics Office and the creation of the prohibited list and so
    forth are pending at the Office of Government Ethics and have
    been there for about a week. We jumped on this immediately.
        Senator Durbin. Thank you very much.
        Senator Collins.
        Senator Collins. Thank you, Mr. Chairman.

                              CONSUMER PROTECTION

        Ms. Schapiro, there is an idea that is being discussed to
    consolidate the consumer protection functions of a variety of
    regulators under a single entity and one such proposal would
    result in the SEC losing its consumer protection
    responsibilities.
        I personally don't think this makes any sense at all
    because to me, the whole reason we have an SEC is to act to
    protect consumer investors.
        What are your views on creating a single consumer
    protection entity that would include the SEC's
    responsibilities?
        Ms. Schapiro. I think that it certainly is one of the ideas
    that's being bandied about and there are many, and I think
    discussions continue to be very vigorous and ongoing throughout
    the regulatory community about the right approach here.
        I think the one thing everybody agrees on is that we must
    have a reorientation toward consumer and investor protection
    among all of our financial regulatory agencies. So whether we
    have the creation ultimately of a single entity or we just
    reheighten and refocus within the bank regulatory agencies and
    the SEC on the protection of the end users of financial
    products, we, I think, all agree that we have to go down that
    path.
        My view is that, and it's been reported that, I don't want
    to create new gaps in the regulatory system and I fear that
    moving mutual fund regulation out of the SEC and into a new
    agency has the potential to do that.
        Mutual fund--investor protection and the mutual fund
    concepts, it's about more than the end product of the sale to
    the investor. It's really about what's the governance of the
    mutual fund. What's the quality of execution that the mutual
    fund is getting when it's buying stocks for its portfolio?
    What's the quality of the disclosure of those companies that
    the mutual fund is buying? What's the quality of the disclosure
    that the mutual fund itself is making?
        These are all a piece. They're all woven together to create
    the fabric of investor protection in the mutual fund space and
    so I want to be sure we don't damage that fabric.
        That said, whatever Congress in its wisdom and the
    administration working together to create that will protect
    investors better and consumers better, we intend to, you know,
    play as strong a role as we can.
        Senator Collins. Thank you. Mr. Chairman, I'm just going to
    ask one final question, if I may, and that has to do with the
    credit rating agencies. I understand you, too, brought this
    issue up, but, unfortunately, I wasn't here. I was voting when
    you did. So I apologize if this is redundant.
        I'm very concerned about the role that was played by credit
    rating agencies in this crisis as far as their ratings of
    subprime mortgages of mortgage-backed securities.
        It seems to me that the current system has so many inherent
    conflicts of interest built into it, not the least of which is
    that the credit rating agencies are being paid by the firms
    that are marketing the securities.
        What are you looking at to improve the integrity of the
    credit ratings process?
        Ms. Schapiro. You very correctly highlight that in the
    issuer paid model where I create a security and then I ask you
    to rate it and I pay you for that rating and I pay you on an
    ongoing basis for future ratings, if I'm happy, has profound
    conflicts of interest and we are looking in particular, as we
    discussed earlier, at the rating shopping phenomenon which
    allows me to select the ratings agency that provides or
    promises to give the highest rating and we're also looking at
    more robust disclosure about fees that are paid and the
    conflicts of interest that exist in the issuer paid model.
        We held a roundtable about 1 month ago. We brought in all
    different kinds of rating agencies to talk about their
    different business models and the pros and cons of each and
    we've gotten a lot of very good ideas from that process and
    we're hoping this summer to pursue some additional rulemaking
    in this area.
        We will focus on rating shopping. We will focus on
    disclosure. We will also look at whether we need to eliminate
    references in SEC rules which creates a market for rating
    agencies and gives a certain amount of credibility and stature
    to ratings that perhaps they don't always deserve.
        Senator Collins. Thank you. Thank you, Mr. Chairman.
        Senator Durbin. Senator Tester.
        Senator Tester. Yeah. I just do want to get to the CFTC
    Chairman, but I just want to just close by saying thank you.
    Thank you for what you've done, thank you for what you're going
    to do.
        I would ask that, you know, as these budgets come forward,
    2005 to 2007 budgets were visited about here on a couple
    different occasions, somebody dropped the ball. Congress
    probably had a part to do with it. Your predecessor may have
    had a part to do with it.
        But it ended up in a disaster and we need to make sure that
    you have the resources, no more, no less, but just the
    resources you need to do your job, and I think that, as a
    friend of mine pointed out last week, we need to quit thinking
    in Government in silos, we need to start thinking about the
    consumer and whoever is consuming that product, whether it's in
    education or housing or in this case securities, and make sure
    that Government works for the betterment of everybody.
        But I really want to thank you for the work you've done so
    far. It's very impressive, and I look forward to working with
    you in the future.
        Ms. Schapiro. Thank you very much.
        Senator Durbin. Thank you very much, Senator Tester.
        Chairman Schapiro, thank you for your testimony.
        Ms. Schapiro. Thank you, Mr. Chairman.

                         ADDITIONAL COMMITTEE QUESTIONS

        Senator Durbin. We'll be working closely with you and your
    agency as we put together the appropriation bill.
        Ms. Schapiro. Thank you.
        [The following questions were not asked at the hearing, but
    were submitted to the Commission for response subsequent to the
    hearing:]
                Questions Submitted by Senator Richard J. Durbin
                   staying on the cutting edge of technology
        Question. With rapid acceleration of electronic innovations in the
    securities markets, the Securities and Exchange Commission faces the
    challenge of keeping abreast of advancements. In the face of aggressive
    efforts of trading firms to invest in new technology, it is critical
    that SEC investigators understand the nuances of modern trading
    operations.
        Does the SEC have sufficient resources to hire the best and
    brightest financial technologists?
        Have you identified specific gaps in SEC's workforce expertise when
    it comes to electronic trading?
        Answer. As you may know, the SEC has launched a new initiative with
    existing resources to broaden the skill sets within its workforce,
    ranging from financial analysis to complex trading strategies. As part
    of this effort, the SEC is recruiting seasoned industry professionals
    into our enforcement, examination, and risk assessment programs,
    through efforts such as the Industry and Market Fellows and the Senior
    Specialized Examiner programs. The SEC is also implementing
    enhancements to the SEC's existing training programs, in areas such as
    the examination program which is enhancing staff expertise in topics
    such as fraud detection, complex financial products, and trading and
    where more than a third of the staff have signed up for training to
    become Certified Fraud Examiners. If Congress were to approve
    additional resources for the SEC, then the agency would look to expand
    these recruiting and training efforts very significantly.
        A key repository at the SEC for expertise on trading systems is the
    Automated Review Program within the Division of Trading and Markets.
    The program conducts examinations of the trading systems of markets and
    clearing agencies, to assess the data's confidentiality, integrity, and
    availability. The program has been able to stay on top of this rapidly
    evolving field, through efforts such as the CYBER CORPS program, which
    has served as a great resource for identifying talented IT
    professionals, and through the NSA, which has provided non-commercial
    software and technical training. Over the past few years, the program
    has increased its expertise in IT security and launched new initiatives
    in the areas of cyber security, auditing intermediaries in credit
    default swaps, and international markets. The Division now plans to
    implement new source code review of trading systems and more
    sophisticated penetration testing, to the extent resources are
    available.
                      expediting fair funds disbursements
        Question. Under the ``Fair Funds for Investors'' provision (Section
    308(a) of Sarbanes-Oxley), the Securities and Exchange Commission is
    required to return money to investors victimized by securities fraud.
    Previously, disgorgements and penalties were deposited into a U.S.
    Treasury General Fund.
        Answer. The Fair Funds provisions of the Sarbanes-Oxley Act of 2002
    gave the Commission authority to increase the amount of money returned
    to injured investors by allowing civil penalties to be included in Fair
    Fund distributions. Prior to Sarbanes-Oxley, only disgorgement could be
    returned to investors.
        Question. What improvements have been realized so far from the
    creation of a specialized office on ``Fair Funds'' disbursement?
        Answer. The Commission established the Office of Collections and
    Distributions (OCD) to, among other things, expedite the distribution
    of Commission recoveries to injured investors. The Office is
    responsible for overseeing the distribution of funds to investors who
    have been injured by securities law violations, implementing the
    Enforcement Division's collections and distributions programs, and
    conducting litigation to collect disgorgement and penalties imposed in
    certain Enforcement actions. In addition, the Office tracks, records,
    and provides financial management assistance with respect to the funds
    and provides overall case management services for the Division.
        The Office has helped streamline the distributions process and
    enhance its internal controls, and it has overseen the distribution of
    approximately $3.2 billion to injured investors to date. Among the
    Office's recent initiatives has been to issue standardized, step-by-
    step guidance to enforcement staff on developing and implementing
    distribution plans in both civil actions and administrative
    proceedings. In addition, the Office has consolidated collections and
    distributions information onto the enforcement program's internal
    website so that is more accessible to staff nationwide. In
    collaboration with other SEC offices, OCD has created templates to
    standardize the reporting of periodic and final accountings for
    distributions of disgorgement funds and Fair Funds, as well as to
    facilitate the examination of administrative expenses. In order to
    manage receivership expenses, the Office also developed billing
    instructions for receivers. OCD conducts training for the staff on the
    use of both the standardized reports and the billing instructions.
        Question. SEC's financial tracking system (Phoenix) was established
    to improve management of distribution of Fair Funds to victims of
    securities law violations. Is the ``Phoenix'' system fully functional
    at this time? What remains to be done to improve its capabilities?
        Answer. To date, the Phoenix system has only been partially
    deployed. Under the functionalities that are already operational,
    Phoenix assists with tracking and recording the disgorgement and
    penalties ordered in Enforcement actions. However, the Phoenix system
    does not yet track and record distribution information. This function
    is currently performed in a limited way within CATS 2000, the SEC's
    case tracking system, which is itself slated to be replaced.
        To that end, the agency is developing business requirements for a
    new module that would record and monitor distribution-related
    information, including information reported on the newly developed
    standardized accounting reports. Once fully built, this module would
    enable the SEC to track a distribution fund's current status or phase
    in the distribution process, enhance reporting and internal controls
    over the accuracy and integrity of distribution data, and provide
    better information about the investment of Commission funds with the
    Department of the Treasury's Bureau of Public Debt. This effort also
    will support integration with the agency's core financial management
    system.
        The SEC expects to finalize and deploy the distributions module in
    fiscal year 2010, depending on the availability of sufficient funding.
        Question. I note that SEC is currently reviewing its performance
    measure of the percentage of Fair Funds and disgorgement dollars
    designated for distribution to victims within a year. What are the
    challenges? What is hampering SEC's ability to track the timeliness of
    the fund distributions and maintain accurate data?
        Answer. As noted in the Commission's fiscal year 2010 budget
    justification, this measure is currently under review and may be
    adjusted in the future. One of the primary challenges with respect to
    such a measure has been the SEC's inadequate systems to collect,
    analyze, and report on distributions (described above), which have
    hampered the Commission's ability to track the timeliness of the fund
    distributions and maintain accurate data.
        Question. What portion of this year's budget (fiscal year 2009) and
    the proposed needs for fiscal year 2010 will be devoted to the Fair
    Funds distribution project?
        Answer. The first major expense associated with Fair Funds
    distributions is information technology, most notably the Phoenix
    system. In fiscal year 2009, the SEC expects to obligate approximately
    $0.1 million in ongoing maintenance and support related to Phoenix. For
    fiscal year 2010, the agency estimates that distributions-related
    projects will cost approximately $3.2 million. These projects include
    efforts to develop new collections and distributions tracking
    functionalities, enhance the current Phoenix system, integrate Phoenix
    with the enforcement program's new HUB tracking system and the core
    financial system, and conduct ongoing system maintenance.
        A second component of the SEC's distributions-related costs is the
    expense associated with the Office of Collections and Distributions.
    OCD's costs amount to approximately $6.0 million in fiscal year 2009
    and $6.2 million in fiscal year 2010. However, it is important to note
    that the Office performs a variety of functions in addition to
    distributions, including assisting with collection of delinquent debts
    and maintenance of internal controls.
        The final element is the substantial staff time spent on
    distributions functions within other parts of the SEC. For example,
    within the enforcement program (outside of OCD), attorneys spend
    considerable time on the development, oversight, and implementation of
    distribution plan actions, while support staff perform data input for
    all cases. In addition, the SEC's Office of Financial Management aids
    with funds investment and disbursement, as well as internal controls;
    the Office of the General Counsel reviews and comments on distribution-
    related documents; and the Office of Economic Analysis evaluates the
    methodologies for measuring investor loss. Although the staff time
    involved is significant, the SEC does not currently track costs at this
    level.
                                     ______

                    Question Submitted by Senator Ben Nelson
                       rule 151a, issued january 16, 2009
        Question. On January 16th of this year, the Commission issued a new
    rule regarding indexed annuities and certain other insurance contracts.
    This rule takes effect on January 12, 2011.
        What level of resources will the SEC devote in fiscal year 2010 to
    preparing to implement this rule? Can you calculate the cost to the
    Commission of the work necessary to fully implement this rule so that
    it can be operational on January 12, 2011?
        Looking ahead to the next fiscal year (fiscal year 2011), in taking
    on this additional regulatory responsibility, will additional staff be
    required? What will additional staff needs and additional regulatory
    responsibility mean for the Commission's budget?
        Answer. The release adopting this rule (Rule 151A) articulated the
    Commission's determination that investors in certain indexed annuity
    contracts are entitled to the protections of the federal securities
    laws. The rule includes a new definition of ``annuity contract'' that,
    on a prospective basis, will define a class of indexed annuities that
    are outside the scope of Section 3(a)(8) of the Securities Act, which
    provides an exemption under the Securities Act for certain insurance
    contracts. These indexed annuities will, on a prospective basis, be
    required to register under the Securities Act. With few exceptions,
    indexed annuities historically have not been registered as securities.
    The new definition will apply to indexed annuities that are issued on
    or after the January 12, 2011, the effective date of the rule.
        The staff is currently considering how to tailor disclosure
    requirements for indexed annuities. As with any other rulemaking, if
    the staff determines to recommend that the Commission propose new
    disclosure requirements, resources will be applied to develop a
    proposal, analyze public comments on the proposal, determine whether to
    recommend adoption of the proposal and consider whether and how it
    should be modified to reflect commenters' concerns.
        In addition, the Commission encouraged insurance companies, sellers
    of indexed annuities, and other affected parties to submit specific
    requests for guidance regarding the implementation of the rule. We
    anticipate that any responses to such requests will require staff
    resources.
        The Division of Investment Management also anticipates reviewing
    filings for approximately 400 new indexed annuity contracts in the
    first year.
        In all, the Division of Investment Management believes the
    implementation of Rule 151A will require an allocation of seven staff
    positions during the first year, with that number likely to decrease in
    the years following the initial implementation. The estimated cost of
    these seven positions is $1.6 million for fiscal year 2011. As
    discussed above, these staff will perform further rulemaking as
    appropriate, provide interpretive advice, and review disclosure
    filings.
                                     ______

                  Questions Submitted by Senator Susan Collins
        Question. Chairman Schapiro, recently many news outlets have issued
    stories about the administration's proposal to move some consumer-
    protection powers outside of the SEC. Reports state that that you are
    opposed to such a proposal. A May 20th Wall Street Journal article
    quotes you as saying that such a plan would ``. . . be hugely expensive
    and highly inefficient . . .'' Would you discuss your objections?
        Answer. I did not believe that investors would be better protected
    by separating some securities products from others, potentially
    creating gaps in the regulatory and enforcement regime. Securities
    products are different from consumer credit products: generally they
    are not guaranteed and include a number of inherent risks, including
    the loss of principal. The administration's white paper outlining its
    consumer protection plan appears to recognize this, and I do not object
    to that approach.
        Question. Secretary Geithner recently laid out a framework for
    overseeing the derivatives market including rigorous reporting
    requirements. Such a proposal would give the SEC and CFTC new
    authorities to regulate derivatives. What are your thoughts on the plan
    and the role of the SEC in the regulation of derivatives?
        Answer. I agree with the Secretary's approach. Both the SEC and
    CFTC have a role in regulating derivatives products. We continue to
    work together and make progress on how such a regime might work to best
    fill gaps in the regulatory framework and prevent regulatory arbitrage.
    I look forward to working with Congress to make the necessary
    legislative changes.
        Question. Two veteran enforcement lawyers at the SEC are currently
    under investigation for insider trading. A May 16 a Wall Street Journal
    article quotes a report by the SEC Inspector General saying that ``the
    SEC has `essentially no compliance system' to detect potential insider
    trading.'' As a result of the investigation into the trading activities
    of the two attorneys', the SEC has proposed the imposition of new rules
    on employee trades. How does this investigation affect your confidence
    in the ability of the SEC staff? In your estimation, do the recent
    troubles at the SEC signify fundamental problems within the
    organization, and if so how do you propose to rectify the issues?
        Answer. I have the utmost confidence in the ability of the SEC's
    staff and their unflagging dedication to the protection of investors.
    Time and time again, I have been impressed by the staff's talent,
    integrity, and enthusiasm for the agency's mission. However, it became
    clear to me soon after joining the agency that the SEC's system for
    ensuring compliance with employee trading rules was not sufficient. The
    report by the agency's Inspector General concerning trading activity by
    certain employees reinforced my belief that the SEC should have a
    trading compliance system that is second to none.
        I know the agency's staff shares my belief that, in light of the
    SEC's mission, it is vital that we conduct ourselves according to the
    highest standards of ethical conduct when it comes to our own financial
    holdings and transactions. To that end, we have taken several
    significant steps to strengthen the SEC's compliance system and reduce
    the potential for even the appearance of inappropriate securities
    trading:
      --We have proposed new rules concerning employee trading. These rules
            will, among other things:
        --Require the pre-clearance of all trades.
        --Prohibit all trading in the securities of a company under SEC
                investigation, regardless of whether the employee is aware
                of the investigation.
        --Require all employees to authorize their brokers to provide
                duplicate trade confirmation statements to the agency.
        --Prohibit the ownership of securities in publicly-traded exchanges
                and transfer agents, in addition to existing prohibitions
                against owning securities in other firms directly regulated
                by the Commission.
        --Require employees to certify that they do not have any non-public
                information about the company whose securities they are
                trading.
          These rules were submitted to the Office of Government Ethics
            (``OGE'') on May 22, 2009, and we await OGE's comments.
      --We recently retained an outside firm specializing in automated
            compliance systems to develop a new computer compliance system
            for the agency, which will automate and simplify the
            transaction reporting process and make it easier to verify and
            monitor employee trading.
      --We are creating a new Chief Compliance Officer position, and have
            already received applications from a number of excellent
            candidates for the new position.
      --I have consolidated responsibility for the oversight of employee
            securities transactions within the SEC's Ethics Office and
            devoted additional staff resources to monitor, review, and
            spot-check these transactions.
        These measures will bolster and modernize the agency's compliance
    program, and help the talented and committed staff do its critical work
    of protecting investors without distraction.
        Question. The fiscal year 2010 budget request does not include an
    increase for the SEC Inspector General. Considering the likelihood of
    an increased workload at the IG's office, as the SEC increases
    surveillance and monitoring of employee trading, do you think that the
    IG will need additional funds?
        Answer. The Inspector General submitted a request for three
    additional positions only a few days before the publication of the
    SEC's Congressional Justification for fiscal year 2010, and therefore
    these additional positions were not reflected in the document. However,
    I have since approved the addition of these personnel, which would
    bring the OIG to a total of 19 positions. When these new staff are
    combined with the two positions approved for OIG in January 2009, the
    Office will have grown by a total of 73 percent within this calendar
    year, which is the highest growth rates of any SEC office during this
    timeframe.
        Question. Please provide a breakdown of the tips and complaints the
    SEC received in fiscal year 2007 and fiscal year 2008, to help explain
    the large decline in that year.
        Answer. As you mentioned, the number of tips and complaints
    received by the SEC's Office of Internet Enforcement declined
    significantly between 2007 and 2008, from about 1,586,000 to about
    615,000 in 2008. Unfortunately, the SEC has not had a tracking system
    that can break down those figures into their component parts or support
    rigorous analysis of underlying trends.
        The SEC's initiative to bolster its systems for tracking tips and
    complaints, working with the Center for Enterprise Modernization, will
    help the agency perform much better analyses in the future. Such
    analyses will help the SEC understand the overall statistics on tips
    and complaints and identify trends among specific firms or practices
    that can provide valuable information for potential enforcement action
    and compliance exams. The SEC also is working to streamline and
    standardize the agency's handling of tips and complaints, so they can
    be addressed more consistently and effectively. Nevertheless, for the
    2007-2008 period, the SEC is reliant on anecdotal evidence to explain
    the decline in tips and complaints during that timeframe.
        In general, the number of complaints the agency sees is related to
    the volume of spam and commercial email traffic received by investors.
    A number of factors likely affected this volume during the 2007-2008
    timeframe. First, the SEC's initiative starting in 2007 to combat spam-
    driven stock manipulations was reported to have been a major
    contributor to reducing the amount of spam.\1\ Under this initiative,
    the SEC suspended trading in the securities of dozens of companies that
    had been the subject of spam stock promotions and initiated several
    spam-related enforcement actions. According to a private-sector
    Internet security report, a 30 percent decrease in stock market spam
    ``was triggered by actions taken by the U.S. Securities and Exchange
    Commission, which limited the profitability of this type of spam . .
    .'' \2\
    ---------------------------------------------------------------------------
        \1\ ``SEC makes inroads against financial spam; Crackdown pays off
    as e-mail campaigns slow,'' by Matt Krantz, USA Today, Oct. 5, 2007 at
    p. 7A.
        \2\ http://eval.symantec.com/mktginfo/enterprise/white_papers/ent-
    whitepaper_internet_security_threat_report_xii_09_2007.en-us.pdf.
    Copyright 2007 Symantec Corporation. All rights reserved. Symantec, the
    Symantec Logo, BugTraq, Symantec Brightmail AntiSpam, and Symantec
    DeepSight are trademarks or registered trademarks of Symantec
    Corporation or its affiliates in the United States and other countries.
    Apple, Mac OS, and QuickTime are trademarks of Apple Inc., registered
    in the United States and other countries. Safari is a trademark of
    Apple Inc. Microsoft, ActiveX, Windows, and Windows Media are either
    registered trademarks or trademarks of Microsoft Corporation in the
    United States and/or other countries. Sun, Java, and Solaris are
    trademarks or registered trademarks of Sun Microsystems, Inc. in the
    United States and other countries.
    ---------------------------------------------------------------------------
        Another major factor is the growing use and sophistication of
    commercial-grade spam email filters, blacklists, and experimental
    ``data mines,'' which radically diminish the number of mass investment
    solicitations received by the average investor. Additionally, tough
    state and federal anti-spam laws, and high-profile prosecutions under
    those laws, likely helped to deter spammers.\3\
    ---------------------------------------------------------------------------
        \3\ See http://www.msnbc.msn.com/id/18955115/(arrest of Robert Alan
    Soloway); http://www.sophos.com/pressoffice/news/articles/2008/02/
    japan-spam.html (Yuki Shiina); http://spamkings.oreilly.com/archives/
    2006/03/stock_spammers_stung_by_secret.html (``g00dfellas'' spam gang).
    ---------------------------------------------------------------------------
        General market conditions also likely played a role in the decline
    in tips and complaints. Email stock promoters' activities lend
    themselves best to the promotion of obscure, thinly-traded stocks, such
    as the tech stocks that flourished during the late 1990s market
    ``bubble.'' Since the collapse of that bubble, it seems fewer investors
    have been interested in these microcap stock promotions.
        It is important to note that, while the number of tips and
    complaints went down significantly in 2008, the figure is still 146
    percent higher than it was 5 years previously. By comparison, the
    number of full-time equivalents in the SEC's enforcement program
    increased by only 23 percent during that period. Also, while the
    quantity of complaints the SEC received decreased between 2007 and
    2008, the SEC believes that the quality of complaints has increased
    dramatically. Thus, the agency's workload from these complaints has
    actually become greater over the past year, despite the reduced number
    of complaints relating to spam.

                         ADDITIONAL SUBMITTED STATEMENT

        [Clerk's Note.--The subcommittee has received a statement
    from the Investment Company Institute which will be inserted
    into the record at this point.]
             Prepared Statement of the Investment Company Institute
        The Investment Company Institute \1\ appreciates this opportunity
    to submit testimony to the Subcommittee in support of the
    administration's fiscal year 2010 appropriations request for the
    Securities and Exchange Commission (SEC). We commend the subcommittee
    for its consistent past efforts to assure adequate resources for the
    SEC. For the reasons expressed below, we urge Congress to provide
    appropriations at least at the funding level requested by the
    President.
    ---------------------------------------------------------------------------
        \1\ The Investment Company Institute is the national association of
    U.S. investment companies, including mutual funds, closed-end funds,
    exchange-traded funds (ETFs), and unit investment trusts (UITs). ICI
    seeks to encourage adherence to high ethical standards, promote public
    understanding, and otherwise advance the interests of funds, their
    shareholders, directors, and advisers. Members of ICI manage total
    assets of $10.18 trillion and serve over 93 million shareholders.
    ---------------------------------------------------------------------------
        As SEC Chairman Mary Schapiro noted in her testimony, the recent
    financial crisis has served as a reminder of the importance and
    interconnectedness of the securities markets to our nation's economy
    and the financial health of millions of Americans. The crisis also
    demonstrated that the current regulatory system is not up to the
    challenges posed by modern financial markets and needs to be
    significantly strengthened and modernized. It has led to broad support
    for reform of the U.S. system of financial services regulation,
    including numerous calls for Congress to close regulatory and
    disclosure gaps to ensure appropriate oversight with regard to hedge
    funds, derivatives, and municipal securities. Toward these ends, it is
    critically important to provide the SEC with the resources necessary to
    assure its ability to soundly and effectively regulate securities
    offerings, market participants, and the markets themselves. And, to the
    extent that the scope of the agency's responsibilities is expanded with
    respect to hedge funds, derivatives, and/or municipal securities, it
    will be imperative that it have sufficient staffing and resources to
    effectively perform all of its oversight functions.
        More generally, the ongoing policy discussions about regulatory
    reform have highlighted why adequate funding for the SEC should
    continue to be a Congressional priority. Unlike other financial
    regulators, the SEC is specifically charged with protecting investors.
    The agency seeks to fulfill this mission in many different ways,
    including through the disclosure and substantive rules it adopts and
    administers, through examinations of regulated entities, and through
    its enforcement program, to name a few. In the wake of the financial
    crisis, it is essential to provide the SEC with the resources it needs
    to successfully pursue its investor protection mission.
        Mutual funds and other registered investment companies have a
    strong stake and vested interest in having a well-funded and effective
    SEC. Registered investment companies are an integral part of our
    economy. They represent, as a whole, the largest group of investors in
    U.S. companies, holding 27 percent of the outstanding stock in U.S.
    companies at year-end 2008. Registered investment companies also held
    the largest share of U.S. commercial paper--an important source of
    short-term funding for major U.S. and foreign corporations. In
    addition, they continue to be one of America's primary savings and
    investment vehicles for middle-income Americans. Today, over 93 million
    investors in more than 53 million U.S. households own shares of
    registered investment companies; the median household income of these
    investors is $80,000. And, since 1990, the percentage of U.S.
    retirement assets held in mutual funds and other registered investment
    companies has more than quadrupled. These millions of Americans
    continue to recognize that mutual funds are the best means of achieving
    their long-term financial goals. They deserve and benefit from
    continued vigilant regulatory oversight of mutual funds and other
    registered investment companies.
        The administration's fiscal year 2010 budget proposes SEC funding
    at a level that represents a 7 percent increase over fiscal year 2009.
    Chairman Schapiro explained in her testimony that this would permit the
    SEC to fully fund an additional 50 staff positions over 2008 levels,
    enhance its ability to uncover and prosecute fraud, and allow it to
    begin to build desperately needed technology. More specifically,
    Chairman Schapiro stated that the additional funding would allow the
    SEC to hire seasoned industry professionals and market experts to
    strengthen and expand the SEC's Office of Risk Assessment, improve its
    examination program, and bolster its oversight of the investment
    management and broker-dealer industries. We have strongly supported
    precisely these types of measures.\2\ It is essential that the agency
    have greater ability (and resources) to attract and retain professional
    staff having significant prior industry experience. Their practical
    perspectives would enhance the agency's ability to keep current with
    market and industry developments and better understand the impact of
    such developments on regulatory policy. The new Industry and Market
    Fellows Program is an encouraging step in the right direction, but we
    also believe that the agency should build strong economic research and
    analytical capabilities and should consider having economists resident
    in each division.
    ---------------------------------------------------------------------------
        \2\ See Letter to The Hon. Mary L. Schapiro from Paul Schott
    Stevens dated February 18, 2009 (attaching recommendations for SEC
    priorities under Chairman Schapiro's leadership). See also Financial
    Services Regulatory Reform: Discussion and Recommendations, which is
    available at http://www.ici.org/pdf/ppr_09_reg_reform.pdf. Chairman
    Schapiro also noted in her testimony that she intends to improve the
    overall management of the SEC, including by hiring a Chief Operating
    Officer to manage the organization. We also supported this idea in both
    our February 18, 2009 letter to Chairman Schapiro and Financial
    Services Regulatory Reform white paper.
    ---------------------------------------------------------------------------
        We are particularly pleased that a key strategic priority for the
    SEC's Division of Investment Management will be to strengthen and
    improve the money market fund regulatory regime. Last November, we
    convened a high level industry working group to study the money
    markets. In March, the group made a series of comprehensive
    recommendations that responded directly to weaknesses in current money
    market fund regulation, identified additional reforms that will improve
    the safety and oversight of money market funds and position responsible
    government agencies to oversee the orderly functioning of the money
    market more effectively.\3\ We look forward to working with the SEC on
    this critically important issue.
    ---------------------------------------------------------------------------
        \3\ See Report of the Money Market Working Group, submitted to the
    Board of Governors of the Investment Company Institute on March 17,
    2009, available at http://www.ici.org/pdf/ppr_09_mmwg.pdf.
    ---------------------------------------------------------------------------
        In conclusion, the SEC and the fund industry share a common
    objective of assuring that mutual funds remain a vibrant, competitive
    and cost effective way for average Americans to access the securities
    markets and realize their long-term financial goals. Future regulatory
    and oversight actions by the SEC will play a key part in this process.
    It is therefore critically important that the SEC have sufficient
    resources to adequately fund the staffing of the agency and to take
    other steps to fulfill its mission of protecting the nation's
    investors, including the over 93 million Americans who own mutual
    funds. Accordingly, we urge Congress to provide appropriations at least
    at the funding level requested by the President.
        We appreciate your consideration of our views.
                      COMMODITY FUTURES TRADING COMMISSION

    STATEMENT OF HON. GARY GENSLER, CHAIRMAN
        Senator Durbin. I'd like to invite Chairman Gensler from
    the Commodity Futures Trading Commission to come forward.
        This year, 2009, marks the 35th year since the
    establishment of this agency. At this time of its inception in
    1974, CFTC's 500 employees were tasked with ensuring fair
    practices and honest dealings on the commodity exchanges of
    America's then $500 billion industry in 1974.
        Today, it is a $22 trillion industry and it looks a lot
    different. The traditional agricultural products are still
    there, but the landscape has been diversified with novel and
    complex commodities, from grains to gold, currencies to carbon
    credits.
        In the past decade trading volume has increased more than
    tenfold, reaching over 3.4 billion trades in 2008. Actively
    traded contracts have quintupled from 286 in 1998 to 1,521 in
    2008.
        CFTC oversees $5 trillion of trades every single day. So we
    don't want you to stay at the table too long. We want you to
    get back and keep an eye on those trades, but we invite you,
    Chairman Gensler, to give your testimony at this point.
        Mr. Gensler. Thank you, Chairman Durbin, Ranking Member
    Collins, and members of the subcommittee, Senator Tester.
        I'm pleased to be here today to discuss our budget and
    especially pleased to learn that Senator Durbin recently
    visited our Chicago office which very encouraged the staff and
    I thank you for it.
        I'm also grateful to each of you for your individual
    support on my recent confirmation. It's an honor to serve the
    country in this capacity.
        I come before you having served as Chairman just 6 calendar
    days, but with full knowledge of the failures of our regulatory
    system, failures that affected all Americans, failures that we
    must ensure do not happen again, and as Chairman, I will use
    every authority available to protect the American people from
    fraud, manipulation, and excessive speculation.
        I will also work with Congress on new authorities to bring
    much-needed transparency and regulation to the over-the-counter
    derivatives marketplace.
        I am grateful on behalf of the agency for the $146 million
    recently appropriated for this Commission. This boost has
    allowed us to get back to beginning to address the alarmingly
    low staffing levels there are at the agency. Our size, however,
    is still roughly equivalent to the Commission that was
    established 35 years ago.
        Today, the futures market is dramatically different, as
    Chairman Durbin just outlined, being some 45 times larger than
    it was 35 years ago, and much more complex as well.
        Just 10 years ago the CFTC was near its peak staffing
    levels, near 580 full-time equivalents. It's shrunk over 20
    percent in the past years, but with your help the fiscal 2009
    funding will permit us to get back to where we were in 1999.
        Since 1999, however, volumes have gone up fivefold, the
    number of contracts have gone up sixfold. The complexity, of
    course, I don't need to tell you, has gone up dramatically.
    We've gone from open outcry pits to electronic trading which is
    in some cases harder to monitor. We've also lived through the
    worst financial crisis in 80 years and seen the results of an
    asset bubble in commodity prices.
        In short, the Commission remains an underfunded agency and
    we're very grateful to the President's budget of $160.6 million
    in recognition of some of these needs. If I could just share
    with you some of the things that have been highlighted to me in
    my first 6 days. I think we still need to ensure that our
    enforcement effort is larger to ensure robust enforcement of
    our laws. Currently, we have about 141 attorneys in our
    Enforcement Division. I believe this is still quite lower than
    what's required, given the financial turmoil we've lived
    through.
        We must ensure greater transparency. I believe that
    commodity index funds did contribute to the asset bubble that
    we've just lived through. To bring greater transparency will
    require more economists. It's going to require announcements in
    our weekly commitments in traders' reports. We'll also need to
    upgrade our systems as well.
        We must ensure that position limits consistently applying
    across the board, and that we're reviewing hedge exemptions and
    no action processes in that regard.
        Our information technology (IT) systems and particularly
    our mission critical systems on positions and transactions have
    not been upgraded for quite some time and I've looked forward
    to working with this subcommittee on getting funds to try to
    upgrade these mission critical systems.
        And also, we need to ensure timely review of new products
    and rule change filings. This has lagged a great deal and just
    last year with the new farm bill, the review of significant
    price discovery contracts will be important moving forward.
        These are only a few of the funding priorities, but I
    wanted to give the subcommittee a tangible sense of some of the
    things that we're grappling with and struggling with.
        With that in context, the $14.6 million of additional
    funding, about one-half of that is to stay at current services
    and one-half of that in the President's budget, fortunately, is
    for 38 new full-time equivalents to bring us back just above
    where we were 10 years ago, to about 610 full-time equivalents.
    These positions are essential. The increase, however, still
    won't allow us to fully address these complex markets and what
    we need to do.
        Before I close, I would like to highlight that the
    additional funding needs will also accompany much-needed
    regulatory reform. I, along with other regulators, and the
    administration feel we need to broaden reforms in the over-the-
    counter derivatives marketplace and bring it all under the
    regulatory umbrella. I look forward to working with this
    subcommittee and Congress for funding those new authorities to
    make sure they're properly implemented.

                               PREPARED STATEMENT

        And with that, I thank you very much and I look forward to
    answering your questions.
        I hope my written testimony can be entered into the record.
        Senator Durbin. Of course. It will be.
        [The statement follows:]
                       Prepared Statement of Gary Gensler
        Thank you, Chairman Durbin, Ranking Member Collins, and other
    members of the Subcommittee. I am pleased to be here to testify on
    behalf of the Commodity Futures Trading Commission, and I appreciate
    the opportunity to discuss issues related to the Commission's 2010
    Budget. I am also grateful to have had each of your individual support
    for my recent confirmation. It is a great honor to serve my country in
    this capacity.
        I come before you today having only served as CFTC Chairman for 6
    calendar days, but with the full knowledge of the failures of our
    financial regulatory system; failures that affected all Americans and
    failures that we must ensure never occur again.
        The last decade, and particularly the last 21 months, has taught us
    much about the new realities of our financial markets. We have learned
    the limits of foresight and the need for candor about the risks we
    face. We have learned that transparency and accountability are
    essential and that only through strong, intelligent regulation can we
    fully protect the American people and keep our economy strong.
        As Chairman of the CFTC, I will use every tool and authority
    available to protect the American people from fraud, manipulation and
    excessive speculation. I also look forward to working with Congress to
    establish new authorities to close the gaps in our laws and bring much-
    needed transparency and regulation to the over-the-counter derivatives
    market. I firmly believe that doing so will strengthen market
    integrity, lower risks, protect investors, promote transparency and
    begin to repair shattered confidence in our financial markets.
        I would like to thank the Committee for the $146 million recently
    appropriated for the CFTC for the 2009 fiscal year and special thanks
    to Chairman Durbin for visiting our Chicago office last year. As a
    result of this much needed boost in funding, the Commission has begun
    to address our alarming staffing levels; levels that recently reached
    historic lows.
        At present, the Commission employs about 500 career staff--roughly
    equivalent to when the Commission was created in 1975. Three decades
    later, the futures market has changed in every way: with respect to
    volume, complexity, risk and locality. What was once a group of
    regional domestic markets trading a few hours 5 days a week is now a
    global market trading 24/7, and what was once just a $500 billion
    business has exploded to a $22 trillion annual industry.
        Ten years ago, the CFTC was near its peak staffing level at 567
    employees, but shrunk by 20 percent over the subsequent 8 years before
    hitting a historic low of 437.
        With the increase in fiscal year 2009 funding the CFTC can reach
    572 employees.
        While this is a start, I believe that merely raising our staffing
    levels to the same as a decade ago will not be enough to adequately
    fulfill all of the agency's missions. In the last 10 years, trading
    volume went up over five fold. The number of actively traded futures
    and options contracts went up over six fold, and many of these are
    considerably more complex in nature. We also moved from an environment
    with open-outcry pit trading to highly sophisticated electronic
    markets.
        In addition to the dramatic evolution of the futures industry, we
    have experienced the worst financial crisis in 80 years. We also
    experienced, in my view, an asset bubble in commodity prices. The staff
    of the CFTC is a talented and dedicated group of public servants, but
    the significant increase in trade volume and market complexity, as well
    as rapid globalization, commands additional resources to effectively
    protect American taxpayers.
        For all of these reasons, I feel it is appropriate for our staffing
    levels and our technology to be further bolstered to more closely match
    the new financial realities of the day.
        In short, despite the recent increase in funding, the Commission
    remains an underfunded agency. The President's Budget recommendation of
    $160.6 million is recognition of this need. Specifically, the
    Commission needs more resources to hire and retain professional staff
    and develop and maintain technological capabilities as sophisticated as
    the markets we regulate.
        I'd like to identify some of my priorities and provide some
    illustrations of how resource limitations have constrained the
    Commission. Among my priorities will be to:
      --Ensure robust enforcement of our laws. Currently, the Commission's
            enforcement program consists of 122 employees--the lowest level
            since 1984. Though fiscal year 2009 funding will get us back to
            141 enforcement employees, this is still below the agency's
            peak of 167 and well below what we need given the current
            financial turmoil. Any financial downturn reveals schemes that
            could only stay afloat during periods of rising asset values.
            Our current, and much larger, downturn is exposing more leads
            than the Commission can thoroughly and effectively investigate.
            This is true both as it relates to fraud and Ponzi schemes as
            well as staff intensive manipulation investigations. The
            regulations we enact to protect the American people are
            meaningless if we do not have the resources to enforce them;
      --Ensure greater transparency of the marketplace. Also, I believe
            that commodity index funds and other financial investors
            participated in the commodity asset bubble. Notably, though, no
            reliable data about the size or effect of these influential
            investor groups has been readily accessible to market
            participants. The CFTC could promote greater transparency and
            market integrity by providing further breakdowns of non-
            commercial open interests on weekly ``Commitments of Traders''
            reports. The American public deserves a better depiction of the
            marketplace. The temporary relief from higher prices does not
            negate this need, especially given that a rebounding of the
            overall economy could lead to higher commodity prices;
      --Ensure position limits are consistently applied. The CFTC has begun
            a review of all outstanding hedge exemptions to position
            limits. This review will consider the appropriateness of these
            exemptions and look for ways to institute regular review and
            increased reporting by exemption-holders. The Commission also
            has begun a review of the process and standards through which
            no-action letters are issued. As part of these reviews, CFTC
            staff will consider the extent to which swap dealers should
            continue to be granted exemptions from position limits;
      --Ensure the Commission has the tools to fully monitor the markets.
            We must upgrade the Commission's mission critical IT systems
            for the surveillance of positions and trading practices.
            Neither is robust enough nor have they been upgraded to reflect
            the vast increase in volume and complexity. Our systems must
            begin to produce the surveillance reports needed to meet the
            analytical needs of our professional staff and the transparency
            needs of the public; and finally
      --Ensure timely reviews of the many new products and rule change
            filings of the futures markets. These have lagged due to the
            growth and complexity of markets and the added responsibilities
            extended to the Commission in the 2008 Farm Bill. The Farm Bill
            requires staff to review all contracts listed on Exempt
            Commercial Markets (ECMs) to determine if they are significant
            price discovery contracts--if they are, then any ECM that lists
            such a contract must also be reviewed to determine compliance
            with a stringent set of core principles under the Commodity
            Exchange Act.
        Other examples that I believe are illustrative of the difficult
    tradeoffs caused by resource constraints are:
      --The Commission does not conduct annual compliance audits of every
            Designated Contract Market (DCM)--rather only periodic reviews
            on average, every 3 years;
      --The Commission does not conduct annual compliance audits of every
            Derivatives Clearing Organization (DCO)--rather periodic
            reviews are conducted of selected core principles that are
            rotated and completed every 3 years; and
      --The Commission does not conduct routine examinations of Commodity
            Pool Operators, Commodity Trade Advisors, and Futures
            Commission Merchants--a function currently performed by Self
            Regulatory Organizations. If the Commission were to perform
            direct periodic audits our staff would better understand the
            operations of brokers and managed funds and could better assess
            compliance with the law and regulations.
        These are only a few of our important funding priorities and the
    workload challenges imposed by resource limitations. There are, of
    course, others. I hope that this helps the Committee to understand, in
    a tangible way, the challenges the Commission faces in regulating the
    futures markets the way the Nation requires.
        Although the work of the Commission can be highly technical in
    nature, the mission of the agency is quite straightforward. The CFTC is
    charged with:
      --Protecting the public and market users from manipulation, fraud,
            and abusive practices and
      --Promoting open, competitive and financially sound futures markets.
        With that context, I would like to address the specifics of the
    fiscal year 2010 Budget request. The fiscal year 2010 Budget proposes
    an increase of $14.6 million. Approximately half of the increase is
    needed to maintain our fiscal year 2009 level of operations into fiscal
    year 2010. The balance would fund an additional 38 positions.
        Twenty-six of the 38 staff would be allocated to principal program
    areas. Specifically, we would allocate 11 positions to Enforcement, 8
    to Market Oversight, 6 to Clearing and Intermediary Oversight, and 1 to
    the Chief Economist's office. The remaining 12 positions will provide
    critical mission support in the areas of legal analysis and counsel,
    technology support, international coordination, legislative and public
    outreach, and human capital and management support.
        The additional 38 positions are essential to addressing some of the
    limitations I mentioned earlier. This increase, however, will not
    provide the Commission with the critical mass of professional and
    technical expertise needed to ensure that the growing markets remain
    free of manipulation and fraud.
        For example, our enforcement staff needs to be significantly
    expanded to:
      --Ensure that crimes are punished to the fullest extent of the law;
      --Develop strategies aimed at quickly identifying and eradicating
            fraudulent schemes, such as Ponzi and foreign exchange ``boiler
            rooms''; and
      --Importantly, pursue resource-intensive investigations and
            litigations involving manipulation, including energy-related
            market abuses, so wrongdoers will not believe they are immune
            from enforcement simply due to the complexity of an enforcement
            action.
        Insufficient resources in the enforcement division force it to be
    too selective in the matters it investigates.
        Our market oversight operation needs additional highly-skilled
    economists, investigators, attorneys and statisticians to:
      --Analyze trading reports quickly and thoroughly, identify potential
            market problems or trader violations promptly, and avoid market
            disruptions and pricing anomalies;
      --Conduct timely and complete reviews of regulated entities to ensure
            compliance with all core principles;
      --Examine exchange self-regulatory programs on an on-going and
            routine basis with regard to trade practice and market
            surveillance; and
      --Ensure their compliance with disciplinary, audit trail, record-
            keeping and governance obligations.
        Our clearing and intermediary oversight program needs additional
    auditors, analysts, and attorneys. This would allow us to:
      --Ensure clearing systems protect against a single market becoming a
            systemic crisis;
      --Protect investors' funds from being misused or exposed to
            inappropriate risks of loss; and
      --Guard against abusive sales practices that harm customers and
            undermine market integrity.
        Our economic research program needs more economists to review and
    analyze new market structures and off-exchange derivative instruments,
    especially in light of novel and complex products and practices that
    call for state-of-the-art economic analysis. Further, additional
    resources would enhance our economic and statistical analysis,
    improving transparency of markets and better supporting the
    Commission's enforcement and surveillance programs.
        We also need to transform the current legacy information technology
    systems into robust systems capable of efficiently receiving and
    managing massive amounts of raw data as well as transforming them in to
    useful analytical and research tools.
        The Commission has made a substantial investment in technology over
    the past 2 years--focusing first on upgrading obsolete computer
    hardware to industry standards. We need technology, however, that is as
    modern and dynamic as the technology-driven markets we are charged with
    overseeing. Our investment in technology must be more than just
    periodic equipment upgrades and maintenance. The Commission must
    leverage resources by employing 21st century technology to protect the
    American people.
        As the Commission informed this Committee in February of this year,
    the agency believes it needs $177.7 million for fiscal year 2010 to
    perform its present duties. I look forward to working with this
    Committee to secure the funding necessary to meet our current
    regulatory responsibilities.
        Before I close, I would like to briefly highlight funding needs
    that might go along with much needed regulatory reform. The CFTC along
    with the administration and other financial regulators is committed to
    working with Congress on broad regulatory reform. This is particularly
    true for the markets that the CFTC currently regulates and the markets
    that may soon come under our regulation.
        Specifically, we must urgently regulate the over-the-counter
    derivatives market and address excessive speculation through aggregated
    position limits.
        President Obama has called for action by the end of this year to
    strengthen market integrity, lower risks, and protect investors. The
    future of the economy and the welfare of the American people depend on
    a vibrant Commission to assist in leading the regulatory reform ahead.
    Additional funding will be necessary to properly implement these
    reforms.
        I look forward to working with the Members here today and others in
    Congress to accomplish this goal.
        Thank you very much. I would be happy answer any questions you may
    have.

                                    STAFFING

        Senator Durbin. Chairman Gensler, thank you for being here
    and we're glad that you're on the job, and it strikes me that
    if we look at your recent arrival and the recent arrival of a
    lot of money into your agency, that you're really going to be
    tested quickly in terms of whether or not you can gather
    together the professional staff to do your job and the added
    responsibilities that you mentioned in the farm bill. I don't
    know if you have had a chance to look at the inspector
    general's report on your agency but that was, I think, one of
    the major points made by that report, as to whether or not you
    would have the human capital necessary to monitor the complex
    situations that you face.
        Now, there's been some problems in the past at CFTC when it
    comes to Federal pay parity, where the Government basically
    said let's start treating all the professionals in our agencies
    alike and CFTC seemed to be lagging in the past in bringing the
    income levels up to meet the pay parity standard.
        You mentioned my visit to the office in Chicago and I'm
    glad I did it. I don't know how many other Congressmen or
    Senators have been there, but it's an eye-opener. It's a small
    staff but it's an amazing staff and I was very impressed. There
    are some people we have working for our Government in that
    office who do such exceptional work.
        One man they introduced me to, I've forgotten his name
    unfortunately, and they told me what his responsibility was
    each day and they said he is the go-to guy. He watches all of
    these transactions going and he's the one who monitors them and
    if he weren't here, you know, I'm not sure how good a job we'd
    do. It would take a lot more people to try to do what he does
    every day. I said, ``Does this man take a vacation?'' They
    said, ``Yes, he does and we try to hang on until he gets
    back.''
        It's that kind of person and that kind of responsibility
    which leads me to ask, now that we've sent you a substantial
    amount of money in this year's fiscal year bill, in the omnibus
    bill, and now that we've told you you need more professional
    people and now that you're looking at this pay parity issue,
    how are you trying to fit these pieces together into some
    coherent way of expanding your agency in a manner that is
    consistent with rewarding the good performance of people there
    and bringing onboard the kind of folks that you need to meet
    these new electronic markets?
        Mr. Gensler. Senator, I think you're right in these are
    important challenges. Just being in the job for 6 days, what I
    see are talented staff facing significant challenges ahead.
        Senator Durbin. Incidentally, you're new to this, but it's
    always great to start your answer with Senator, you're right.
    Please proceed.
        Mr. Gensler. Senator, you're right. As I understand it, the
    agency's been able to fulfill all of the job postings--about 95
    job postings. There's confidence, at least within the staff, as
    to what might be achieved by September 30. We all know there's
    a summer and August and so forth, but all the postings are up.
    Some of the recruiting has already occurred and people have
    been coming in.
        But I also agree with Chairman Durbin that this agency,
    which was so sorely underfunded and actually shrank over 20
    percent in the face of this complexity during the last 8 years,
    has too many jobs that are being done by one person or not
    enough. As an example, when I asked, well, how large is the
    group that oversees clearing, this really important function in
    futures. I was told that there is a nine-person staff out in
    Chicago, which is part of that larger staff, I said, ``Is that
    enough?'' Well, you know, everybody said, ``Well, that's what
    we have. We've had to make tough choices.''
        So I think that's very important. I'm committed to make
    sure that taxpayer dollars are put to work most appropriately
    and efficiently, but I do have confidence in what I've seen in
    6 days, that there's a plan of action for these hires.
        Senator Durbin. What about the pay parity issue?
        Mr. Gensler. On pay parity, as I understand it, we've been
    able to bring up to a figure of about $4 to $4.5 million.
        Senator Durbin. I might say that there----
        Mr. Gensler. I'm sorry Senator, let me just correct this.
    There is $1.4 million in the fiscal 2010 budget specifically
    with regard to that.

                             STUDENT LOAN REPAYMENT

        Senator Durbin. One obscure little thing which I
    accomplished when Senator Collins was chairing the Governmental
    Affairs Committee.
        Senator Collins. Governmental Affairs.
        Senator Durbin. Governmental Affairs Committee, when it
    started, was the whole question of student loan repayment as an
    incentive to bring in professionals to Federal agencies.
        The SEC is one of the best agencies in Government on this
    front, 385 of their staff, 181 of whom are attorneys have used
    the student loan repayment, and I believe this brings them into
    Federal Government where their services are very valuable.
    Otherwise they might not be able to consider it.
        CFTC has not instituted such a program, probably for lack
    of money, and I'm wondering if you expect to be able to provide
    that benefit as part of recruitment in the future.
        Mr. Gensler. The answer is yes, sir, I think that we tried
    to do--I think it was just a small amount this year, $200,000
    in this fiscal year.
        Senator Durbin. I see.
        Mr. Gensler. In fiscal 2009, actually.
        Senator Durbin. Well, I think it can be a major part of
    attracting really talented college graduates who otherwise
    would be lured to something that may pay a little more just to
    defray their costs.
        Mr. Gensler. The agency shares that view.
        Senator Durbin. Thank you.
        Senator Collins.

                                  UNDERFUNDING

        Senator Collins. Thank you, Mr. Chairman.
        Mr. Gensler, Senator Lieberman and I, as the chairman and
    ranking member of the Homeland Security and Governmental
    Affairs Committee, held three hearings last year looking at
    speculation in the commodities markets, and I want to talk
    about some of our findings as a result of those hearings.
        The first we've already discussed at some length and that
    is that the CFTC has been woefully understaffed. We were told
    by the Commission that there were more than 3 billion futures
    and options contracts that were traded last year, I guess it
    would have been the year before last, and that was up from 37
    million in 1976 when the Commission was first created, so 37
    million to 3 billion contracts, and yet the Commission was
    operating with fewer employees than it had 30 years ago. Just
    an untenable situation.
        Now, the Acting Chairman of the Commission in February
    wrote to the Office of Management and Budget (OMB) Director in
    protest of the budget that had been handed down by OMB of
    having a budget of $160.6 million and he described it as
    perilously inadequate. He went on to say that it would not
    allow the Commission to implement all of its responsibilities.
    That is the budget that we're talking about today.
        Do you disagree with the letter that was written by the
    Acting Chairman or do you share his concerns?
        Mr. Gensler. I share the concerns that this agency is both
    underfunded, as you and Senator Lieberman's panel determined
    last year. I think, as the Acting Chairman Mike Dunn did an
    excellent job these past 4 months laying out that this agency
    needs more. We're very appreciative of the President's budget
    and the 38 additional employees, but I don't think it's really
    yet up to the task that the American people expect or how we're
    going to protect against fraud, manipulation, and, as your
    hearings looked at, the burdens of excess speculation in these
    markets.

                                  SPECULATION

        Senator Collins. Let me turn to the speculation issue. As a
    result of the hearings that we held, Senator Lieberman and I
    introduced a bill that directed the CFTC to establish position
    limits that would apply to an investor's total interests in a
    commodity, regardless of whether they originate on a regulated
    exchange, the over-the-counter market or on foreign boards of
    trade that deal in U.S. commodities.
        Do you support establishing position limits, having the
    Commission do it rather than the exchanges?
        Mr. Gensler. I think, Senator, that it's important that we
    bring a broader view of this even than was being discussed
    then, that we have the over-the-counter derivatives marketplace
    under regulation, but, in addition, that the position limits
    that are set--for instance, if it was for crude oil, that it
    would look across markets and aggregate not only
    internationally, as you were discussing, but also with the
    over-the-counter derivatives marketplace. There may be
    contracts that are really quite similar, as you addressed in
    the farm bill, but more broadly as we work with Congress later
    this year and try to get aggregate position limit authority for
    Federal regulators to look across markets and across futures
    and swaps.

                                 INDEX TRADERS

        Senator Collins. What our hearings demonstrated was that
    speculation in the commodities markets by noncommercial
    investors, not individuals or entities that are actually taking
    possession of the commodity at some point, but entities, like
    pension funds, university endowments and other institutional
    investors, has grown enormously from 2003 to 2008.
        In just that 5-year period the total value of their futures
    contract and commodity index funds investments soared from $13
    billion to $260 billion. So you have this influx of money from
    speculators. There's always been speculation in the commodities
    futures markets.
        I understand that and I understand that speculation is
    useful for hedging risk, but we're talking now about
    speculation from individuals who are not the traditional buyers
    and sellers of the commodity, and I understand that those
    investors' intention is to provide good returns as a hedge
    against inflation, asset diversification, but the effect of
    that activity cumulatively appears to drive up the price for
    some of the traditional users of the commodity markets.
        Just a week ago Maine's fuel dealers were in my office
    saying that they believe excessive speculation by noncommercial
    players is once again driving up the cost of oil. That's a
    tremendous issue in a State where 80 percent of the families
    use home heating oil to stay warm.
        So two questions. First, what is your general opinion on
    whether the influx of funds from nontraditional players is
    putting artificial price inflation or causing prices to go up
    beyond what they otherwise would, and second, what, if
    anything, should we do about it?
        Mr. Gensler. Two excellent questions. I do think that,
    looking back, in that period that you named and when oil prices
    peaked last summer, that a contributing factor, not the only
    factor because there were many factors, but a contributing
    factor to the commodity asset bubble was index investors and
    other financial investors.
        We have also lived through other asset bubbles in housing,
    unfortunately, in the stock market in the late 1990s and then
    again maybe last year. So in a similar way, I think financial
    actors contributed to this but were not the only cause.
        I do think that the Commodity Futures Trading Commission,
    at its core and has been for 70 plus years, one of its missions
    is to make sure that markets' integrity is sound, that there's
    not manipulation and fraud but also that the burdens of
    excessive speculation be guarded against through position limit
    authority.
        So in terms of that mission, the Commodity Futures Trading
    Commission is not a price-setting agency, but it is an agency
    that has to guard to make sure that the markets are operating
    free of manipulation, free of fraud, and that through the
    position limit authority the Congress first granted back in the
    1930s, that there's some limit to the actors within the
    marketplace.
        Senator Collins. Thank you.
        Senator Durbin. Senator Tester.
        Senator Tester. Thank you, Mr. Chairman, and thank you for
    those questions, Senator Collins.
        I've just got a follow-up that goes right under her
    question and that is, do you think the marketplace right now is
    being impacted by--I'm talking about the oil marketplace is
    being impacted by trading of nontraditional traders?
        Mr. Gensler. Senator Tester, again I've only just been in
    the job for 6 days and mostly been preparing for this
    Appropriations hearing and a hearing for Thursday on other
    matters, so I haven't formed a view.
        I do think that, just as the asset bubble broke last year
    with this financial crisis, that part of what we're seeing is
    with some confidence coming back in the stock market and in
    other investment markets, just as Senator Collins mentioned,
    some investments of firms and others are having more confidence
    in the value in the commodities marketplace.
        But again, I've only been there 6 days and haven't, you
    know, been able to meet with economists and sort through the
    specifics of this market.
        It is likely that, as economy--if we're able to get out of
    this recession and get away from the financial crisis, the
    commodity prices will move and I'm not saying where, but a lot
    will change in the economy, as well.
        Senator Tester. Being a farmer, I don't mind having
    commodity prices go up. I can tell you that the price of
    gasoline at the pump in Montana over the last 6 weeks has
    probably went up a buck a gallon. I don't see that kind of
    increase at the barrel level. I can still hear about ships
    floating around out in the ocean full of oil.
        I can't make any sense of what's going on and what further
    frustrates me is that last year, during the last Congress, we
    had people in, and you're right, it was a multifaceted thing,
    but very, very few people would step up to the plate last year
    and say part of this--a good part of this is caused by
    speculation in the marketplace.
        It was all supply and demand, supply and demand, supply and
    demand, and that was part of it, but I think a good part of it
    was just flat speculation and greed.
        Mr. Gensler. Senator Tester, as I just mentioned to Senator
    Collins before you arrived, I believe that index investors,
    hedge funds, and other pension and financial investors were a
    contributing factor in this asset bubble of last year. I just
    haven't been able to tease out exactly what's happened in my
    first 6 days.
        Senator Tester. I look forward to further communication,
    either in committee or outside the committee, on that issue
    because I think it's really important. I think it's really
    important that we make sure that we have honest markets here.
        Mr. Gensler. I fully agree with that.

                                     MERGER

        Senator Tester. Okay. I asked a question to Secretary
    Schapiro about the discussions of future roles of your agency
    and the SEC as we conduct a regulatory modernization effort, if
    they were combined, if CFTC were combined with SEC.
        Can you just tell me some of the challenges, opportunities,
    possible consequences?
        Mr. Gensler. You said if.
        Senator Tester. That's right.
        Mr. Gensler. Well, thank you for your question, Senator. I
    think whether it's in Government or in commerce, it's important
    to consider that a merger just for merger's sake is probably
    not much reason to do that, whether it's in Government or in
    commerce.
        Senator Tester. Yeah.
        Mr. Gensler. I think some of the challenge is that each of
    these agencies, agencies that date back to the 1930s, have a
    mission to protect against fraud manipulation but with
    different missions.
        At the CFTC, its core was around farmers and ranchers,
    which you know a great deal about, to protect their markets so
    they can hedge a risk, buy the seed and plant a crop knowing
    that the market pricing mechanism is honest.
        That's at the core of the CFTC and if, for any reason,
    Congress and the President working together wanted to merge
    these agencies, which again I'm saying merger for merger's sake
    probably isn't it, we'd have to really protect that root
    mission, that we're protecting the pricing mechanism for
    farmers, ranchers, commercial users, all the users of the
    futures and derivatives marketplaces that the CFTC oversees.
        Senator Tester. Okay. If the President's working group
    recommends combining the two agencies, if again, and you
    believe that they should be separated, would you support the
    working group's regulatory modernization proposal?
        Mr. Gensler. I chair an independent regulatory agency. My
    responsibility, I think, to the American public would be to
    tell you what I believed at that time. So I think I would speak
    out openly and share with this subcommittee and the rest of the
    Congress what I thought.

                             DERIVATIVES REGULATION

        Senator Tester. All right. Good. Derivatives. You've been
    involved in a conversation on regulating or deregulating
    derivatives for over a decade in past positions that you've
    held.
        Could you give me a quick synopsis, because I'm already out
    of time, on how your opinion of derivatives and the regulation
    has evolved over the last 5 to 10 years?
        Mr. Gensler. It has evolved, Senator. I think now that we
    must bring under regulation the over-the-counter derivatives
    marketplace through two complementary schemes.
        One is the dealers or institutions that actually deal in
    these swaps, if I may call them, and that's nearly 100 percent
    of the market, probably in 20 or 25 big institutions. We know
    their names and you're familiar with them.
        We should police for fraud manipulation. We should get 100
    percent of the record, both for standardized and customized
    swaps and set capital standards at the Federal level and margin
    requirements through the dealer side.
        But, in addition, in an additive way, also regulate the
    markets and then we can lower risk, we can lower risk if we
    have standard products go through central clearing and we can
    promote transparency and this is critical that we promote
    transparency through having regulated exchanges, as well.
        Senator Tester. Okay. Thank you very much, Mr. Chairman.
        Senator Durbin. Chairman Gensler, as you look at the volume
    of work that you're faced with, the new responsibilities, what
    do you think is the--let me state it this way.
        What would you recommend as the optimal number of people
    that you need in your agency to do that job effectively?
        Mr. Gensler. Under the current authorities, because, of
    course, we'll work together with Congress and with the rest of
    the administration on new authorities,--thank you, Senator
    Tester.
        Under the current authorities, the agency put forward, as
    Senator Collins said, an appeal letter in February that was
    speaking to--I think it was about 650 full-time people under
    that $177 million.
        I don't know yet, again through just 6 days, whether that's
    going to allow us to fully cover, but I agree with Acting
    Chairman Dunn that it's more toward that number of people and
    it may be as high as some figures I've seen inside that are a
    little higher than that, closer to the 700-person figure.

             ENFORCEMENT PENALTIES: AMOUNT, RECOVERY AND DETERRENCE

        Senator Durbin. When Chairman Schapiro was here, I noted
    that the fees collected by her agency within the marketplace
    generated about 40 percent more than the annual appropriation
    for her agency.
        Similarly, in your situation, the penalties that have been
    assessed for wrong-doing and the amounts collected, I've seen
    varying estimates of this amount, but they appear to be over
    the last 8 years somewhere between $1.5 and $2 billion your
    annual appropriation, for last year $146 million, in comparison
    there.
        So could you say to me, I mean, or could we say to those
    who are observing this hearing that when your agency does its
    job and ends up with a trustworthy marketplace, it also is
    engaged in enforcement actions which bring in more revenue than
    the actual budget of the agency?
        Mr. Gensler. I think, Mr. Chairman, that the agency--we
    could say to those looking at this is a sound investment of a
    $160 million for the next year of taxpayer money because in
    helping police these markets, enforcing these markets, bringing
    integrity to the markets, making sure that they're fairly
    priced in the marketplace is the crucial thing.
        But in addition, you're right, there are enforcement
    actions that have penalties. The penalties are at least greater
    than the budget. The collections tend to be a little less than
    that, as you know.
        Senator Durbin. How well is the CFTC able to measure the
    deterrent impact of these enforcement actions?
        Mr. Gensler. It's a challenge to measure the results, but
    we believe that the stronger we are in enforcement, just as
    Chairman Schapiro said, in finding some of those cases that you
    can really bring the wrong-doers to bear is critical to make
    sure that the markets operate better.
        Senator Durbin. What is your recovery rate?
        Mr. Gensler. As I understand it, the collections on the
    large manipulation cases are very high. The collection on the
    Ponzi schemes and fraud cases, unfortunately, is very low
    because so often those individuals behind those cases don't
    have any money, but I believe it's somewhere in the 30 to 40
    percent when you average out high recoveries on complex
    manipulations and low recoveries on these Ponzi schemes.
        Senator Durbin. I'd like your thoughts, and maybe you can
    share them with me in separate communication, about whether the
    current penalty structure is in fact at a level consistent with
    creating a deterrent and what additional remedies or
    instruments you may need for that recovery rate to improve, and
    I understand that, as you said, some recovery is going to be
    extremely difficult.
        But if you would take a step back and look at those two
    aspects, the deterrence and recovery, and give us your thoughts
    on that, I would appreciate that very much.
        Mr. Gensler. We will follow up with you, Mr. Chairman.
        Senator Durbin. Thank you.
        Senator Collins.

                             DERIVATIVES REGULATION

        Senator Collins. Thank you, Mr. Chairman.
        Just two final questions from me. Senator Levin and I have
    introduced a bill that would repeal the language that prohibits
    the Commodity Futures Trading Commission from regulating
    derivatives, and I understand that the administration's new
    proposal would give both the SEC and the CFTC new authority to
    regulate derivatives.
        What are your thoughts on this plan and the role of the
    CFTC in the regulation of derivatives?
        Mr. Gensler. I wish to applaud you and Senator Levin on
    that bill. I believe that we have to have, working with
    Congress, significant amendments to the Commodities and
    Exchange Act and seeking the same goal, to bring all the over-
    the-counter derivatives marketplace under regulation.
        I think the Commodity Futures Trading Commission has the
    lead expertise on derivatives. Futures are a form of
    derivatives and these things that are now called over-the-
    counter swaps are another form of derivatives.
        Working with Chair Schapiro, I'm hopeful that we can
    present a unified front and, as she said, you know, there's the
    boundary issues are important.
        I think it's critical that we not have any gaps in
    regulation, but we believe at the CFTC and I believe interest
    rate swaps, currency swaps, commodity swaps, equity swaps,
    credit default swaps and any swaps invented in the future that
    are just a blip on the radar need to come under this regulatory
    regime.
        There may be areas where a swap is more security-like, like
    a single issuer credit default swap, where, of course, we need
    multiagency work, insider trading and SEC, you would want very
    much involved in things like that.
        Senator Collins. Actually, I would argue that the credit
    default swaps were more like an insurance product and yet they
    were not regulated by State insurance agencies either.
        Mr. Gensler. They had many insurance attributes. There were
    many lessons, unfortunately, out of this crisis. You were
    earlier asking Chair Schapiro, but I think one of the great
    lessons of AIG was that there was unregulated institutions.
    That's why I am for regulating all derivative dealers, whether
    they're affiliated with banks or not.
        But then these products, as you say, credit default swaps,
    have attributes of insurance, like monoline insurance. They
    have attributes of securities.
        Senator Collins. Exactly.
        Mr. Gensler. They have attributes of derivatives that the
    CFTC is the expert on.
        Senator Collins. Which is why we need this council of
    regulators approach because the problem now is the marketplace
    is always going to be innovating and we want it to be
    innovative and producing new kinds of products and we need a
    system where just because a product is new does not mean that
    it falls into a regulatory black hole and no regulator ends up
    having responsibility and no regulator or regulators is looking
    at the impact across the financial system.
        When you think of a credit default swaps situation, here we
    have a new product that grows into the trillions of dollars,
    jeopardizes the entire financial market, and yet it doesn't
    fall under securities, it doesn't fall under insurance, it
    doesn't fall under the Consumer Product Safety--I mean the
    Commodity Futures Trading Commission. So clearly, we need to
    resolve that.
        Let me just turn to another loophole that our hearings took
    a look at and that's the so-called swaps loophole that allows
    financial institutions to evade position limits on commodity
    contracts that regulators are using to prevent unwarranted
    price swings or attempts at manipulation.
        What should be done to close that loophole?
        Mr. Gensler. I think that explicit authority should be
    given to the Federal regulators, with the CFTC taking the lead
    on position limits, to bring the over-the-counter derivatives
    marketplace under a regulatory regime: that we regulate all of
    the dealers to make sure that they are not manipulating, that
    we're policing fraud, that we're policing position limits,
    aggregate position limits, as I referred to earlier, that we,
    amongst the regulators, have an enormous opportunity to see 100
    percent of the transactions.

                                 INTERNATIONAL

        Senator Collins. Finally, do you have sufficient funds to
    pursue your international responsibilities?
        What I'm thinking of is there is a problem with foreign
    exchanges and what rules they're going to play by, particularly
    if they're dealing with U.S. commodities which they are, and
    particularly when they have a presence in the United States.
        I don't know whether that's an issue you've looked at yet,
    but the SEC seems to be far more active in that area than the
    CFTC is.
        Mr. Gensler. Well, Senator, you're right that we've had to
    make as an agency tough trade-offs, an agency that shrunk 20
    percent in the last years, but thankfully with this year we'll
    start to move back.
        There's a small Office of International Effort but it's
    very small, I think four or five people at the CFTC. We do
    share your concern and share the view that we have to make sure
    that foreign boards of trades that are influencing these
    markets and are in our markets have consistent regulation, come
    under the position limits and other authorities here.
        Though the CFTC has moved forward in this regard, we do
    think that it's important to work with Congress to embed in
    statutes some additional authorities with regard to foreign
    boards of trade.
        Senator Collins. Thank you. Thank you, Mr. Chairman.
        Senator Durbin. Thank you, Senator Collins.

                         ADDITIONAL COMMITTEE QUESTIONS

        Chairman Gensler, thanks for your testimony. We're going to
    keep the hearing record open until next Wednesday, June 10, at
    12 noon for subcommittee members to submit statements and/or
    questions, and we ask that the information we requested you do
    your best to comply with at a convenient time.
        [The following questions were not asked at the hearing, but
    were submitted to the Commission for response subsequent to the
    hearing:]
                Questions Submitted by Senator Richard J. Durbin
       most serious management challenges identified by inspector general
        Question. The Reports Consolidation Act of 2000 requires the
    Inspector General to summarize the ``most serious'' management and
    performance challenges facing the Commodity Futures Trading Commission
    (CFTC). In the Inspector General's assessment report of November 14,
    2008, the Inspector General identified two management challenges for
    fiscal year 2009.
        The first concern is with the Modernization of Electronic Market
    Surveillance. The Inspector General explains that while market
    surveillance has always been an integral part of CFTC operations, the
    past years have witnesses the transformation of futures trading from an
    open outcry trading floor based system to an electronic system. In
    fact, in 2008, electronic trading accounted for 84 percent of total
    exchange traded derivatives.
        The second area is the Efficient Acquisition and Integration of
    Skilled Human Capital. The Inspector General cites the fact that recent
    economic turbulence has simulated an interest in applying the
    historically successful centralized clearing mechanism to the bilateral
    and complex swap markets. The Inspector General expressed skepticism
    that the CFTC currently has the human capital to monitor these complex
    markets and that situation may demand review of existing hiring
    procedures.
        Chairman Gensler, have you had an opportunity to review the
    Inspector General's analysis?
        What is your reaction?
        What is your plan for prioritizing these two key items in your
    management agenda?
        Answer. Yes, certainly the need to modernize electronic market
    surveillance will require additional technological capabilities. It is
    also apparent that if the Congress entrusts the Commission with
    significant additional responsibilities, the Commission will need to
    expand its staff and pay particular attention to needed skill sets. The
    Congress provided the Commission with substantial additional funds for
    fiscal year 2009. At this point we have almost completed hiring the new
    staff funded for this year. I asked the staff to provide the following
    information on the modernization of electronic market surveillance:
        In late 2008, the CFTC contracted with the Promontory Group to
    review the market surveillance program. Commission staff is finalizing
    its assessment of the Promontory report and preparing recommendations
    for the Commission. The objective is to ensure that the CFTC has an
    effective approach to surveillance, from both a programmatic and
    operational perspective.
        The CFTC also is in the process of modernizing its trade
    surveillance system in order to perform its statutorily mandated
    oversight functions and to keep pace with the explosive growth in
    electronic trading. In 2007, the CFTC's Division of Market Oversight
    (``DMO'') and Office of Information and Technology Services (``OITS'')
    embarked on a multi-year plan to develop a new trade surveillance
    system (``TSS''), to replace the Commission's antiquated system. TSS is
    designed as a database of exchange data maintained by the Commission
    which can be evaluated with off-the-shelf alert and analysis tools. A
    contract was awarded to Actimize in 2008 to deliver such a product.
    OITS expects to have all of the exchanges connected to the Actimize
    tool by the end of the first quarter 2010.
        A challenge to the Commission in implementing TSS has been a lack
    of data uniformity. To resolve this problem, in May 2007, DMO formed a
    subcommittee through the Joint Compliance Committee to discuss and
    formulate a plan for using ``FIXML'' as a standardized format for trade
    data submitted to the Commission and to formulate a FIXML transition
    plan. In December of 2008, a schedule was presented to all exchanges
    for submission of trade data in FIXML by the end of 2009.
        The Commission has also been working to better link its trade
    surveillance and market surveillance systems. Currently, the Commission
    is unable to connect accounts identified by large traders with their
    intra-day transactions. To resolve this problem, the Commission has
    issued an advanced notice of proposed rulemaking to solicit comments on
    the collection of account ownership and control information from
    exchanges. Such information would be used to improve DMO surveillance
    by serving as an adjunct to the CFTC's ISS (large trader position data)
    and TSS databases.
                    adequacy of funding to permit pay parity
        Question. In response to the 1980s banking crisis, Congress passed
    the Financial Institutions Reform, Recovery, and Enforcement Act of
    1989 (FIRREA) (Public Law 101-73) which provided for pay parity among
    federal financial regulatory agencies.
        The Commodity Futures Trading Commission was granted comparable pay
    authority (Public Law 107-171) with other financial agencies to level
    the playing field with a goal of attracting the best and brightest
    talent. Despite the authorization, the CFTC has not been fully funded
    to the level of comparable agencies covered under the law.
        During recent years, the Commodity Futures Trading Commission's
    budget situation has resulted in hiring freezes and has not permitted a
    meaningful review by the IG to determine its effect on employee
    retention and whether new hires are appreciably more experienced or
    better qualified.
        Chairman Gensler, what has been the practical impact of the CFTC's
    not having sufficient annual budget authority to accomplish pay parity
    for your workforce?
        Answer. The Commission is currently near pay parity with the other
    FIRREA agencies with regard to pay, having implemented merit pay and
    new pay ranges. There are several areas where we need to align the
    Commission with the FIRREA agencies; these include personnel benefits
    and possibly some job reclassification.
        The implementation of pay parity without sufficient budget
    authority has had the same practical effect as meeting all other
    resources challenges without sufficient budget authority--the
    Commission froze and/or restricted hiring and deferred investment in
    Information Technology. These steps were taken after exhausting all
    other savings from administrative efficiencies.
        Question. To what extent has the CFTC's inability to compensate
    staff at comparable levels led to departures of experienced personnel
    to positions in other Federal financial regulatory agencies?
        Answer. Since the Commission is currently comparable with other
    FIRREA agencies with regard to pay, and nearly comparable with regard
    to benefits, the Commission is no longer losing, as it once did, a
    significant number of staff to other financial regulatory agencies as a
    result of inadequate compensation. However, those past losses tell us
    it is important that the Commission maintain comparability with these
    agencies.
        Question. What funding level would permit the CFTC to move toward
    providing pay parity?
        Answer. The fiscal year 2010 budget includes approximately $1.4
    million that would permit the Commission increased contribution to
    personnel benefits package thereby making it more comparable to FIRREA
    agencies. Funding would also permit the Commission to reclassify
    selected positions if an ongoing review concludes that is appropriate
    to support parity and to improve recruitment and retention.
        Question. As CFTC Chairman, what are your goals in this area?
        Answer. As a new Chairman I look forward to reviewing the findings
    and recommendations of the Commission Pay Parity Governance Committee
    before advancing any new goals of my own. However, I am committed to
    ensuring that the Commission receives adequate funding to stay
    comparable with our fellow financial regulatory agencies.
        Question. When does the CFTC plan to institute a student loan
    repayment program as a recruitment and retention tool?
        Answer. Our goal is to implement a student loan repayment program
    by the end of the year.
        Question. What resources would that require?
        Answer. We have initially set aside $200,000 for the implementation
    of this program.
                      derivatives market regulatory reform
        Question. Derivatives--contracts between two investors betting on
    whether a stock, bond, or other security will go up or down in value--
    has ballooned into the world's largest trading market, estimated to be
    in the tens of trillions of dollars. Much of the activity is not
    currently under a regulatory apparatus.
        This market has also helped catalyze the current economic crisis.
    Losses on one type of derivative known as credit-default swaps helped
    topple American International Group (AIG), prompting a government
    bailout that has grown to $180 billion.
        On May 13, President Obama unveiled a plan to regulate the
    derivatives market. This proposal includes new rules to restrict banks,
    hedge funds, and other investors, and has four goals: (1) force the
    trade of most derivatives through a regulated clearinghouse and require
    traders to report activities and hold a minimal level of capital to
    cover losses; (2) improve oversight by ensuring clearinghouses and
    firms dealing in derivatives provide copious information to regulators
    about their trades; (3) empower regulators to force traders to submit
    detailed information and pursue cases of fraud and manipulation; and
    (4) prevent derivatives from being marketed to groups that may not
    understand their complexities.
        How would expanded derivatives regulation impact the CFTC workload?
    What budgetary considerations need to be considered?
        Answer. We must establish a comprehensive regulatory regime to
    cover the entire over-the-counter derivatives marketplace. This will
    help the American public by: (1) lowering systemic risk; (2) providing
    transparency and efficiency in markets: (3) ensuring market integrity
    by preventing fraud, manipulation, and other abuses; and (4) protecting
    the retail public. I envision this will require two complementary
    regimes--one for regulation of the dealers and one for regulation of
    the market functions.
        The Department of the Treasury, on behalf of the Administration,
    has submitted legislation to Congress to regulate the over-the-counter
    (OTC) markets. Although some improvements are appropriate to ensure
    that we best meet the goals stated above, the Administration's
    comprehensive proposal is consistent with regulatory reforms that the
    CFTC has proposed in testimony to Congress. The Administration's
    proposal will lower risk by requiring capital and margin on dealers and
    mandatory clearing of all standardized products. It will enhance market
    integrity by protecting against fraud, manipulation, and other abuses
    and establishing new authorities to set aggregate position limits. It
    will promote transparency and market efficiency by requiring
    recordkeeping and reporting for all derivatives and requiring that
    standardized derivatives be traded on transparent trading platforms.
        Of course there would be a need for some additional resources at
    the CFTC to handle this expanded regulatory obligation. Until the
    nature and scope of the regulation of OTC derivatives markets is
    determined by the Congress, the resources necessary for implementation
    cannot be predicted with certainty.
        Whatever the cost of regulation, it will pale in comparison to the
    cost of doing nothing. If the current financial crisis has taught us
    anything, it is that that the derivatives trading activities of a
    single firm can threaten the entire financial system. The costs to the
    public from the failure of these firms has been staggering, $180
    billion of American taxpayer financial support for AIG alone. The AIG
    subsidiary that dealt in derivatives was not subject to any effective
    federal regulation.
                memorandum of understanding between cftc and sec
        Question. Last year (March 11, 2008), then-Commodity Futures
    Trading Commission (CFTC) Acting Chairman Walter Lukken and then-
    Securities and Exchange Commission (SEC) Chairman Christopher Cox
    entered into a formal ``Memorandum of Understanding'' (MOU) setting
    forth several principles designed to guide inter-agency collaboration.
    The premise of this agreement was to seal some of the regulatory gaps
    and better accommodate new products that blur the lines between the
    futures and the securities worlds.
        The MOU establishes a permanent regulatory liaison between the CFTC
    and SEC; requires quarterly joint meetings of staff; sets up a
    framework for extensive information sharing and exchange confirms
    existing enforcement policies; creates guidelines for new financial
    products that combine elements of securities, futures, or options; and
    addresses jurisdictional overlaps.
        Chairman Gensler, can you describe some of the benefits to the CFTC
    since entering into the MOU with the SEC in March 2008?
        Answer. The MOU has provided a formal mechanism to assure dialogue
    among senior staff of the two agencies regarding the treatment of novel
    derivative products and other issues of mutual regulatory interest. In
    addition, following on the MOU, the CFTC and SEC Divisions of
    Enforcement undertook efforts to improve coordination and cooperation.
    Specifically, in the summer of 2008, the CFTC and SEC Divisions of
    Enforcement appointed senior staff to serve as liaisons for their
    respective agencies, and also established quarterly meetings to discuss
    issues related to investigation and litigation dockets for matters of
    common concern. The enhanced cooperation between the CFTC and SEC
    Divisions of Enforcement is also reflected in the May 2009 joint
    training session for enforcement staff in which experts from both
    agencies discussed strategies regarding the agencies' coordination,
    investigation and prosecution of several recent Ponzi fraud matters.
        Question. What impediments hinder CFTC's ability to oversee and
    regulate new products that have mixed characteristics of futures and
    securities?
        Answer. Neither the CFTC nor the SEC currently has regulatory
    jurisdiction with respect to OTC derivatives transactions, some of
    which are relevant to both the futures and the securities markets. In
    areas where jurisdiction does exist, further enhanced communication
    between the CFTC and SEC staff--specifically, ongoing communications
    regarding whether activity detected by one agency implicates the
    jurisdiction of the other agency--will improve the CFTC's ability to
    oversee and regulate such new products.
        Question. How do intend to collaborate with SEC Chairman Schapiro
    in advancing the goals of this MOU?
        Answer. In addition to direct communications with Chairman
    Schapiro, as we have done in discussing regulatory reform with respect
    to OTC derivatives, I anticipate that Chairman Schapiro and I will
    actively direct and guide our respective staffs to fulfill the
    objectives of the MOU. We will work cooperatively and collaboratively
    to remove unnecessary duplication and other regulatory roadblocks to
    innovative market developments, while assuring that there are no
    regulatory gaps that endanger the public interest. The agencies' focus
    on this goal is currently reflected in our joint harmonization project,
    including the unprecedented joint meetings recently held by our two
    Commissions.
        Question. Do you envision the need for any modifications to the
    agreement to strengthen the current interagency relationship?
        Answer. The MOU was intended to be a ``living'' document. Just as
    the agencies have entered into an Addendum to the MOU with respect to
    novel derivative products, additional Addenda may be considered as the
    agencies address new issues and harmonization on a going-forward basis.
      enforcement actions to preserve market integrity and protect market
                                     users
        Question. Detecting and deterring against illegitimate market
    forces requires CFTC's steady vigilance and swift response. Over the
    past 8 years, CFTC has assessed over $2 billion in civil penalties
    against perpetrators of various fraud schemes. For instance:
      --To address manipulation, attempted manipulation, and false
            reporting in the energy arena, the CFTC filed 43 enforcement
            actions against 73 entities or individuals in the December 2001
            to September 2008 period resulting in $445.5 million in
            assessed civil penalties.
      --To address misconduct in connection with commodity pools and hedge
            funds by unscrupulous and unregistered operators and advisors,
            from October 2000 and September 2008, the CFTC filed 73
            enforcement actions against 24 entities, with $564.13 million
            in penalties assessed.
      --To combat the problem of foreign currency (forex) fraud, between
            December 2000 and September 2008, on behalf of nearly 26,000
            affected customers, the CFTC has filed 98 enforcement actions,
            charging 374 entities or persons, culminating in over $562
            million in civil monetary penalties and $454 million in
            restitution.
        How well is the CFTC able to measure the deterrent effect of these
    enforcement actions?
        Answer. Measuring the deterrence effect of enforcement actions
    remains a challenge to the CFTC and other law enforcement agencies. The
    CFTC has undertaken a number of actions to increase deterrence as noted
    below by staff:
      --The CFTC maximizes the deterrent effect of its enforcement program
            through: the filing of enforcement actions, cooperative
            enforcement, public outreach and investor education. In cases
            of ongoing fraud, the CFTC's objective is to bring its
            enforcement action as quickly as practicable in order to stop
            the fraud, freeze assets, and preserve books and records. The
            CFTC also leverages the impact of its enforcement actions by
            working cooperatively with federal and state criminal and civil
            authorities who often bring their own actions based upon the
            conduct that violates the Commodity Exchange Act and CFTC
            Regulations. Whenever the CFTC files an enforcement action and
            obtains a final judgment in one of its enforcement actions, it
            publicizes these events through press releases and media
            interviews. To alert market users and the public to the dangers
            of fraud, the CFTC has issued a number of Consumer Advisories
            warning the investing public of potential risks and scams, and
            has posted these Advisories on its website. The CFTC also seeks
            to maximize the deterrent effect of its enforcement program by
            tracking industry trends. For example, the CFTC's Acting
            Director of Enforcement gave Congressional testimony in June
            2009 regarding the observed uptick in fraud involving
            solicitation of retail customers for purported off-exchange
            transactions in precious metals, and certain energy and
            agricultural products. The fraudsters appear to have drafted
            customer agreements to make them appear to be spot contracts
            outside of CFTC jurisdiction and not futures contracts covered
            by the Commodity Exchange Act.
      --The CFTC remains committed to developing improved performance
            measures to reflect the deterrence effect of its enforcement
            program. For example, the CFTC has requested funds every year
            since the fiscal year 2007 OMB budget request thru fiscal year
            2010, to study the performance measurement issue, however,
            funds, to date, have not been approved.
        Question. How rapidly are you able to collect restitution,
    disgorgement of ill-gotten gains, and civil monetary penalties imposed
    against violations of the federal commodities laws?
        Answer. When the CFTC files enforcement actions that include
    allegations of fraud, its general practice is to seek a statutory
    restraining order to immediately freeze the defendants' known assets,
    including trading and bank accounts, homes and other real property and
    cars. These assets are then preserved for purposes of customer
    restitution or disgorgement at the conclusion of a successful
    prosecution. The CFTC Division of Enforcement may also request that the
    federal district court order defendants to make an accounting, which
    assists the CFTC in tracking money flows and identifying additional
    assets for recovery. The CFTC also names as relief defendants in its
    enforcement actions persons known to have received funds derived from
    the fraud and to which they have no legitimate claim, and seeks to
    freeze and recover these funds for return to customers as well. At the
    conclusion of litigation, and in the event of a remaining judgment, the
    Commission follows an established protocol to ensure that matters are
    appropriately referred to the Department of Justice and Department of
    the Treasury for collection.
        Question. What is the annual recovery rate?
        Answer. Staff has supplied the following information:
        Below is a table that sets out the CFTC's annual recovery rate for
    civil monetary penalties assessed for fiscal years 1992 through 2008.

                          CIVIL MONETARY PENALTIES \1\
                       [Fiscal year 1992-fiscal year 2008]
    ------------------------------------------------------------------------
                                               Penalties        Penalties
                  Fiscal year                   imposed         collected
    ------------------------------------------------------------------------
    1992..................................       $3,207,277       $2,285,664
    1993..................................        3,313,100        3,514,715
    1994..................................        4,112,407        3,134,266
    1995..................................       11,201,100        9,430,239
    1996..................................        1,335,000        1,526,000
    1997..................................        4,532,000        1,752,636
    1998..................................      132,623,756      125,803,781
    1999..................................       85,863,311       22,165,368
    2000..................................      179,811,562        3,299,362
    2001..................................       16,876,335        3,170,252
    2002..................................        9,942,382        5,922,387
    2003..................................      110,264,932       87,699,077
    2004..................................      302,049,939      122,468,925
    2005..................................       76,672,758       34,163,077
    2006..................................      192,921,794       12,364,509
    2007..................................      345,614,139       12,137,848
    2008..................................      234,835,121     140,745,252
    ------------------------------------------------------------------------
    \1\ The discrepancy between the amount of civil penalties imposed and
      the amount collected is accounted for by the following factors: (1)
      when courts order the defendants to both pay restitution to victims
      and a civil monetary penalty to the Government, established Commission
      policy directs available funds to satisfy restitution obligations
      first; (2) in fraud actions, it is not uncommon that the proceeds of
      the fraud have been dissipated and/or that the penalty far exceeds the
      defendants' represented financial ability to pay; (3) delinquencies
      assessed in default proceedings against respondents who are no longer
      in business and who cannot be located or are incarcerated; (4)
      penalties imposed in one year may not become due and payable until the
      next year; (5) a penalty may be stayed by appeal; (6) some penalties
      call for installment payments that may span more than 1 year; (7)
      penalties have been referred to the Attorney General for collection;
      and (8) collection may still be in process.

        Question. What has been the impact of more sophisticated
    information technology to monitor and detect fraud more readily?
        Answer. In the enforcement arena for fraud cases, information
    technology assists in asset tracing, account reconstruction, and
    electronic data recovery of financial records. Improvements in
    information technology have improved the CFTC's search capability for
    evidence of illegal activity involving Internet websites, instant
    messages, e-mail and audio.
        In the regulatory arena, as discussed above, the CFTC is currently
    implementing its new trade practice surveillance system (TSS). TSS is
    designed as a database of exchange trade data maintained by the
    Commission upon which off-the-shelf alert and analysis tools can be
    connected. A contract was awarded to Actimize in 2008 to deliver an
    alert and analysis tool that has the capability to perform
    sophisticated pattern recognition and data mining to automate basic
    trade practice surveillance, and to detect novel and complex abusive
    practices. TSS also will fill a vacuum in inter-market surveillance
    which only the Commission can address, e.g., where NYMEX and NYSE Liffe
    both list metals contracts.
        Question. Are there any statutory or administrative impediments
    that prevent the CFTC from doing more to combat fraud?
        Answer. As noted above, the CFTC has observed an upswing in retail
    customer complaints regarding potential fraud involving off-exchange
    transactions in precious metals, energy products and agricultural
    commodities. It appears that fraudsters are drawing upon the adverse
    precedent of a line of cases under CFTC v. Zelener, 373 F.3d 861 (7th
    Cir. 2004), in which the Seventh Circuit held that certain contracts
    were spot transactions beyond the jurisdiction of the CFTC. Congress
    addressed this problem in the CFTC Reauthorization legislation included
    in the 2008 Farm Bill with respect to Zelener-type foreign currency
    transactions. A similar fix is needed if the CFTC is to effectively
    prosecute boiler rooms offering Zelener-type contracts in metal,
    energy, and other commodity contracts to retail customers (and is
    included in the Administration's proposed OTC derivatives reform
    legislation).
        In addition, in the wake of the decision in CFTC v. Wilshire, 531
    F.3d 1339 (11th Cir. 2008), defendants in fraud cases increasingly are
    asserting that federal courts lack authority under the Commodity
    Exchange Act to award restitution based on customer losses suffered as
    a result of the fraud. Wilshire held that the proper measure of
    restitution is the gain to the wrongdoer, rather than the losses
    suffered by customers. In cases where the fraudster retains only a
    small portion of the monies fraudulently induced from customers, this
    limit on restitution threatens the CFTC's ability to obtain make-whole
    relief for defrauded customers.
        Staff advises that additional statutory measures that may increase
    the CFTC's ability to combat fraud include, among others, the
    following:
      --Amendment of the Privacy Act to clarify that CFTC investigators may
            seek promotional material and verbal sales solicitations
            without identifying themselves as CFTC employees or providing
            personal information as to their true identity.
      --In Section 4n of the Commodity Exchange Act, provide authority to
            require accountants to maintain records of audit activity
            concerning commodity pools that would be available for
            inspection by the CFTC.
      --Clarify that the CFTC need not show criminal intent in actions
            based on conversion under Section 9(a)(1) of the Commodity
            Exchange Act.
        Question. Is the current penalty structure designed to serve as an
    effective deterrent?
        Answer. Yes. Commission staff supplies the following background:
      --Section 6(e) of the Act, 7 U.S.C.  13a-1(d), instructs the
            Commission to impose a civil monetary penalty that is
            appropriate to the gravity of the violation. Commission
            precedent has long recognized the importance of deterrence in
            preventing violations, most recently in In re DiPlacido
            [Current Transfer Binder] Comm. Fut. L. Rep. (CCH)  30,970
            (CFTC Nov. 5, 2008) (``[g]iven the gravity of DiPlacido's
            offenses and potential maximum fine, the focus of the
            Commission's analysis shifts to assessing a specific penalty
            appropriate to the level of gravity and suitable to deter
            future violations''). Indeed, the Commission signaled the
            paramount role that deterrence plays when it emphasized that
            ``[i]n imposing monetary sanctions, the primary focus of the
            Commission's analysis has been deterrence.'' In re Murlas,
            [1987-1990 Transfer Binder] Comm. Fut. L. Rep. (CCH)  24,440
            at 35,929 (CFTC Apr. 24, 1989) (emphasis added).
      --Also, in last year's CFTC Reauthorization legislation, Congress
            increased the maximum civil monetary penalty for manipulation,
            attempted manipulation, and false reporting to $1 million per
            violation. See Title XIII of the Food, Conservation and Energy
            Act of 2008, Pub. L. No. 110-246, 122 Stat. 1624 (June 18,
            2008); 7 U.S.C.  13(a).
        Question. What additional remedies or authorities might be useful
    to boost your recovery rate?
        Answer. Staff has advised that additional statutory measures that
    could potentially boost the CFTC's recovery rate include, among others,
    the following:
      --Similar to provision for non-payment of penalties imposed in CFTC
            administrative enforcement actions (see Section 6(e)(2) of the
            Commodity Exchange Act), provide that a defendant's non-payment
            of civil monetary penalties imposed in enforcement actions in
            federal court shall result in the non-paying defendant
            automatically being prohibited from trading and automatically
            suspending any applicable registration until the defendant pays
            the full amount of the penalty, with interest to the date of
            the payment.
      --Provide that collection of judgments and orders in fraud actions
            shall not be subject to State homestead exemptions or other
            State or local impediments to collection.
      --Provide that disgorgement and restitution awarded in CFTC
            enforcement actions are non-dischargeable in bankruptcy.
      --Add disgorgement as an available sanction in administrative
            enforcement proceedings.
                      performance goals/measuring outcomes
        Question. The Commodity Futures Trading Commission (CFTC)'s
    performance-based budget for fiscal year 2010 delineates four specific
    goals tied to the agency's overall mission. For each of the goals,
    several outcomes are specified.
        First Goal.--Of the $160.6 million in appropriations requested for
    fiscal year 2010, the CFTC would designate $48.2 million (or 30 percent
    of the total funding) and 185 FTE to meet the first goal--to ensure the
    economic vitality of commodity futures and options markets.
        The outcomes to be achieved as a result of the investment made
    related to this goal are markets that accurately reflect the forces of
    supply and demand for the underlying commodity, are free of disruptive
    activity, and are effectively and efficiently monitored to ensure early
    warning of potential problems or issues.
        How does (or will) the CFTC measure whether and how well these
    outcomes are achieved?
        Answer. The Commission has developed nine performance measures
    intended to measure progress in achieving the stated outcome objective.
    The performance results along with an annual performance analysis and
    review are included in pages 46-55 of the Fiscal Year 2008 Performance
    and Accountability Report available on the CFTC website at:
    www.cftc.gov/aboutthecftc/cftcreports.
        Question. How does the CFTC intend to meet a performance goal of
    ``no price manipulations or other disruptive activities that would
    cause loss of confidence or negatively affect price discovery or risk
    shifting''?
        Answer. This goal is fundamentally tied to the Commission's mission
    and is a priority of the Commission market surveillance and enforcement
    efforts as noted by staff below:
      --Continuous monitoring of market activity is the principal way the
            Commission seeks to protect the economic function of the
            markets. Effective market surveillance requires sufficient
            staff with expertise in each of the diverse markets under the
            Commission's jurisdiction. The Commission takes preventive
            measures to ensure that market prices accurately reflect
            fundamental supply and demand conditions, including the routine
            daily monitoring of large trader positions, futures and cash
            prices, price relationships, and supply and demand factors in
            order to detect threats of price manipulation.
      --As discussed above, the CFTC maximizes the deterrent effect of its
            enforcement program through: the filing of enforcement actions,
            cooperative enforcement, public outreach and investor
            education. The CFTC also leverages the deterrent impact of its
            enforcement actions by working cooperatively with other federal
            criminal authorities who often bring their own actions based
            upon the conduct that violates the Act and CFTC Regulations.
        Question. When it comes to a performance goal of ``improving
    effectiveness and efficiency of market surveillance'' what indicators
    will be used to determine if you have indeed reached this goal and how
    well? What is the baseline from which progress is to be measured?
        Answer. A strategic priority of the Commission is to enhance the
    Commission's technological capability, improve data standards, and
    enhance in-house human analytical and decisionmaking capability--each
    in order to recognize, understand and adapt to market changes early on.
    Indicators of success will be progress in achieving the following
    tasks: upgrading ISS to get more timely market position information and
    to integrate trading data with position data; developing capability to
    provide real-time margin and settlement information; promoting data
    standards throughout the industry; developing and implementing
    sophisticated trade surveillance systems; developing automated
    capability to analyze and integrate off-exchange data as it relates to
    surveillance and investigations; developing a recruitment plan to
    address required skills; identifying needed competencies and developing
    a training plan that empowers employees to react quickly in
    understanding and resolving regulatory matters. Each of these tasks
    represents a strategic need of the Commission that is not currently
    being met adequately.
        Question. Second Goal.--Of the $160.6 million in appropriations
    requested for fiscal year 2010, the CFTC would designate $42.9 million
    (or 27 percent of the total funding) and 160 FTE to meet the second
    goal--to protect market users and the public. The three outcomes to be
    achieved as a result of the investment made related to this goal are
    better detection and prevention of violations of commodities laws, high
    standards for professionals, and expeditions handling of customer
    complaints.
        How does the CFTC plan to increase the probability of violators
    being detected and sanctioned?
        Is this readily measurable?
        What is the baseline against which future performance will be
    gauged?
        Answer. Having sufficient resources to pursue violations is key to
    increasing the probability of violators being detected and sanctions.
    The Commission has developed four performance measures to assess
    progress in detecting violators. The performance results along with an
    annual performance analysis and review are included in pages 58-63 of
    the Fiscal Year 2008 Performance and Accountability Report available of
    the CFTC Web-site at: www.cftc.gov/aboutthecftc/cftcreports.
        Like all enforcement programs, we face a challenge in establishing
    overall performance measures that indicate the percentage of violative
    activity deterred, since no way has yet been devised to measure the
    total universe of violative activity that exists. The Commission keeps
    extensive records on the number of investigations opened and cases
    filed during the year, the number and amount of sanctions obtained, as
    well as the number of cases filed by criminal and civil law enforcement
    authorities that included cooperative assistance from the Commission.
    However, these statistics do not measure complexity of the matters
    opened and filed. For example, the Commission met its performance
    target in fiscal year 2008 with regard to the number of enforcement
    investigations opened. However, commencing in 2002, the complexity of
    Commission investigations has increased substantially over prior years
    (including the Commission's investigation of alleged energy market
    manipulation). As a result of these investigations, the complexity of
    the Commission's cases filed and litigated also has increased
    substantially since 2002. The Commission's performance target tries to
    take into account both of these factors but they cannot be predicated
    with precision.
        Question. How will the CFTC ensure there are ``zero unregistered,
    untested, or unlicensed commodity professionals (unless they are exempt
    from registration)''?
        Answer. There are several complementary aspects to the Commission's
    program that ensure compliance with registration requirements as
    summarized by staff below:
      --Registration and NFA Membership.--Under Section 17 of the Commodity
            Exchange Act (``CEA''), the National Futures Association
            (``NFA'') performs registration functions on behalf of the
            CFTC. NFA registers members through its Online Registration
            System (``ORS'') a web-based registration and membership filing
            and processing system. With certain exceptions, all persons and
            organizations that intend to do business as futures
            professionals must register under the CEA. The primary purposes
            of registration are to screen an applicant's fitness to engage
            in business as a futures professional and to identify those
            individuals and organizations whose activities are subject to
            federal regulation.
          In addition, all individuals and firms that wish to conduct
            futures-related business with the public must apply for NFA
            membership or associate status. Mandatory membership serves an
            important function: NFA Bylaw 1101 prohibits members from
            conducting customer business with non-NFA members.
      --Testing.--Individuals who are applying for NFA membership as a sole
            proprietor FCM, IB, CPO, CTA or for registration as an AP of
            any of these categories must satisfy proficiency requirements.
            Applicants generally must have passed the National Commodity
            Futures Examination (NCFE or Series 3) within the 2 years
            preceding their application.
      --Ethics Training.--The CFTC Statement of Acceptable Practices (see
            Appendix B to Part 3 of the Commission's regulations) for
            ethics training allows flexibility, permitting firms to tailor
            their training programs to best suit their particular
            operations. In an Interpretive Notice to its Compliance Rule 2-
            9, NFA states that good business practice dictates that
            employees receive periodic training to keep them cognizant of
            new developments in technology, commercial practices and
            regulations, and their ethical implications.
      --Oversight.--NFA conducts ongoing audits of its registrants for
            compliance with NFA rules. In turn, Commission staff pursues
            formal and ongoing oversight of NFA's compliance and
            registration programs. Formal oversight activities involve
            periodic reviews of NFA programs and inspection of records and
            interviews with NFA staff.
          NFA pursues statutory disqualification and other disciplinary
            matters through Registration, Compliance & Legal Committee
            (``RCLC'') cases. On a quarterly basis, Commission staff meets
            with NFA to provide guidance on registration issues generally,
            and to review the past quarter's RCLC cases.
        These oversight activities are designed to protect market
    participants and the public interest by ensuring that persons who deal
    with customers and those who handle customer orders and funds meet the
    standards for fitness and integrity established under the Commodity
    Exchange Act.
        Question. What type of tracking system is in place to demonstrate
    that this outcome has been achieved?
        Answer. Currently, there are more than 67,000 individuals and
    companies registered with the CFTC in some capacity. Although it would
    be impossible to track the negative (i.e., that there are unregistered
    individuals conducting business), through its oversight of NFA's
    registration program, the Commission ensures both that qualified
    applicants are properly registered, and that unqualified applicants (or
    registrants) are denied registration (or have their registration
    revoked). Through the quarterly meetings of the Registration Working
    Group involving CFTC and NFA staff, the Commission ensures that
    standards for such actions are applied consistently, and gives guidance
    when questions arise.
        Question. With regard to meeting timeframes for resolution of
    customer complaints, how does the CFTC track disposition of complaints,
    proceedings, and appeals in order to show that the targets are achieved
    in the caseload?
        Answer. The various Divisions at the CFTC (Enforcement, Clearing
    and Intermediary Oversight, Market Oversight, and General Counsel's
    Office) each operate an ``officer of the day program'' to receive, and
    address or refer, inquiries (including complaints) from members of the
    public. The Office of Proceedings handles and tracks the disposition of
    adjudicatory matters at the hearing level. With respect to adjudicatory
    appeals to the Commission, pending cases are maintained with the
    Secretariat, with monthly status reports issued by the Office of
    General Counsel.
        Question. Third Goal.--Of the $160.6 million in appropriations
    requested for fiscal year 2010, the CFTC would designate $38 million
    (or 24 percent of the total funding) and 144 FTE to meet the third
    goal--to ensure market integrity in order to foster open, competitive,
    and financially sound markets
        The outcomes to be achieved as a result of the investment made
    related to this goal are that clearing organizations and firms holding
    customer funds have sound financial practices, commodity futures and
    options markets are effectively self-regulated, markets are free of
    trade practice abuses, and the regulatory environment is flexible and
    responsive to evolving market conditions.
        How will the CFTC work to ensure zero loss of customer funds as a
    result of firms' failure to adhere to regulations and ensure that no
    customers are prevented from transferring funds from failing firms to
    sound firms?
        What mechanisms does the CFTC have to monitor self-regulatory
    organizations to ensure that no funds are lost as a result of the
    failure of SRPs to comply with their rules?
        Answer. Again, the Commission has several complementary programs
    that address the protection of customer funds held by FCMs) and
    derivatives clearing organizations (``DCOs''). They are summarized by
    staff below:
      --Protection of Customer Funds--Statute and Regulations.--The
            Commodity Exchange Act and Commission regulations require each
            FCM to segregate from its own assets all money, securities or
            property deposited by customers to margin or secure futures and
            option on futures positions traded on designated contract
            markets or funds that accrue to customers from these open
            positions. Each FCM also must set aside in accounts (i.e.,
            ``secured accounts''), separate from its proprietary accounts,
            sufficient funds deposited by customers trading on non-United
            States futures markets to meet its obligations to customers
            trading on foreign markets.
      --Notification.--Commission regulations also require each FCM to
            perform daily calculations demonstrating compliance with the
            segregation and secured amount requirements. Any FCM that does
            not maintain sufficient funds in segregated accounts or in
            secured accounts, as applicable, to meet its obligations to its
            customers (i.e., is ``under segregated'') is required to
            provide immediate telephone notice, confirmed immediately in
            writing, to the Commission and to the FCM's self-regulatory
            organization (``SRO'') that conducts financial surveillance
            over the firm.
      --Commission and SRO Responsive Action (Direct Examinations).--Upon
            receipt of a notice, Commission staff work with the applicable
            SRO to determine the facts and to assess whether the situation
            is a temporary under segregation that can be immediately
            rectified by the FCM infusing additional funds into segregated
            or secured accounts, or indicative of a more serious issue that
            may require prompt SRO or Commission action to protect customer
            funds. In certain situations, Commission and/or SRO staff may
            conduct an immediate onsite examination of the firm's books and
            records to assess the FCM's compliance with its financial
            requirements.
      --SRO Oversight.--The Commission conducts periodic reviews of SROs'
            financial surveillance programs. The SROs' financial
            surveillance programs include routine examinations of FCMs to
            assess their compliance with Commission and SRO minimum
            financial requirements and related reporting requirements,
            including minimum capital requirements and compliance with the
            segregation and secured amount requirements. The Commission and
            SROs also may conduct an examination of an FCM on an exigent
            basis in response to an FCM filing a notice that it is not in
            compliance with the customer funds segregation or secured
            amount requirements. Experience has demonstrated that if the
            Commission and SROs can react promptly at the initial signs of
            weakness in the financial condition of an FCM, it is more
            certain that customer funds will be protected. In this regard,
            open futures and options on futures positions may be
            expeditiously transferred to another FCM if the FCM that is
            experiencing financial difficulties has properly segregated and
            secured customer funds.
      --Communication With SROs.--Commission staff hold periodic meetings
            with the financial surveillance staff of the SROs for the
            purpose of discussing emerging issues and to coordinate
            examination procedures and policies. This includes an annual
            review of the detailed SRO audit programs, which are submitted
            to the Commission for review.
          The resources requested by the Commission for the protection of
            customer funds would allow Commission staff to conduct more
            frequent assessment of the SROs' execution of their financial
            surveillance programs. Additional resources would also allow
            the Commission to conduct more frequent direct examinations of
            FCMs for compliance with financial and other requirements,
            including the segregation of customer funds.
      --Risk Surveillance Program.--The Commission's risk surveillance and
            DCO review programs also serve to protect customer funds by (i)
            identifying traders that pose risks to firms and firms that
            pose risks to DCOs, and (ii) taking steps to mitigate those
            risks thereby decreasing the likelihood of default. Additional
            resources would allow the Commission to enhance these programs.
        Question. What are the advantages and disadvantages of ``regulatory
    restructuring'' from the perspective of the CFTC?
        Answer. Exchange traded futures and options contracts are
    derivatives relied upon by the nation's businesses for price discovery
    and risk management. The CFTC's mission is to protect market users and
    the public from fraud, manipulation, and abusive practices related to
    the sale of commodity and financial futures and options, and to foster
    open, competitive, and financially sound futures and option markets.
    Like exchange traded futures, OTC swaps and similar transactions are
    derivatives. Like futures, OTC derivatives are used for risk shifting
    purposes. In recent years the OTC market has grown to far exceed the
    exchange traded market in size. Bringing OTC dealers and markets under
    CFTC regulatory oversight will greatly enhance the ability of the
    Commission to fulfill its mission and to protect the price discovery
    and risk shifting functions of derivatives markets. Additionally,
    bringing the OTC dealers and markets under federal regulation will
    significantly improve financial integrity and transparency, qualities
    that were lacking in the collapse of firms like AIG and Lehman
    Brothers.
        Question. Fourth Goal.--Of the $160.6 million in appropriations
    requested for fiscal year 2010, the CFTC would designate $31.5 million
    (or 19 percent of the total funding) and 121 FTE to meet the first
    goal--to facilitate agency performance through organizational and
    managerial excellence, efficient use of resources, and effective
    mission support.
        Among the outcomes to be achieved as a result of the investment
    made related to this goal are a productive, technically competent,
    competitively compensated and diverse workforce, a modern and secure
    information system, and an organizational infrastructure that
    effectively and efficiently responds to and anticipates both the
    routine and emergency business needs of the agency.
        How does the CFTC intend to measure progress and the extent to
    which these outcomes have been achieved?
        Answer. The Commission has developed 18 performance measures
    intended to measure progress in achieving the stated outcome objective.
    Of the 18 measures 11 results were determined to be effective, one was
    determined to be moderately effective, and six were determined to be
    adequate. The performance results along with an annual performance
    analysis and review are included in pages 91-110 of the Fiscal Year
    2008 Performance and Accountability Report available of the CFTC Web-
    site at: www.cftc.gov/aboutthecftc/cftcreports.
                                     ______

                  Question Submitted by Senator Susan Collins
        Question. Excessive speculation in the commodities market is
    prohibited under CFTC's statutes. However, determining what constitutes
    excessive speculation is a thorny question. Last year, as oil and other
    commodities skyrocketed on the futures market, many in Congress became
    concerned that these market prices were more reflective of the activity
    of speculators than commercial interests in the underlying product.
    Last year, under the leadership of Chairman Lukken, the CFTC stated
    that despite the rapid increase in prices, the data did not reflect
    manipulation by speculators. Critics, however, contend that in this
    arena, the CFTC is simply outmatched. It lacks the manpower and
    resources to effectively collect the large volume of data in the
    commodities markets and to effectively analyze that data. Do you
    believe the CFTC needs more resources to gather relevant data and
    effectively analyze it to better understand the role and the effects of
    speculators?
        Answer. The Commission examines markets by studying the behavior of
    commercial and non-commercial traders. In determining the status of
    traders, the Commission has traditionally accepted their self-
    classification. The Commission has begun to examine trader patterns to
    ascertain the general accuracy of these classifications. Commission
    assessments of the self-classifications are staff intensive and in
    order to accomplish them expeditiously and on a sustained basis,
    additional resources will be required.
        On another front the Commission relies on market positions
    information that is updated daily. Without intraday position
    information, the Commission cannot examine any price effect occurring
    on the same day as a position change. This problem could be addressed
    were position information available throughout the trading day.
    Obtaining and processing such information will require additional
    resources for both staff and data processing capacity.

                              SUBCOMMITTEE RECESS

        Senator Durbin. Thank you very much for coming in.
        Mr. Gensler. Thank you, Mr. Chairman, Ranking Member
    Collins. Thank you so much.
        Senator Durbin. Thank you very much.
        The subcommittee hearing is hereby recessed.
        [Whereupon, at 12:27 p.m., Tuesday, June 2, the
    subcommittee was recessed, to reconvene subject to the call of
    the Chair.]

      FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR FISCAL
                                   YEAR 2010

                                  ----------

                             TUESDAY, JUNE 9, 2009

                                           U.S. Senate,
               Subcommittee of the Committee on Appropriations,
                                                        Washington, DC.
        The subcommittee met at 10:30 a.m., in room SD-138, Dirksen
    Senate Office Building, Hon. Richard J. Durbin (chairman)
    presiding.
        Present: Senators Durbin, Lautenberg, Nelson, Tester,
    Collins, and Bond.

                           DEPARTMENT OF THE TREASURY

                            Office of the Secretary

    STATEMENT OF HON. TIMOTHY F. GEITHNER, SECRETARY

                 OPENING STATEMENT OF SENATOR RICHARD J. DURBIN

        Senator Durbin. Good morning. My apologies. I was on the
    floor, defending the administration, that's all I can say. To
    my colleagues, I apologize.
        Please convene this hearing to examine the fiscal year 2010
    funding request of the Department of the Treasury, including
    the Internal Revenue Service (IRS). Mr. Secretary, thank you
    for joining Senator Collins and my other colleagues this
    morning. We know that IRS Commissioner, Doug Shulman, is also
    here and prepared to testify.
        And I am going to waive the remainder of my opening
    statement, in the interest of time, and to allow my colleagues
    to say few words so that we can catch up with the schedule.
        Senator Collins.

                       STATEMENT OF SENATOR SUSAN COLLINS

        Senator Collins. Thank you, Mr. Chairman. Secretary
    Geithner, Commissioner Shulman, I am very pleased to welcome
    you to this hearing and I thank you for your service to our
    Nation.
        Mr. Secretary, you have so many challenging
    responsibilities that it's difficult to know where to begin.
    You're responsible for reinvigorating bank lending to consumers
    and small businesses, stabilizing the housing markets,
    overseeing the automobile industry and encouraging sustainable
    economic growth. Most important, you must try to protect
    American taxpayers and their investments and promote the long-
    term financial security of the United States at a time of
    unprecedented debt.
        The current financial crisis is rooted in a tangled web of
    high-risk financial instruments backed by high-risk loans,
    issued by high-risk individuals. To emerge from this crisis and
    to overcome its effects, we must restore trust in our Nation's
    financial institutions and financial markets. And, in my view,
    that will require significant reforms in our system of
    financial regulation, an issue that I want to discuss with you
    today.
        Several developments are shaking American's trust in the
    economy. First among these is the dangerous increase in our
    Nation's long-term debt. While I supported the short-term
    fiscal stimulus as necessary to get our economy back on track,
    I am troubled that the President's budget proposes to double
    the debt in 5 years and triple it in 10. I am concerned that
    the long-term debt proposed by this administration poses a
    threat to the sustainability of our economy. Where will the
    money come from to pay these debts? China, where you have
    recently visited? Saudi Arabia? Sovereign wealth funds? Will
    this public debt crowd out private investment and slow the
    recovery? Who ultimately will pay for this--our children and
    our grandchildren? We need to assess what we're doing to our
    country's long-term financial health.
        Finally, Mr. Secretary, I remain very concerned, as I
    indicated to you in our conversation yesterday, about the
    management accountability and transparency of the troubled
    asset relief program (TARP) fund. Originally, TARP was
    envisioned as a fund to prevent our largest banks and financial
    institutions from failing and to increase liquidity in our
    credit markets. Today, however, TARP encompasses 12 different
    programs, not just for banks but also for insurance companies
    and automobile manufacturers, and involves Government funds
    combined with private funds adding up to almost $3 trillion.
        It is disturbing to me that we really cannot assess what
    impact TARP funds has had on recipients, and whether TARP has
    truly increased lending. And the Treasury Department has yet to
    articulate how it will measure whether this injection of
    capital has been an effective use of taxpayer dollars. I am
    concerned that we're being asked simply to trust that this
    large infusion of capital into the economy will lift us out of
    a severe financial crisis, whose complex origins are still
    being untangled.
        Secretary Geithner and Commissioner Shulman, you both face
    great challenges in managing the Federal Government's finances
    and attempting to reinvigorate our economy. These truly are
    extraordinary times. I pledge to work very closely with you, as
    well as with our chairman, to make sure that you have the
    staff, the authority, and the resources that you need to serve
    the American people.
        Thank you, Mr. Chairman.
        Senator Durbin. Thank you, Senator Collins. I am going to
    invite my colleagues to make brief opening statements.
        And Senator Lautenberg, I recognize you.

                    STATEMENT OF SENATOR FRANK R. LAUTENBERG

        Senator Lautenberg. Thanks very much Mr. Chairman.
    Greetings Mr. Geithner, Secretary Geithner. You've taken on a
    formidable task and, so far, I think that the score in the ball
    game is going your way, but we are quite a distance from the
    ninth inning.
        As we meet today, the economy is slowly beginning to show
    signs of a possible recovery and the challenges still remain.
    This recovery will require strong reforms to place our
    financial system on a firm footing. We've got to give the
    regulators the tools that they need to predict and prevent
    financial crisis.
        And we've got to change corporate culture. That says, the
    people, the leadership at the top, can often take its
    compensation without regard for what happens with the employees
    or the future investing for the well-being of the company and
    taxpayers.
        I am still on the board of the Columbia Business School and
    some time ago I gave them the chair, I was out of the Senate
    for a couple years, I took a hiatus, and what I proposed was
    that salaries at the top be related to salaries at the bottom.
    And instead of letting the ratio slip as it has, from 40 times
    typically in the eighties, to 400 times recently at times, and
    also--and I don't know, Mr. Secretary, what kind of latitude
    you have or what kind of authority you have to suggest conduct
    in the CEOs office. But one of the things I think we have to
    look at while we change this corporate culture is to make it
    clear that, when an executive retires, that the reward ought to
    be, my view, in the performance of the company after the leader
    leaves. And the bonuses should be expanded as time goes by, and
    not simply related to the stock price. Because stock price may
    be at the expense of investing in the future of the business.
        Anyway, we're glad to see you here and urge you to carry on
    and work hard. Thank you.
        Senator Durbin. Senator Nelson.

                        STATEMENT OF SENATOR BEN NELSON

        Senator Nelson. Thank you, Mr. Chairman. Secretary, we are
    glad you're here. We appreciate the efforts that you are
    providing and that the progress that we hope will come will, in
    fact, come.
        When I go home, I have people come to me complaining about
    the bailouts, complaining about TARP, complaining about putting
    the auto industry into bankruptcy and they're all concerned
    about that. They're concerned also about the growing deficit
    and the increasing budget. The one thing that they are now
    becoming alarmed about is the Government ownership of stock.
    And when we come to the questions, I've got some questions
    about that. Because they come to me and say, look, aren't we
    drifting into socialism at a rapid rate. And I assure them that
    our goal is not to hold the stockholdings or warrants or any
    other financial instruments that we shouldn't be holding. That
    our goal is to get these companies so that they are functioning
    on their own, so that they are either publicly traded or that
    they are privately owned, but not Government owned. So, I'll be
    asking you for reassurance on that side.
        Because I hope and I believe that our goal is just as I've
    stated it, to help these companies get on their feet and, when
    on their feet, to become private once again, not to have that
    kind of public ownership that we currently have. So I'll be
    anxious to get your take on that.
        Thank you, Mr. Chairman.
        Senator Durbin. Senator Tester.

                        STATEMENT OF SENATOR JON TESTER

        Senator Tester. Thank you, Mr. Chairman. Commissioner
    Shulman, Secretary Geithner. It's good to have Secretary
    Geithner and Commissioner Shulman here today. I've gotten to
    visit with Secretary Geithner on several occasions and I look
    forward to the one today.
        We have just, we have just experienced, over the last
    little over 1 year, the biggest economic downturn since the
    1930's. We have seen irresponsibility on Wall Street, we have
    seen irresponsibility in Government, with a lack of regulation.
    In some cases, no regulation. We have stepped forth with the
    TARP program, we have stepped forth with the recovery bill. You
    are in the eye of the storm.
        I look forward to visiting with you about all those things
    that impact the economy and where we're going from here. And I
    appreciate your coming in front of the subcommittee.
        Thank you.
        Senator Durbin. Senator Bond.

                    STATEMENT OF SENATOR CHRISTOPHER S. BOND

        Senator Bond. Thank you very much, Mr. Chairman, Ranking
    Member Collins. Welcome, Secretary Geithner.
        Everybody knows, over the past year, we've had a major
    economic storm raging with great damage to everybody. The
    Federal Government has responded to the economic crisis with
    aggressive and unprecedented, but unfortunately, I believe, ad
    hoc actions through taxpayer-funded bailouts of too-big-to-fail
    private corporations, a $1 trillion stimulus, foreclosure
    rescue programs, just to name a few.
        We've seen some positive signs of green shoots, but there
    are some wondering whether they will wither away due to
    continuing problems in the housing sector, consumer debt
    remaining high, significant de-leveraging occurring in the
    financial sector, and lingering questions about the solvency of
    banks. Are we seeing a ``dead cat bounce'' in the markets?
        Economic and financial experts are telling us that economic
    recovery cannot occur or be sustained until we address the root
    cause, the credit crisis. That's what TARP was supposed to do,
    but it got off on the wrong foot last fall, in my view, and
    it's still there. And President Obama told us in January we
    can't have a recovery until we get the toxic assets out.
        These are questions that I want to follow-up with. The size
    of the stimulus also is now causing questions from the Federal
    Reserve. If we get in a position of monetizing our debt, we
    will face an unprecedented disaster and go the way perhaps of
    Argentina. And tripling the debt in 10 years seems to me to be
    a very risky approach.
        We've seen the United Kingdom, which was recently warned
    about its credit rating. Perhaps that is the canary in the coal
    mine for our Nation's own future.
        Thank you, Mr. Chairman.
        Senator Durbin. Thank you very much, Senator Bond.
        [The statement follows:]
               Prepared Statement of Senator Christopher S. Bond
        Thank you Chairman Durbin and Ranking Member Collins for holding
    today's hearing on the Department of the Treasury and the Internal
    Revenue Service (IRS). I welcome both Treasury Secretary Timothy
    Geithner and IRS Commissioner Douglas Shulman and thank them for
    appearing before our subcommittee.
        Over the past year, a major economic storm has raged across America
    causing hardships and damage to families, communities, and businesses.
    Families have lost their jobs and homes. Retirement savings have
    plummeted turning 401(k)s into ``201(k)s.'' Students have seen their
    college savings evaporate. And, our financial and auto industries have
    been shaken to their core.
        The Federal Government has responded to the economic crisis with
    aggressive and unprecedented, albeit ad hoc, actions through taxpayer-
    funded bailouts of ``too big to fail'' private corporations, a trillion
    dollar stimulus, and foreclosure rescue programs, just to name a few.
        In recent weeks, some have identified positive signs of economic
    recovery or ``green shoots.'' But other experts believe that these
    green shoots may just wither away due to continuing problems in the
    housing sector, consumer debt remaining high, significant deleveraging
    occurring in the financial sector, and lingering questions about the
    solvency of some of our big banks. As they say in the financial
    industry, we may be experiencing a ``dead cat bounce.''
        Economic and financial experts believe that true economic recovery
    cannot occur or be sustained until the root cause of the crisis is
    addressed--the credit crisis. The financial system cannot be fully
    repaired unless the toxic assets are cleansed from the balance sheets
    of financial institutions. I strongly agree.
        Unfortunately, the administration has failed to develop or execute
    a credible plan to cleanse the toxic assets that continue to choke our
    financial institutions. The center-piece of the administration's
    financial rescue plan to remove the toxic assets--the Public-Private
    Investment Program or ``PPIP''--remains sidelined, and based on the
    recent comments by leaders such as Secretary Geithner's successor at
    the Federal Reserve Bank of New York, the growing sentiment is that it
    will never be launched.
        Due to fundamental flaws with the design of PPIP that placed most
    of the risk at the taxpayers' feet, it is frankly no surprise that this
    program has stalled and is not likely ever to be implemented.
        It cannot be emphasized enough that a well-functioning credit
    market must be restored for economic recovery. Too much money has been
    thrown at our financial institutions without removing the toxic assets,
    and further delay only makes the problem worse as we have seen with
    Japan in the 1990s. The good news is that we can face this 800-pound
    gorilla by using a true-and-tried approach that helped our Nation
    recover from the Savings and Loan Crisis.
        Unfortunately, the administration has resisted the creation of a
    Resolution Trust Corporation approach but continues an ad hoc,
    incremental approach to our ``too big to fail'' financial institutions
    without any semblance of an exit strategy.
        But when it comes to our domestic auto industry, the administration
    has not shied away from taking a different approach. It fired the head
    of General Motors and orchestrated the bankruptcy of both GM and
    Chrysler.
        The creation of jobs will be an essential ingredient to economic
    recovery and President Obama has staked his performance on this
    measure. The administration's main effort to create jobs was a trillion
    dollar ``stimulus'' bill with the promise of saving or creating at
    least 3 million jobs, which would prevent the unemployment rate from
    rising above 7.8 percent. Clearly, this estimate was overly rosy as the
    most recent jobs report showed that unemployment had reached 9.4
    percent.
        To be fair, the sliding economy necessitated a significant fiscal
    stimulus. But instead of stimulating the creation of jobs, so far, it
    only seems to be stimulating the growth of Government programs and
    ballooning our debt.
        While the lack of stimulus is extremely troubling, what is truly
    alarming is the administration's future budget plan, which promises
    more spending that will double the debt in 5 years and triple the debt
    in 10 years. This means that our children are going to inherit an
    obligation where interest payments on the debt--around $800 billion
    annually--are likely to be the largest single item of the Federal
    Government. These figures are certainly not funny to future
    generations, but it is difficult not to laugh when administration
    officials publicly claim that lending money to the U.S. Government is
    still safe.
        Frankly, our country's fiscal health and viability are serious
    matters that must be addressed sooner than later. There are recent
    signs of investor concern about our Nation's fiscal health. Interest
    rates on 10-year Treasury notes have recently shot up. This means that
    the Government's cost to borrow money will increase by tens of billions
    of dollars. One of the most stable and industrialized nations in the
    world, the United Kingdom, was recently warned about its credit rating.
    What is happening in the United Kingdom should be viewed as a ``canary
    in the coal mine'' for our own Nation's future fiscal situation. Even
    Federal Reserve Chairman Ben Bernanke recently called for our Nation to
    begin planning now for the restoration of fiscal balance.
        The good news is that we still have the opportunity to change
    course, but we can only do so if there is the will to confront the most
    treacherous political landmines, such as entitlement spending. Much has
    been said publicly about the importance of our fiscal health and the
    commitment to tackle spending matters. However, action speaks louder
    than words, and until I see action, many Americans, including myself,
    will continue to sound the alarm.
        Thank you.

        Senator Durbin. Mr. Secretary, the floor is yours.

                 SUMMARY STATEMENT OF HON. TIMOTHY F. GEITHNER

        Secretary Geithner. Chairman Durbin, Ranking Member
    Collins, and members of the subcommittee, it's a pleasure to be
    before you today, my first time appearing before you about the
    Treasury's budget. I look forward to building a close working
    relationship and I look forward to having a chance to answer
    the many important questions you raised in your opening
    statements.
        While we see some initial signs of economic improvement, I
    think you could say that the force of the storm is weakening a
    bit. And although the financial system is beginning to heal,
    our country faces very substantial economic and financial
    challenges.
        Now the President and the administration are working to
    meet these challenges. We are working hard to get Americans
    back to work, to get our economy back to a growth path again,
    by committing to restoring fiscal discipline to ensure and
    sustain recovery and by making the long-neglected investments
    in healthcare reform and energy and education necessary to
    improve the productive capacity of our economy and to ensure
    that, over the longer term, we enhance the competitiveness of
    the U.S. economy.
        To achieve these goals, we are working to repair and reform
    our financial system so that it works for, not against,
    recovery. We are working to restore growth and meet our fiscal
    goals by redesigning our Tax Code, bolstering enforcement. We
    are working to advance our interests globally, working with
    other countries to promote economic recovery and financial
    repair and to ensure more open markets for U.S. businesses.
        And to protect our Nation's national security interests, we
    are deploying all of the tools at our disposal to exclude
    terrorists, proliferators, and other illicit actors from the
    international financial stage and thereby secure our financial
    system and prevent threats to our security.
        Now, the fiscal year 2010 budget you have before you will
    allow Treasury to pursue these core missions. The $13.4 billion
    request includes a $676 million, or 5.3 percent increase over
    the enacted 2009 levels.
        Just a few brief highlights about the budget request. Of
    the increase we are seeking, $14 million would go to bolstering
    the staffs of our domestic finance and tax policy offices. Now,
    these offices, domestics finance and tax policy, are at the
    center of the administration's efforts to support strong
    design, rigorous analysis, improve the financial system, reform
    the financial system, and implement reforms to our tax policies
    and Tax Code.
        We include in the budget a $137 million request to more
    than double our community development financial institutions,
    our community development financial institutions (CDFI) fund,
    to ensure that the benefits of our financial efforts reach
    beyond major banks and businesses to help 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 and business failures
    that the crisis has exacerbated.
        We propose a total of $332 million for new IRS enforcement
    efforts, including $128 million to add nearly 800 new IRS
    employees to combat offshore tax evasion and improve compliance
    with the U.S. international tax laws by businesses and high-
    income individuals. Another $130 million would go to bolster
    the security of the IRS's information technology, improve the
    efficiency of its business systems, and upgrade its fraud
    detection capabilities.
        Now, although not directly under the jurisdiction of the
    subcommittee, I just wanted to note also that our budget
    includes funds to meet our international obligations and to
    help us craft a global response to the crisis in this more
    integrative global system we live in today.
        Now, as we seek these additional funds to respond to our
    Nation's immediate challenges, we've cut back on some programs
    that are either ineffective or we believe can be safely
    deleted. Just one example, even as we are trying to increase
    capital investment for the IRS, our budget would reduce the
    Department-wide Treasury's Department-wide capital investment
    account by 65 percent, for a modest savings of $17 million.
        Now, just before I end, I want to say a few words about the
    Treasury staff. I have the honor of leading a team of
    exceptionally smart and dedicated individuals who are working
    very hard to make our Government more effective. They're
    performing a great service to our country under challenging
    circumstances. I am very grateful to them and I think if you
    look at the scale of what we've set in motion, just in the last
    6 months, they have done extraordinary things in a very short
    period of time.

                               PREPARED STATEMENT

        Thank you, Mr. Chairman, I'd be happy to answer any
    questions.
        [The statement follows:]
                   Prepared Statement of Timothy F. Geithner
        Chairman Durbin, Ranking Member Collins, members of the
    Subcommittee, I appreciate the opportunity to testify before you for
    the first time as Treasury Secretary on the President's fiscal year
    2010 budget request for the Department of the Treasury.
        While we see some initial signs of economic improvement and the
    financial system is beginning to heal, our country faces very
    substantial economic and financial challenges.
        President Obama and his administration are working to meet these
    challenges by getting Americans back to work and getting our economy to
    grow again; by restoring fiscal discipline to ensure a sustained
    recovery, and by making the long-neglected investments in health care,
    energy and education needed to enhance America's global competitiveness
    and produce more balanced, sustainable growth over the long-term.
                           treasury's key priorities
        To achieve these goals, we are repairing and reforming our
    financial system so that it works for, not against, a recovery that
    serves all Americans.
        To restore growth and meet our fiscal goals, we are redesigning and
    bolstering enforcement of our tax code so that it is both fairer and
    more efficient.
        To advance our interests globally, we are working with other
    nations to promote economic recovery and financial repair, and to
    ensure more open markets for U.S. business.
        And to protect the country, we are deploying all of the tools at
    our disposal to exclude terrorists, proliferators, and other illicit
    actors from the international financial stage, and thereby secure our
    financial system and combat threats to our security.
        The fiscal year 2010 budget that you have before you will allow
    Treasury to pursue these core missions assigned to the Department by
    the President and the Congress. The $13.4 billion request includes a
    $676 million, or 5.3 percent, increase over enacted 2009 levels.
        Of this increase, $14 million would go to bolstering the staffs of
    our Domestic Finance and Tax Policy offices, which are at the epicenter
    of administration efforts to support rigorous analysis and
    implementation of revenue policy and to redesign and improve our tax
    policies and tax code.
        Some $137 million would be devoted to more than doubling our
    Community Development Financial Institutions (CDFI) Fund to ensure that
    the benefits of our financial repairs reach beyond our major banks and
    businesses to help economically distressed communities. These
    communities were underserved by our financial system even before the
    current crisis, and have been deeply hurt by the job losses and
    business failures that the crisis has spawned.
        A total of $332 million would be devoted to new Internal Revenue
    Service (IRS) enforcement efforts, including $128.1 million to add
    nearly 800 new IRS employees to combat offshore tax evasion and improve
    compliance with U.S. international tax laws by businesses and high-
    income individuals. Another $130 million would go to bolster the
    security of the IRS information technology, improve the efficiency of
    its business systems and upgrade its fraud detection capabilities.
        Although not directly under the jurisdiction of this Subcommittee,
    our budget also includes funds to meet our international obligations to
    help us in mounting a global response to the crisis and in creating
    mutually reinforcing growth around the world.
        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 that we believe can be safely delayed.
        For example, while the Earned Income Tax Credit (EITC) continues to
    be one of the most effective anti-poverty programs that the Federal
    Government administers, the Advanced EITC, a related program which
    provides benefits in advance of filing a tax return, has been prone to
    exceptionally high levels of error and low use by those eligible for
    it. Accordingly, our budget proposes to end this latter program for
    savings next fiscal year of $125 million.
        Similarly, 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.
        The Treasury budget would reduce the number of international
    economic attaches from 20 to 16, saving $2 million next fiscal year. It
    would absorb a portion of our non-pay inflation through more efficient
    use of contracting and other cutbacks, saving $18 million. It would
    take advantage of the growth of efficient electronic filing of tax
    returns to reduce the IRS processing budget by $8 million next fiscal
    year.
        Given we have had control over the budget for fewer than 5 months,
    the reductions that I have just described represent a first attempt to
    do more with less. As we begin work on the Budget for fiscal year 2011,
    Treasury has prepared itself for a more rigorous assessment of its
    spending.
        I have already issued guidance to Treasury senior staff that says,
    in part: ``To afford any new investments, we will have to take new
    approaches to solving old problems. I expect each bureau and policy
    office to identify opportunities for innovation that will transform how
    Treasury fulfills its missions in order to both improve performance and
    reduce cost.''
        In addition, the President has announced his intention to nominate
    Dan Tangherlini to be our Assistant Secretary for Management and
    Budget. Consistent with the President's mandate, I will look to Mr.
    Tangherlini to scour the Treasury's budget for efficiencies and cost
    savings. He comes to the job with an impressive track record of working
    on budget, management and performance issues with District of Columbia
    Mayor Adrian Fenty, and I am convinced that he will bring the same
    results-oriented approach to the Federal Government.
                  repairing and reforming the financial system
        The President has assigned the Treasury to repair key sectors of
    our economy so that they help revive growth and produce broadly shared
    prosperity.
        The Treasury has been working to repair and reform every major
    element of our financial system, and to fill gaps in the system so that
    it benefits all Americans.
        Last month, Federal banking supervisors announced results of the
    stress tests that we asked them to conduct on our 19 largest financial
    institutions. The aim of these assessments was to ensure that these
    institutions have sufficient capital buffers to absorb the losses that
    they could suffer under worse-than-expected economic conditions and
    continue to make the loans necessary to sustain recovery.
        The clarity and transparency provided by the tests has helped
    improve market confidence in the banks, making it possible for them to
    collectively raise nearly $90 billion through private equity offerings,
    bond issuances without Government guarantees and sales of business
    units.
        On housing, Treasury is working with HUD to bolster our housing
    markets by helping to drive down mortgage interest rates and by
    assisting responsible homeowners to refinance into more affordable
    mortgages or modify their at-risk loans to avoid preventable
    foreclosures.
        In terms of the non-bank financial sector, Treasury is working to
    revive critically important securitization markets for both new and old
    asset-backed securities.
        We have begun to boost new consumer and business lending by re-
    starting the markets for asset-backed securities that financed almost
    half of all lending in this country before the crisis. There were more
    securities of this type issued the 4 months after we launched our
    effort than in the preceding 9.
        Additionally, Treasury is about to join with private investors in
    seeking to restart the markets for legacy mortgage loans and securities
    that are now stuck on bank balance sheets, keeping these institutions
    from making new loans to families and businesses.
        As we have made repairs to the financial system, we have understood
    that repair alone is not enough. We must also reform the system so that
    it is less prone to crises of the dimensions that we now face.
        In the next few weeks, we will outline a comprehensive plan of
    reform that will include systemic risk regulations to ensure that no
    large and interconnected firm or market can take on so much risk that
    its failure could destabilize the entire financial system. The plan
    calls for bolstering consumer and investor protections. And it will
    streamline our out-of-date regulatory structure so that our regulatory
    system matches the size, shape and speed of our modern financial
    system. Together, these changes will help prevent another crisis of the
    magnitude that we have just lived through, and give the Government new
    tools to better cope with similar problems should they occur in the
    future.
        In addition to the financial system, Treasury is helping to ensure
    that the Nation has a viable auto industry in the future. We are
    working with General Motors and Chrysler to make sure these companies
    make the changes necessary to again prosper. As President Obama has
    said ``we cannot . . . must not . . . and will not let our auto
    industry simply vanish.''
        The resources for administering key elements of both our financial
    and auto repair efforts were authorized by the Emergency Economic
    Stabilization Act.
        These activities are being handled by our Office of Financial
    Stability (OFS), which is focused on ensuring that TARP funds serve the
    public purpose of economic and financial stabilization; that they are
    fulfilling this purpose in ways that protect taxpayers; and that we can
    provide a clear account to the Congress and the American people about
    the effectiveness of the funds' use.
        In order to administer TARP and ensure compliance by TARP
    recipients, OFS has had to quickly assemble a substantial staff. OFS
    staffing levels, which were at 88 when I arrived in office, had risen
    to approximately 165 by the end of last month and are expected to rise
    to 225 by next fiscal year. The office's budget for next fiscal year
    will total $262 million, a 6 percent decline from the current fiscal
    year's $279 million. The change is largely due to a decline in
    estimated spending on contracts as part of the program's initial start-
    up.
        While TARP is proving effective at improving the immediate
    stability of the financial system, the scope of the issues that this
    administration and this Department face extend beyond TARP to include
    striking the delicate balance between intervention and allowing market
    participants latitude to operate; devising a new financial regulatory
    structure for the future; and working through the tough problems of
    what form our Government-sponsored enterprises, Fannie Mae and Freddie
    Mac, should take as we emerge from this difficult period.
        All of these issues fall to Treasury's Office of Domestic Finance,
    which, together with OFS, is having to operate on new policy terrain,
    tackling problems that the country has not faced in generations and for
    which we have few guideposts in our immediate past.
        That is why the workload of the Office Domestic Finance has already
    expanded greatly, and is all but certain to expand still further. And
    it is why we are seeking to modestly increase its size and bolster its
    expertise in several critical areas.
        Our budget requests an additional $8.7 million for the office to
    add 26 full-time equivalent (FTE) positions to the staff. This
    represents a 26 percent increase from the office's current fiscal year
    staffing of 101.
        The additional funds will be used to create two new Deputy
    Assistant Secretary positions, one for housing finance, small business
    and consumer issues, and a second for capital markets. These two new
    officials will lead teams that will perform the economic and
    institutional research necessary to ensure that we understand all of
    the policy options in each of these areas and choose the most effective
    ones for solving our problems.
        As we seek additional funds for Treasury, we must also seek them
    for the front-line institutions that will sustain our economic recovery
    and ensure that its benefits are broadly shared.
        Our budget would more than double the resources of the Community
    Development Financial Institutions (CDFI) Fund to $243.6 million. The
    fund's mandate is to help low-income, economically distressed
    communities that were poorly served by our financial system even in
    economic good times, and--although they had nothing to do with causing
    current conditions--have been significantly hurt by the economic and
    financial fallout of the crisis that we now face.
        The $136.6 million, or 128 percent increase in funding, would allow
    this program to support financial institutions in making job-creating
    investments and in providing access to capital in communities that are
    often considered too risky for mainstream financial institutions to
    serve. By targeting lenders and borrowers in these communities, the
    Fund would help some of our most vulnerable populations weather the
    crisis and benefit once recovery is underway.
        The aim of the fund is to make sure that we provide distressed
    communities with more than simply Government grants and aid. We must
    also build the capacity of their local financial institutions to ensure
    that capital is flowing to homebuyers and businesses so that they can
    finance their own economic futures. Since its inception in 1994, the
    fund has directed nearly $1 billion to distressed communities, and
    allocated $19.5 billion in tax credits through its New Markets Tax
    Credit program.
        Financial institutions funded through the CDFI program make loans
    to small businesses and micro-enterprises and take equity positions in
    them. They provide mortgages to low-income homebuyers, and finance
    developers of low-income housing and community facilities, such as
    charter schools, health clinics and child care centers.
        One example can be seen right here in the Anacostia neighborhood of
    Washington, DC. City First Bank--a local CDFI--and Charter Schools
    Development Corporation partnered to provide a $13.3 million New
    Markets Tax Credit for the Thurgood Marshall Academy, the city's first
    charter school focused on law, serving 360 students in grades 9 through
    12 and achieving a 100 percent college acceptance rate for its first
    three graduating classes.
        Historically, the CDFI program has been heavily oversubscribed and
    has had to turn away qualified applicants. For example, in the current
    fiscal year, the program for CDFI financial and technical assistance
    awards is budgeted at $55 million, but it expects to receive
    applications for more than $500 million in funding.
             redesigning the tax system for fairness and efficiency
        The President has asked Treasury to redesign and bolster
    enforcement of our tax code so that it supports growth, sets the stage
    for our return to a sustainable fiscal path, and accomplishes these
    goals in a manner that is fair, efficient and supportive of our
    society's broadest goals.
        To make good on the President's assignment, our budget requests a
    modest increase in funding for Treasury's Office of Tax Policy and more
    substantial increases to expand IRS enforcement activities and to
    improve its information technology.
        Treasury has moved quickly in implementing the more than 30 tax
    provisions of the President's economic recovery plan. Treasury also has
    played an integral role in designing the tax provisions of the
    President's fiscal year 2010 budget, and it will play a similar role in
    implementing these.
        The President has made clear that he will not seek any major
    revenue increases until 2011 when the recovery should be firmly in
    place. He has, however, been equally clear that once recovery is
    underway, we must get our fiscal house in order or risk having
    Government borrowing crowd out productive private investment. Treasury
    and the White House will work with Congress to make the tax changes
    that are necessary to reduce deficits and to do so in a manner that is
    fair to all Americans.
        As part of our efforts to make sure that the tax system is working
    for recovery and is operating fairly, we have designed new policies to
    curb the use of off-shore tax havens, close the international tax gap,
    remove tax incentives for companies to shift jobs overseas, and replace
    these incentives with ones that encourage creation of jobs at home.
        Our tax work on the recovery plan, the fiscal year 2010 budget, and
    these international tax issues are just the beginning of an ambitious
    agenda for this administration.
        On healthcare, the President has made clear that the road to fiscal
    discipline and to solvency for Medicare and Social Security runs
    through overall healthcare reform. Although much of the cost of the
    President's reform plan will be covered by savings from the system, we
    will need to design programs to cover some of the costs in ways that
    are fair to all Americans and do not harm the economy. Treasury is
    deeply involved in this effort and in the related work to expand
    coverage and improve our healthcare system in other important ways.
        On retirement and economic security, Treasury and, in particular,
    the Office of Tax Policy, is taking the lead in developing and actively
    working with Congress to flesh out the initiatives proposed in the
    President's budget to help enhance retirement security and savings for
    the half of working Americans who have no retirement provisions beyond
    Social Security. These proposals would make it easier for people to
    save for their own retirement, either through their workplaces or on
    their own, and would move us toward universal retirement savings
    coverage.
        On climate change, Treasury is already working closely with
    Congress to design the auction mechanisms that will be needed to
    implement the administration's greenhouse gas cap-and-trade program.
        Our Office of Tax Policy has been deeply involved in all of these
    issues from the outset of the administration. Like our Office of
    Domestic Finance, its workload already has substantially increased and
    is certain to grow as the health reform, retirement security and
    climate change debates get underway in earnest.
        At the moment, the Office of Tax Policy's career staff includes 30
    lawyers and 44 economists as well as support staff for an overall
    staffing level of 93. This is lower than its usual complement of over
    100 professionals.
        Our fiscal year 2010 budget would increase the office budget by
    $4.9 million to add 15 full-time equivalent (FTE) positions in order to
    increase overall staffing to 108, and would therefore represent a
    return to historical norms. The additional staff is needed to perform
    analysis and revenue estimates for new policy proposals, conduct
    research for, among other things, congressionally mandated studies, and
    develop regulations and guidance for new legislation.
        The vast majority of the new funds that we request in this budget
    are for improving the enforcement efforts and the information
    technology of the IRS.
        As I have said, $332 million would go to new IRS enforcement
    efforts, including $128.1 million to improve international tax
    compliance. The balance of these funds would be used to support three
    critical programs: 755 employees to increase examinations of tax
    returns for businesses and high-income individuals; 300 employees to
    expand the IRS document matching program, which compares tax returns to
    other forms such as W-2s and 1099s; and an additional 491 employees to
    improve collection operations and build two new IRS automated
    collection center sites.
        Turning to IT, our Budget requests a $90 million increase in
    funding to protect taxpayers' personal records from the increasing
    number and sophistication of Internet-based attacks. With these funds,
    the agency will deploy state-of-the-art, automated tools to improve
    record access management, risk assessment and system auditing. This
    effort would address concerns noted in the past by both the Government
    Accountability Office and the Treasury Inspector General for Tax
    Administration.
        Our budget also requests an additional $18 million for systems to
    help the IRS return review program detect noncompliance and fraudulent
    refunds, and a $22 million increase to continue modernizing the
    agency's core taxpayer account database and modernized the e-File web-
    based platform.
                  reengaging with the world on economic issues
        The President assigned Treasury to ensure that this country
    reengages with the world, not just on issues of war and peace, but also
    on the current crisis, and on issues crucial to our common economic
    futures.
        This is a global crisis. Recovery here depends on recovery abroad.
    We are working closely with other major economies to put in place the
    fiscal stimulus and make the financial repairs necessary to ensure U.S.
    and global recovery.
        The United States is seeking to mobilize the financial resources of
    the better-off nations to help the emerging and developing economies
    that have been especially hard-hit by this crisis. We are doing this
    for more than simply humanitarian reasons; as recently as last fall,
    these economies accounted for fully 42 percent of all U.S. exports.
        Last month, the President and leaders of the other G-20 nations
    agreed on the need to make more than $1 trillion in financial resources
    available to support global growth and trade.
        Those funds include our commitment of up to $100 billion for an
    expanded New Arrangements to Borrow, a permanent back-up mechanism that
    provides the International Monetary Fund with supplemental resources to
    help emerging markets and developing nations weather the crisis.
        As part of our effort to rekindle global growth for the sake of our
    own recovery, we are seeking to meet our past and present financial
    commitments to the multilateral development banks that help emerging
    and developing countries.
        Although the funds to do this are not directly within the purview
    of your Subcommittee, I mention them to illustrate how Treasury's
    entire budget is tailored to let us fulfill the missions that the
    President has set out for us. Our budget request includes $2.5 billion
    for international programs, most of which would serve to meet our past
    and present commitments to the multilateral development banks.
        Our financial reform effort in the United States must be matched by
    similarly strong efforts elsewhere in order to succeed.
                                   conclusion
        Before I end, let me say a word about the Department's staff. I
    have the honor of leading a team of smart and dedicated individuals who
    are working to make our Government more effective and our society
    fairer, who are following a long tradition of debating policies
    fearlessly on their merits, doing what is right and not what is
    expedient, and drawing on the best ideas and expertise that are
    available. They are performing an incalculable service to our country
    in these challenging times, and I am immensely grateful to them.
        The Department of the Treasury is responsible for promoting the
    Nation's economic prosperity and protecting its financial security. We
    advance our interests around the world through the strength not only of
    our economy but of our ideas.
        This President and Treasury have already begun the hard work of
    recovery and reform. Our fiscal year 2010 budget will allow us to
    pursue these critical goals, and deliver the balanced and sustainable
    growth that the American people seek and deserve.

                              MORTGAGE FORECLOSURE

        Senator Durbin. Mr. Secretary, many of the questions we'll
    ask will be policy questions, somewhat global in scope. I will
    try to bring those home to the actual budget aspects of this
    hearing as best I can.
        Let me start with a topic that you won't be surprised that
    I'm interested in, mortgage foreclosure. I have brought before
    the Senate, twice now unsuccessfully, an attempt to change the
    bankruptcy code so that we can create more incentives for
    renegotiating mortgages to avoid foreclosure. I failed in both
    efforts and, in the last effort, was opposed by virtually all
    of the banking institutions of the United States, save one,
    Citigroup, that supported our efforts.
        The Mortgage Bankers Association reported last week that
    about 12.07 percent of mortgage loans were delinquent or in
    foreclosure in the first quarter, the highest level ever
    recorded since the survey was launched in 1972. Also, for the
    first time, most mortgages in foreclosure were prime loans,
    49.8 percent, compared to 43.2 percent subprime, which we
    initially identified as our major concern. Foreclosures bounced
    up 32 percent to 342,000 during the year over year period
    ending in April, according to Realty Track.
        The Obama administration's ``Making Home Affordable''
    program has resulted in only 55,000 mortgage modifications in
    the last 2 months. According to The Washington Post, experts
    say foreclosure prevention programs will not be successful
    unless they address homeowners who owe more than their
    properties are worth.
        I sense that this was the catalyst that led us into this
    recession. It is my feeling that the previous administration
    and, so far, this administration has failed to come up with an
    approach which is dramatically, could dramatically turn around
    this increasing number of mortgage foreclosures. A year ago,
    the estimate was 2 million, this year it's 8 million.
    Ultimately, one out of every six home mortgages faces
    foreclosure based on current predictions.
        Do you agree that we need to strengthen incentives to
    modify more mortgages to turn this economy around? And wouldn't
    it help, wouldn't that help spur participation in the
    Treasury's own mortgage modification program? And can you
    suggest a better method to give homeowners more leverage than
    to change the bankruptcy code?
        Secretary Geithner. Senator, you're right that housing is
    at the center of this crisis and, of course, millions of
    Americans are losing their homes, including many who were very
    responsible and are suffering simply because of the actions of
    those borrowers who lived way beyond their means and those
    banks that made a bunch of loans they should not have made.
        And I agree with you that I think this Government should
    have moved earlier to address this crisis. We were late, as a
    country, and behind the curve. I do believe though that the
    President's program is a, does provide a very powerful set of
    incentives to induce a substantial increase in successful
    modifications. We are at the very early stage of implementing
    that program.
        It's true we've been in office now almost 6 months, but--
    and this program was laid out, in terms of its detail, only a
    few months ago, but there is a substantial increase in efforts
    to put out notifications to potentially eligible borrowers and
    I expect to see a very substantial acceleration of the pace of
    modifications.
        Now, this program does create significant incentives for
    servicers to participate. It also does reach homeowners that
    are significantly underwater. It won't reach all homeowners.
    There are some homeowners that simply borrowed--got themselves
    to the point where they've got a completely unsustainable
    mortgage and are unlikely to retain their house. But the
    program is designed to reach homeowners that are living today
    with significant amounts of negative LTV's, or high LTV's,
    negative equity.
        Now, the program has been successful in helping bring down
    interest rates, working alongside the Fed. It has been
    successful in substantially increasing refinancing so that more
    Americans can take advantage of those lower rates and, as I
    said, we are just beginning to see the effects of these very
    substantial incentives we put in place to encourage
    modifications.
        Realistically, I don't think we are going to know, until
    probably early fall, whether we've got the incentives right and
    whether they will prove powerful enough. But our judgment is
    that this is the best package of incentives which offers the
    best return for the taxpayer's resources we are going to use to
    help address the housing crisis.
        Senator Durbin. I would just say that I have asked this
    question of your predecessor; in perhaps a little different
    form, and still remain skeptical that the voluntary approach to
    mortgage renegotiation is going to save us from this crisis
    that we are facing.
        I think, until we get an honest approach that really
    results in substantial renegotiation of mortgages, that the
    real estate industry and the housing industry are going to
    continue to be weak. I don't know how we can build a strong
    American economy if our homes are losing value and we see our
    neighbors facing foreclosure as we find across this country.
        Secretary Geithner. Senator, I understand your concern and
    I commend you for your leadership and focus on this issue from
    an early perspective. But this program is a dramatically
    different program from what was tried in the previous
    administration. The financial incentives that we put in place
    here are very substantial. And it came alongside a substantial
    change in policies by Fannie and Freddie to help allow for
    refinancing, even for homeowners who were slightly underwater.
        So, I think that we all want to see results. And you should
    judge us by our results. And it will take a little longer
    though to judge whether this is as powerful as we expect it to
    be. Now, I think if you just step back and look what's happened
    in the housing market over the last 6 months or so, partly
    because the effectiveness of the recovery program and
    confidence and partly because of the impact of the Fed's
    programs and the Treasury's programs, the pace of decline in
    house prices has started to slow. And that is early signs of us
    being able to look to the other side of this.
        But realistically, I think you are going to still see a
    very challenging period ahead for many homeowners, many more
    Americans are still at risk of losing their homes and that's
    why we want these programs to work.
        Senator Durbin. Senator, I might say that each member will
    have 5 minutes and probably more than one go-round.
        Senator Collins.

                         TROUBLED ASSET RELIEF PROGRAM

        Senator Collins. Thank you, Mr. Chairman.
        Mr. Secretary, I want to follow-up on the discussion we had
    about the use of TARP funds. It troubles me that banks have
    received billions of dollars without having to demonstrate that
    they've increased lending as a result and without having to be
    fully accountable and transparent in the expenditure of the
    funds they have received.
        I mentioned to you that I've seen, in my State, a large
    recipient of TARP funding constrain credit, to actually cut off
    lines of credit, to cease lending to a nonprofit hospital in my
    State, and a major retailer.
        So I don't see, on the grassroots level, the benefits of
    putting billions of dollars into financial institutions, the
    intent of which was to prevent this constrained credit. In
    addition, the Special Inspector General for TARP, in his report
    in April, criticized the Treasury for not adopting
    recommendations to require that all TARP recipients account for
    the use of the funds.
        So, I'd like to ask you to comment on why the Treasury
    hasn't made, as conditions for receipt of TARP funds,
    requirement for increased lending and full transparency?
        Secretary Geithner. Senator, excellent question. Could I
    just start by saying that we, you know--this is a crisis
    produced, in significant part, by two things.
        One is, families across the country substantially increased
    the amount they borrowed. So household debt rose dramatically
    as a share of our overall economy. And we had pockets of excess
    leverage, too much lending buildup, across the financial
    system. Now we are going through a very deep recession. In any
    recession, the demand for credit falls because economic
    activity falls. In a recession that follows a long credit boom
    like this, you would normally have expected the credit to fall
    quite sharply. That's an important context because it's hard to
    know how best to measure the full impact of these programs.
    Because again, it would have been, under any circumstance, we
    would have had a period where borrowing would fall, as
    homeowners, as families decided to go back to living within
    their means, decide to save more, reduce their debt
    outstanding. And lending would fall as the weaker parts of the
    financial system decline to a more sustainable level.
        Now, it is very important to us that we have better ways of
    measuring the impact of these programs. So when we came into
    office, we put in place a much more comprehensive reporting so
    that all banks that received TARP assistance have to report
    monthly on what is actually happening to lending behavior. We
    started with the major banks and we extended that out to all
    TARP recipients and you will be able to see monthly now, on the
    Treasury website, what banks are actually doing in terms of
    lending. And that is the ultimate measure of the impact of
    these capital assistance programs.
        We are very committed to improving the overall quality,
    transparency, and accountability across these programs and each
    of the programs we have designed provides for an exceptionally
    careful level of oversight, and a level transparency so people
    can measure the actual impact and effects.
        Now, if there are other things that we can do to strengthen
    that, we will do it. Because nothing is more important to the
    credibilities programs than a better sense among the American
    people that they have the chance to judge and measure impact.
        Now, just to finish quickly, where do you begin. My own
    judgment is that the programs that the Congress authorized last
    fall, and the actions that my predecessor took initially to put
    capital into the U.S. banking system, were absolutely essential
    to prevent a catastrophic financial collapse. If you look back
    to that period of time, lending absolutely stopped. And because
    lending stopped, and because confidence was so badly damaged,
    basic business stopped. And it happened around the world. And
    when that capital was put into those banks initially, that was
    the first step in beginning to lay a foundation for recovery
    and repair.
        We cannot know with certainty what would have happened in
    the absence of that action, but my judgment is that, without
    those actions, you would have faced the prospect of a
    catastrophic failure in the U.S. financial system and much,
    much, more damage to economic activity than we already saw.
        Now today, we're seeing, over the last several weeks, we
    are seeing some very impressive and encouraging signs of
    improvement in the overall credit conditions. So if you look at
    concern about risk and exposure to banks, and if you look at
    the ability of banks to go raise equity to replace the
    Government's investment, if you look at what's happening to the
    borrowing in businesses across the country. If you look at
    what's happening to mortgage rates, the interest rates, there
    have been substantial improvements in those basic measures of
    these programs. So, my sense it is early days, as I said, and
    this is just the beginning, but I think where the Government
    has acted, you can see very tangible benefits in improvement.
        Now, we have a ways to go. This crisis took a long time,
    the conditions of this crisis took a long time to build up and
    it will take a long time to work through, but I think these
    programs are having, are achieving traction and they're the
    right mix of programs. And we will do everything we need to do
    to make sure that we are adopting sensible recommendations by
    not just the SIGTARP, but by the congressional oversight panel
    and the Government Accountability Office (GAO) who are looking
    very, very carefully at all these programs.
        Senator Collins. Thank you.
        Senator Durbin. Senator Lautenberg.

                             EXECUTIVE COMPENSATION

        Senator Lautenberg. Thank you, Chairman.
        Mr. Geithner, the financial crisis that we're seeing was,
    in my view, due in significant part to the poor management of
    these companies and particularly I am pained by the outcome of
    the management years in the automobile industry who refused to
    see what the public appetite was, when we refused to be
    competitive, and thus jobs have been lost and an industry
    practically destroyed that we loved and admired for so many
    years.
        When we look at the risks taken by corporate executives,
    decisions made, many of these executive pay packages insulate
    CEOs from the risk and, again, I may, I don't want to take you
    out of your bailiwick, but to avoid this excessive
    mismanagement, should executive compensation be tied to the
    long term health of the company? Where do we have a right to
    interject our views?
        Secretary Geithner. Senator, this is a very important
    issue. And I agree with you that I think, although many things
    caused this crisis, what happened to compensation and the
    incentives that created risk-taking did contribute in some
    institutions to the kind of vulnerability we saw in this
    financial crisis. And my view is that we need to help encourage
    substantial reforms in compensation structures, particularly in
    the financial industry because of the dependence of the economy
    on a well-functioning, more stable, better set of judgments by
    financial institutions.
        I think boards of directors did not do a good job. I think
    shareholders did not do a good job in terms of disciplining
    compensation practices. And I think a centerpiece of sensible
    reforms would be to tie compensation to better measures of
    long-term investment and return and to adjust them to reflect
    the risk, to reflect risk. That's part of the reforms and we
    are, as part of our broader regulatory reform proposals, our
    proposals to reform the whole framework of renewed regulation
    in the United States, will include some suggestions for trying
    to encourage reform in compensation practices.
        Senator Lautenberg. Where does the start begin? Is it in
    Treasury or is it IRS or the Securities and Exchange Commission
    (SEC)? How do we get things introduced into the governance of
    these things?
        Secretary Geithner. Well, as you'll hear from us in the
    next few days, the SEC has some important responsibilities and
    obligations in this area and some tools and authorities they
    may seek in this area. The bank supervisors, under the
    leadership of Chairman Bernanke and others, have already
    initiated a process to define standards and principles that
    supervisors would use to help bring about reforms in
    compensation practices in the financial industry.
        Those are two ways we can have influence over the shape of
    practice in these areas. There are other ways, too, but my own
    sense is that the core will be those two authorities.
        Senator Lautenberg. Senator Nelson mentioned something
    about the Government owning shares in these companies and its,
    I think it has to happen. Who, for instance, would vote the
    shares? Would the Government be, the American Government, be
    likely to appoint the board of directors and have them make a
    decision?
        Secretary Geithner. Senator, this is an enormously
    important set of questions. As we said before, the President
    and I have said, we are an extremely reluctant investor, an
    investor. We do not want to be in the business of managing
    these companies on a day-to-day basis. We would like to make
    sure that we have the ability to get out as quickly as we can
    and have these companies emerge on their own as viable entities
    without our assistance on an ongoing basis and the capacity to
    go raise capital in the markets to repay the Government's
    investments.
        To underscore that, we are--we've designed a set of
    policies and mechanisms that will ensure that people understand
    we only intend to use our voting rights for a very limited
    number of core judgments about financial structures of the
    firm, to make sure that there's a strong board and management
    in place at the time that we take our equity investments so
    that the taxpayers' interests are protected. So we have
    confidence in their ability to oversee a sufficiently robust
    restructuring plan.
        We do not want to leave the impression or the reality in
    place that the Government of the United States will, will be
    able to and will have the capacity to exercise judgments over
    the day-to-day operations of these businesses. We think that
    would be damaging to franchise value, damaging to the interests
    of the taxpayers in trying to make sure that we can get out as
    quickly as possible. And our hope is that we design a set of
    institutional protections to avoid that risk.
        Senator Lautenberg. Thank you, Mr. Chairman.
        Senator Durbin. Thank you. Senator Bond.
        Senator Bond. Thank you very much, Mr. Chairman.

                          FAILED BANKING INSTITUTIONS

        Mr. Secretary, a lot of us in the heartland are wondering
    why you are treating failed banking institutions differently
    from General Motors and Chrysler? The administration has
    orchestrated forcing car companies into bankruptcy, but they
    seem to be reluctant to force failed large financial
    institutions, like Citi, into restructuring. Now, we've seen in
    the past that large organizations, not as large as Citi, but
    IndyMac has gone through a Federal Deposit Insurance
    Corporation (FDIC) cleansing program and this one is outside of
    politics. And when you do it through the FDIC, you don't get
    the political questions that are asked, you don't get the
    political involvement in it. And, as The Wall Street Journal
    asked today, if Citi is not forced into an FDIC-like
    restructuring, you know, how can you ensure taxpayers that
    failed banks will not continue to return for billions and
    billions of bailouts, which I think all of us have heard great
    concerns from our constituents about.
        Secretary Geithner. Senator, I share those concerns and I
    think it's important to acknowledge that the actions that the
    Government has had to take, over the last 12 months in
    particular, to help protect the economy from this financial
    crisis have created, well, they have been exceptional and
    extraordinary, and they have created the risk that, unless we
    reform the system, we are going to face a greater risk of
    financial crises in the future, because we will have created a
    moral hazard that might make the system more vulnerable in the
    future.
        I am deeply worried about that, I share that concern. And
    that is why it is so important that we put in place stronger
    protections against constraints on risk taking in the future. A
    centerpiece of what the President will recommend, in terms of
    financial reform, will be a set of much more conservative set
    of constraints on risk taking across the financial system, more
    evenly enforced with a more effective oversight. And, as part
    of that, we need to have a better capacity to deal with
    potential failure of large institutions.
        Now the system that you referred to, the system that the
    Congress helped to put into place, built around the FDIC,
    strengthening in the wake of the savings and loan (S&L) crisis,
    is a very effective process, but it was designed to deal with
    relatively small banks and thrifts and was it not designed for
    a crisis of this severity. That is why we do not have--and that
    system was not designed to deal with a more complex set of
    failures, for example like AIG.
        That's why a centerpiece of what the President will
    recommend would be a stronger capacity to resolve, address,
    better manage the risks to the system posed by those types of
    institutions.
        Now, I just want to underscore just a couple things about
    context. Now, when I came into office, the Government of the
    United States had already invested roughly $200 billion in our
    Nation's banks. As I said to Senator Collins, I think that was
    a necessary thing to do. We would never want to do that, but it
    was the correct thing to do.

                                  TOXIC ASSETS

        Senator Bond. Mr. Secretary, I'm running out of time but I
    think everybody would agree, the Federal Reserve came up and
    flooded the system with money, we put--the TARP money in. But
    now we're past that. And unless we take some steps to deal with
    too-big-to-fail, we're going to have a moral hazard. And I'm
    also worried about the PPIPs, a lot of people saying that the
    banks aren't participating because it looks like it's going to
    be political. And if they get in--who would want to get in
    partnership with the Federal Government when they see what some
    of our fellow Members of Congress are doing?
        Are you going to be able to get any of these toxic assets
    out with PPIP? Where are the participants?
        Secretary Geithner. Senator, again, I want to underscore
    that you are right. This issue of too-big-to-fail moral hazard
    is a really important thing. And that's why the President wants
    to move so quickly on legislation.
        Now on the issue of these legacy assets, that are still on
    the books of the Nation's banks. You're right that there is
    some concern in the market still about participation and
    whether that brings some risk of political conditions imposed
    in the future. And that could limit participation in the
    beginning and that would be an unfortunate thing. I think we
    all have a responsibility to act to reduce that sense of risk
    and uncertainty about the rules of the game.
        It's also true that banks have found it more easy to raise
    equity than they thought. And that, combined with a slight
    improvement in confidence in the system, may also reduce
    participation. In my judgment though, these funds still are an
    important part of the necessary framework of tools to help get
    our country through this crisis. And I believe it is important
    that we go ahead and put them in place, even if we see
    participation somewhat more limited than people would have
    expected because of both the political concerns and because the
    basic improvement----
        Senator Bond. I would hope that we would use the FDIC model
    I and others and Senator Dodd have proposed, beefing up the
    FDIC, we need to use them. And I'll have further questions for
    the record.
        And Mr. Chairman, I would ask that my full statement and
    all of my good advice in it be included in the record, in the
    hopes that somebody might read it someday.
        Senator Durbin. Well, we'll look forward to reading that
    and it will gladly be inserted. Thank you, Senator Bond.
        Senator Nelson.

                              AUTOMOBILE INDUSTRY

        Senator Nelson. Thank you, Mr. Chairman. Secretary
    Geithner, you mentioned that we are reluctantly in a position
    of holding the shares of General Motors and perhaps in a
    position of controlling other institutions, but we are doing so
    reluctantly.
        I am so reluctant to be one of those holders of that stock
    that I am introducing a resolution, as a sense of the Senate
    resolution, that we begin the process to divest ourselves of
    that stock ownership over a reasonable period of time, making
    clear that we are only a temporary shareholder and that we
    should take obviously all steps to protect the American
    taxpayer dollars and begin to divest the ownership as
    expeditiously as possible and call for a GAO study to help
    determine the period of time that it may take to return General
    Motors and Chrysler to solvency and complete the divestiture.
        I think that says what I would like to say. In addition,
    I've heard it said that, for those who worry that somehow we
    are drifting into socialism, that socialism is where the
    Government wants to take over profitable ventures, as opposed
    to being where we are right now.
        Apart from the levity, I think it is probably accurate. And
    so I hope that the administration will be supportive of every
    effort to make public statements that this is a temporary
    situation, not one that is optimum or optimal in terms of what
    we would prefer to do, but where we are at the moment but to
    make certain also that we are not going to stay there one day
    longer than we should in that position of ownership.
        And I'm encouraged where you say that we won't exercise
    day-to-day judgment over many of the decisions and
    opportunities that the industry will have.
        I've got some other questions about that and that relates
    to the dealerships. I know they're very concerned about
    summarily being dismissed after decades of relationships with
    the auto industry. Is there any effort to try to establish some
    sort of a recognition of the rights, and not just contractual
    rights, but the rights of dealerships in this dismissal where
    any compensation is being directed toward those dealerships to
    soften the blows?
        It's not taking their position that is so important, it is
    recognizing that, in small communities all across America,
    particularly Nebraska, where dealerships are going to be lost,
    people are going to lose their jobs as well. In small
    communities where job replacement can be even more difficult
    than in the urban centers. I wish you might comment on that.
        Secretary Geithner. Senator, can I just begin where you
    began to say, and I think you said it right, in terms of the
    Government stake in these entities, where we take a stake,
    temporary, clear path to exit, not a day longer than is
    necessary, no ongoing role in day-to-day management.
        And, in that context, this broader question about the
    impact of communities of the substantial reduction in
    dealerships that the automobile companies have decided was
    necessary to get back on the path of viability. I just want to
    underscore that these were their judgments, based on a careful
    analysis of what was necessary, again, to get them down to a
    cost basis that was more attainable over time.
        But I understand the concern about the impact and would be
    happy to explore with you and talk to my colleagues about--to
    make sure you have responses to your thoughtful questions about
    with the companies themselves might be able to do to help to
    soften the blow.
        Senator Nelson. I appreciate that. Thank you.
        Secretary Geithner. But it has to be their judgment----

                          FINANCIAL REGULATORY REFORM

        Senator Nelson. Of course, of course.
        In terms of financial regulation, can you give us a preview
    of what you have planned for financial regulation? For example,
    are there any plans to change the State-based regulation of
    insurance? Will you propose an Office of Insurance Information
    or a similar position or will you seek authority to regulate
    insurance at the Federal level?
        Secretary Geithner. Senator, I don't want to get ahead of
    the President of the United States on this. He is going to
    layout a comprehensive set a proposals next week. In that
    context, we will lay out our judgment about what we think is
    the most practical way to help begin the process of ensuring
    more effective supervision of at least parts of our insurance
    industry. But I don't want to get out in front of him. But
    we'll be taking a careful look at what is the most practical
    way to help to begin that, begin progress against the
    objective.
        Senator Nelson. Well, as you take a look at the case of
    AIG, although it's an insurance holding operation, keep in mind
    that the insurance subsidiaries were profitable. That they
    didn't have bad assets. That this is not, this is not something
    that has rippled through the insurance industry. But focus on
    what happened with the Glass-Steagall modifications that
    permitted AIG to do what it did.
        And so let's don't cure problems that don't exist as we try
    to take a ``comprehensive approach''. Let's just make sure that
    it is not so comprehensive that the sweep in regulatory schemes
    and mechanisms that are currently working.
        Secretary Geithner. Senator, I completely agree and we are
    bringing a broader pragmatic spirit to this exercise and try to
    focus on things that were central to the crisis, not things
    that were not. On things that are necessary to do, not just
    those, not those that would be desirable to achieve over time.
        Now, we may not all agree on the judgments we're making,
    but that's the pragmatic framework we're trying to make.
        Senator Nelson. Apparently, you are making a commitment not
    to have collateral damage, right?
        Secretary Geithner. Well, that is something of an
    obligation that we all share and we would be very careful to
    try to avoid that, but Senator we did have really systematic
    failures across the regulatory framework of the United States
    and we are going to have to change a lot of things to address
    those failures.
        Senator Nelson. Thank you. Thank you, Mr. Chairman.
        Senator Durbin. Thank you, Senator Nelson. Senator Tester.

                  TROUBLED ASSET RELIEF PROGRAM: RESERVE FUND

        Senator Tester. Thank you, Mr. Chairman.
        So many questions, so little time. Secretary Geithner, in
    your budget there's a financial stabilization reserve of $250
    million. In front of the Banking Committee last week, Herb
    Allison was there. He is going to oversee the TARP, hopefully.
    He talked about, he called it head room, I interpret it as
    being reserve, of $100 billion. Can you tell me why we need
    $250 million in the budget?
        Secretary Geithner. Senator, could I just begin by saying
    that I announced this morning that banks have, we've indicated
    to banks, the Fed indicated to banks that they have the right
    to repurchase $68 billion, return $68 billion of those initial
    investments and those will be coming back into the general
    fund. Now the way the EES legislation is designed, that does
    create additional flexibility to allow us to use those funds,
    if we believe there's a strong, compelling case. And since
    were--things are getting better in the financial system, I
    think, to be realistic, there's a lot of risk ahead for us and
    we need to be careful, to remind people that that flexibility
    authority is important.
        Now, in the reserve fund. The President put in the budget
    this additional reserve fund, in an abundance of caution,
    against the possibility that we could face a deepening crisis.
    Now, we do not expect, at this time, to come back to Congress
    to ask for authority to use those resources.
        I began by pointing out the $68 billion repayment thing,
    because it does provide some modest encouragement, I think,
    that we are going to be able to get through this without having
    to put you in the position of coming back for substantial
    additional funds.
        Senator Tester. We appreciate that. I guess the question is
    out of $700 billion, $250 million, even though it's a ton of
    money, is like spitting in the ocean.
        Secretary Geithner. Well, you're right. We are a $14
    trillion economy. This is a very severe financial crisis, the
    worst in generations, and financial crises are expensive to
    solve, particularly if you wait to solve them.
        Senator Tester. All right. I interpret by your answer to
    the last question that you anticipate the money that is going
    to be paid back will go into the general fund and not
    reinvested in the troubled banks.
        Secretary Geithner. By law, it goes to the general fund but
    it also goes, as the law is written, and I think this was wise,
    it does give us flexibility to use that, again, if we think
    there's a compelling case.

                   EXTENSION OF TROUBLED ASSET RELIEF PROGRAM

        Senator Tester. Okay. In the end--well, you have an
    opportunity to extended it to the fall of 2010, the TARP
    program.
        Secretary Geithner. We do.
        Senator Tester. Do you anticipate that that trigger will be
    asked for?
        Secretary Geithner. I don't know at this stage. There's a
    range of exceptional programs we put in place, as Senator
    Collins just said, and some of them expire at the end of
    October and some of them have a longer fuse on them. Some of
    them can be extended. We will have to make that judgment as we
    get a little more----
        Senator Tester. If you ask for an extension, I assume it
    applies to all the money and not just a portion? Is that
    correct?
        Secretary Geithner. That's right. The way the law is
    structured, the authority is about the $700 billion and it
    applies to the full $700 billion.

               TRANSPARENCY OF THE TROUBLED ASSET RELIEF PROGRAM

        Senator Tester. Okay. You talked about, and it has been
    referenced before, about reluctant investor, not involved in
    day-to-day decisions. It has been pointed out to me that some
    of the TARP funds are being used by banks for speculation in
    the oil market and the commodities market. Is there enough
    transparency now that they are using the TARP funds for you to
    know that?
        Secretary Geithner. Well, I think that's really a question
    that I would have to refer to the supervisors. The supervisors
    of those banks that receive assistance have the full capacity
    to judge what kind of risk they're taking generally and whether
    those risks are appropriate, given the conditions of the----
        Senator Tester. I know you don't want to be day-to-day, and
    I don't want you to be in on the day-to-day decisions. The
    question is, do you think that's an appropriate use of TARP
    monies?
        Secretary Geithner. Look, I want to make a big distinction
    between banks and others. Banks, because the risks they pose to
    the economy and because of the protections they enjoy, they are
    subject to a very intensive level of supervision and regulation
    by the Nation's banking authorities. That was not strong enough
    in some cases and needs to be stronger, but that is a perfectly
    legitimate public policy interest because of the interest of
    the system. So, I would distinguish that from the role of the
    Government as temporary shareholder.
        Senator Tester. Okay. In the previous question, you said
    that, as far as closing down dealerships, that was their
    decision. Who is they?
        Secretary Geithner. The companies themselves. And their
    boards.
        Senator Tester. Okay. In the plan for General Motors, the
    investment of billions of dollars into that, were there any
    assurances that they wouldn't move manufacturing overseas?
        Secretary Geithner. In the context of General Motors, the
    company has publicly committed to lay down a path for
    production in the United States as a share of total production.
    And in those plans, they've indicated that they expect
    production to be maintained at current levels, and perhaps
    expand slightly as they build this new plan for small cars.
        So their plans now are, and these were part of the
    framework established for a bunch of reasons, they expect
    production in the United States to not just level off, but to
    expand slightly.
        Senator Tester. Okay. Thank you.

               REPAYMENTS UNDER THE TROUBLED ASSET RELIEF PROGRAM

        Senator Durbin. Thanks, Senator Tester. Going back to the
    repayment of TARP, which is $68 billion which was announced
    this morning. What is the expected return on investment for
    taxpayers?
        Secretary Geithner. The way the terms were initially
    established, these preferred investments came with a 5 percent
    coupon. I don't have my press statement with me, but the
    Treasury has already earned several billion dollars in terms of
    those dividend payments on the preferred.
        Now, the full terms for the Government include the value of
    the warrants that Treasury took as part of these investments.
    We are in the process of going through a judgment about what
    fair market value for those warrants is likely to be and in the
    release we put out this morning, I'm not sure we made an
    estimate, but some of the estimates now are in the several
    billion dollar range for those initial banks that are repaying.
        Government--so people will bring all sorts of financial
    prisms to judge the return, of course you have to look at the
    returns to the country, not just in terms of the direct
    financial returns to country which are significant. They really
    are significant. But you have to look at the broader benefit in
    avoiding a financial collapse because there is dramatically
    more credit available today than there would have been if these
    banks were forced to shrink dramatically.
        Senator Durbin. That's the second question. Assuming that
    you wouldn't allow repayment, if there's any question of
    soundness in the institution, what kind of assurance do we have
    that these banks that return this money are going to be issuing
    credit, which was one of the original goals?
        Secretary Geithner. Right. Well, the judgment on the law
    was made by the Federal banking industry's responsible, so they
    did a very careful process of judging whether they really could
    prudently repay this money. And the figure I announced this
    morning reflects the judgment of the Federal banking agencies.
    That means these banks are in the position now where they can
    make normal business judgments about lending. And I think, by
    many measures, lending is very--expanding credit is a very
    economic thing to do today.
        But as I said, we are in recession that followed a huge
    boom in credit. So it's going to be, for many parts, many
    families, many businesses, borrowing will decline as we go
    through this. And that is a healthy, necessary thing. It makes
    it very hard to judge, because you don't know what would have
    happened in the absence of investments, what lending would have
    been produced.
        But I think you have a different financial system today
    that is substantially stronger than it was 2, 3, 6, 9 months
    ago and is in a much better position to provide the credit
    necessary to help us get through this recession and to get back
    on a growth path again.

                          CREDIT CARD INTERCHANGE FEES

        Senator Durbin. Mr. Secretary, we recently enacted or
    passed in the Senate an historic credit card reform bill, which
    I commend my colleague, Senator Dodd, although the Banking
    Committee worked so hard on it. It's been 25 years or more
    since we've done anything in that field.
        There was the third rail in this discussion which we
    couldn't bring up and couldn't discuss for fear it would
    explode the whole process, interchange fees. Interchange fees
    are the fees that are charged by credit card companies and
    imposed on retailers, and there's very little room, when it
    comes to the retailers, to negotiate these fees. Approximately
    2 percent of our purchases using credit cards are paid back to
    the credit card company in interchange fees and the retail
    establishments across America are very concerned about this
    because they have little or no voice in that.
        I'd like to ask you two questions about interchange fees.
    First is a more general question about what the Treasury is
    doing, if anything, to look into the interchange fee system.
        But then, in particular, since it turns out that the
    Federal Government is now accepting credit cards, it turns out
    that there are 200 Federal entities that accept credit cards,
    Amtrak, the Postal Service, the Treasury's financial management
    services, it turns out that our Government paid these credit
    card companies over $200 million in interchange fees to Visa
    and MasterCard, in fiscal year 2007.
        I have repeatedly asked the credit card industry and the
    banks to demonstrate that the rates that they've established
    are legitimate to process the card transactions and
    unfortunately they have not been able to provide any data or
    information to suggest that the amount charged, even to the
    Federal Government, represents a reasonable fee. In fact, the
    GAO report on this recently said that the FMS tried to
    negotiate lower interchange fees with Visa and MasterCard and
    negotiations were not successful.
        So, in addition to the general question of interchange fees
    on retail establishments across America, what is the status of
    your effort to make sure that Uncle Sam isn't paying too much
    to these credit card companies for the use of the credit cards?
        Secretary Geithner. Senator, this is a very complicated
    question and, to be honest with you, I have not thought about
    this very much yet. But I would be happy to spend some time
    with you and your staff, understanding your concerns about this
    and taking a careful look at both questions you raised.
        If I'm not mistaken, I think you asked the GAO to do a
    study of one of these dimensions and of course we would look
    carefully at the conclusion of this study. But I am happy to
    commit to spend some time on this and see if we can--see if
    there are some sensible things that we can do to protect the
    Government's interests, not just to address the broader reform
    question you raised.

                 STAFFING OF THE TROUBLED ASSET RELIEF PROGRAM

        Senator Durbin. If Senator Collins would just bear with me
    for one more question. I think, with the establishment of TARP
    under the previous administration and the continuance under
    this administration, there has been a shift of personnel within
    the Department of the Treasury to deal with the obvious
    demands, administrative demands.
        Can you give me a general impression of whether or not this
    has created dislocations in other parts of the Treasury
    Department which need to be addressed and whether the repayment
    or the payback on these TARP funds is some indication that we
    be getting out of this business and can get back to business as
    normal?
        Secretary Geithner. The way that the EESA legislation was
    written it provided funding for the administrative resources
    required to design and run these programs and we have
    substantially increased resources, using that authority, to
    staff that part of Treasury, the Office of Financial Stability.
        But we are also going to have to increase, as we proposed
    in the budget, the rest of the domestic finance staff. Because
    they have got this greatly expanded, much more complicated set
    of challenges in a range of policies, including the one you
    just raised. And we did announce several weeks ago the
    appointment of a new Deputy Assistant Secretary for Consumer
    Policy Issues in the financial sector.
        I do not believe that we've had to devote resources from
    other parts of the Government to these financial crisis
    imperatives on a scale that would jeopardize our capacity to
    carry out those broader responsibilities. And we will be very
    careful to avoid that risk. But there are parts of the
    Treasury, as I suggested, where we think that we are going to
    need to have some modest increases in baseline, like tax
    policy, which is outside of domestic finance. And I think, with
    that support, I think we will be in a stronger position to meet
    these broader objectives.
        But my basic answer to your question is, no, I'm not
    concerned now that we've had a substantial diversion of
    resources, as important as the financial crisis is, at the
    expense of other core priorities of the Government.
        Senator Durbin. Senator Collins.

                       AUTOMOBILE DEALERSHIP TERMINATIONS

        Senator Collins. Thank you, Mr. Chairman.
        Mr. Secretary, I want to follow up on the questions that
    Senator Nelson asked you with regard to the decision of General
    Motors and Chrysler to terminate dealerships.
        This decision has been perplexing to many of the automobile
    dealers in my State. Everyone understands that General Motors
    and Chrysler have to restructure and shed costs in order to
    survive, but the dealerships in Maine tell me that they pay for
    the cars, that they pay for the shipping, that they own their
    own showrooms, and they pay for their sales people. So, they've
    raise the question of how does this save money for the
    automobile manufacturers to have fewer people promoting their
    products? Could you shed some light on this for us?
        Secretary Geithner. Senator, that is an excellent question
    and I have spent some time, I've never run an automobile
    company, but I've spent some time trying to----
        Senator Collins. Until now.
        Secretary Geithner. I don't expect to be running one now
    either. But I've spent some time looking at this and I guess I
    would say, I'm not sure this is going to be convincing or
    persuasive to you, but if you look at the broad consensus,
    people who looked at what was going to be necessary to put
    these companies back on a better financial foundation, I think
    there is a very broad consensus that, to do that, they need to
    get the distribution costs down and the distribution system
    more efficient. And that's why the companies themselves, at the
    center of their plans, have proposed very substantial reduction
    in the number of dealers.
        Now, I know that it's--I'm not sure that's persuasive, but
    my sense, again, in reading a bunch of and listening to people
    who study these companies look at them and say, a very broad
    sense, that this is a part of, an important part, to get them
    down to a cost basis to allow them to be viable. Now that comes
    with enormous damage in those communities, and it is a
    wrenching adjustment, but the reality is that these
    restructuring programs will leave the country with many, many
    more dealers then what would have existed in the absence of
    these programs.
        The balance, it may not be perfect, but I think that my
    sense in looking at it is that this is a necessary part of
    their efforts to get back to a path where they don't need the
    Government.
        Senator Collins. Was the decision to reduce dealerships
    made by the manufacturers or was it imposed upon them by the
    auto industry task force?
        Secretary Geithner. It was not imposed by the auto industry
    task force. It was a judgment made by those boards of directors
    and their management, again, about what was a critical part of
    a restructuring plan.
        Senator Collins. Thank you.

                          FINANCIAL REGULATORY REFORM

        I'd like now to return to the issue of financial regulatory
    reform. I introduced a bill in March to create a council of
    regulators to act as a systemic risk monitor. I know that the
    other model for that is to have the Federal Reserve assume that
    responsibility. I think there's widespread consensus that we do
    need to have a systemic risk monitor so that someone, or some
    entity, is looking across the financial system and identifying
    high-risk practices, policies, or products and regulatory black
    holes, so that we don't have the problem of no one regulating
    faulty credit or swaps or the next product that comes along.
        The reason that I support the council is I believe there's
    value in bringing many perspectives to the table and many areas
    of expertise. The Fed frankly has its hands full. There are
    also issues about congressional oversight. We want the Federal
    Reserve to be independent in order to set monetary policy. If
    it's also going to be the systemic risk monitor, there's going
    to have to be more congressional oversight of its operations.
        So tell me, I know you don't want to precede the President
    in announcing his plan, but discuss with me the pros and cons
    of the two approaches.
        Secretary Geithner. Well, I should begin by saying,
    although I am not going to get ahead of the President, that we
    share many of the objectives you laid out.
        I think a necessary part of the solution for the U.S.
    financial system will be a more effective body to bring
    together the responsible supervisory agencies, alongside the
    Fed, to make sure we are looking across the system as a whole,
    that we are keeping abreast of changes in the structure of the
    system so that we can better limit the risk in the system. And
    I think a council has a lot of merits in that context.
        And I don't believe it is necessarily desirable for us to
    concentrate all authority for dealing with the future risk of
    the system in one part of our complicated governmental
    structure.
        So, although we are going to propose some important
    streamlining consolidation simplification of the oversight
    regime, we are not going to propose to concentrate all the
    authority for systemic issues in only one place. It's too
    complicated really to do that.
        I think the really important thing is, again, is that we
    have more effective oversight over the core institutions that
    are critical to the system, that we bring critical markets like
    derivatives under an effective framework of oversight and
    protections there, that we have much better enforcement with
    tougher rules for enforcement for consumer investor protection.
    That we have better tools for managing future crises. And we
    are going to have to have tougher constraints on risk-taking
    involving better constraints on leverage and capital, so that
    you have thicker shock absorbers, thicker cushions against
    future crises. We are more able to let firms fail. The system
    is more robust to potential failure.
        So, those are broader objectives in our approach. But
    you'll find many of the concerns and objectives you laid out
    present in our recommendations.
        Senator Collins. Thank you.
        Senator Durbin. Senator Tester.

                     TERMINATION OF AUTOMOBILE DEALERSHIPS

        Senator Tester. Thank you, Mr. Chairman. I don't want to
    beat this horse, but I will just say this. And I like ya.
    There's an overwhelming attitude in this country that bigger is
    better. And I think what we're allowing General Motors and
    Chrysler to do, by closing down these small dealerships, is
    putting all the forces into a few big dealerships because,
    number one, it is easier to deal with a few people than it is a
    lot. And number two, it will reduce competition. And I've got
    to tell ya, if the dealership is making money, I don't see any
    criteria for shutting them down. And that's my only editorial
    comment I will tell you.
        And the only other thing to keep in mind is, in rural
    America, it's a heck of a lot different than it is in urban
    America. You shut down some of these smaller dealerships in
    some of these small towns that are making money, that General
    Motors is making money off of, its going to have an incredible
    impact on the economy. That's all. And I know you aren't making
    that decision, but if you could pass that along to the powers
    that be, I would appreciate it.
        Secretary Geithner. Message heard and received.
        Senator Tester. Okay. Thank you.

                                FEDERAL DEFICITS

        Chairman Bernanke talked restoring fiscal balance. Could
    you just comment on that and where you see us going over the
    next few years, assuming the economy gets turned around?
        Secretary Geithner. It is critically important for this
    country, it's central to the prospects of recovery, that we put
    in place a framework that gives confidence to Americans and
    investors around the world, that we are going to have the
    ability, the will and ability, to bring our fiscal deficits
    down to a sustainable position over the medium term. And that's
    why the President, in his initial budget, laid a path for
    dramatic reductions in the deficit to bring them down over a 5-
    year period to a level at which our overall debt is not growing
    and can start to come down.
        Senator Tester. I just heard the Government will triple in
    10 years not more than one-half an hour ago.
        Secretary Geithner. Well, you know, we came into--I last
    served in the administration during the period where we had an
    extraordinary accomplished record of fiscal discipline,
    produced surpluses, helped bring down interest rates, helped
    lay the foundation for not just a strong dollar but an
    incredibly long period of private investment growth,
    productivity growth. So, I am a deep believer in and have deep
    conviction in the central importance of fiscal responsibility
    for this country.
        Now, we started this year in the worst financial crisis in
    decades and, because of that crisis and the damage done by the
    financial system, we had to do, with the Congress,
    extraordinary things. And those, by necessity, produced a
    short-term temporary increase in our deficits. There was no
    path through this crisis that did not involve some temporary
    short-term increase in borrowing. But at the time that we
    proposed and, again, the President proposed and he acknowledged
    that we were going to have to bring this deficit down over time
    and that's what we're going to do with the Congress, it is
    going to be difficult to do, and it is going to be important to
    do, because, again, we are going to find that recovery will be
    weaker, private investment will be weaker, interest rates will
    be higher unless we are able to convince people that we're
    going to have the will and ability to do that.

                          FINANCIAL REGULATORY REFORM

        Senator Tester. Okay. Too-big-to-fail. It can't be an
    option in any industry and I think we may be there in energy
    and we may be there in food systems. We are absolutely there in
    the banking industry. How do we fix it? Do we fix it with
    regulation? How do we fix it?
        Secretary Geithner. I think there are, I would just mention
    a few things and they will be the core of what the President
    lays out soon.
        First, you have to have better design, tougher constraints
    on leverage, on risk taking in the core parts of the system.
    You have to have better oversight of the central markets like
    derivatives, because those are the markets that sort of effect
    whether failure is going to risk wrecking the system or whether
    failure can be absorbed and accommodated. So you need thicker
    shock absorbers in those central market, too.
        You need resolution authority, as I said in response to
    Senator Bond's comments, that allows us to deal with the
    perspective failure of a large complex institution like AIG.
    Those are some of the things you need.
        And I would just make one observation, Senator, just to
    show how hard and complex this is. It's not just the size. And
    in some ways size is not the most important factor. It is the
    role the firm plays in the system, how connected it is, what
    impact its failure has. And you've had, in this crisis, what
    are not the largest institution in the world, present the risk
    of catastrophic damage because of how interconnected they are.
        So, better capital applied across the system to limit scale
    of leverage, much better oversight and shock absorbers in the
    central infrastructure to limit the risk of damage caused by
    failure and better resolution tools.
        Senator Tester. Okay. I want to step back, step back for
    just a second. Neel Kashkari said that that the big guys had an
    advantage over the community banks in particular, because of
    their access to credit due mainly to TARP, I would imagine. Do
    you think that they have an unfair advantage and----
        Secretary Geithner. I don't, I don't--you know, we have
    9,000 banks in this country. I expect that, 10 years from now,
    we will still have a financial system, and it is very important
    that we have a financial system, that has thousands and
    thousands of small community banks operating across the
    country. I think that makes our system more resilient and
    stronger and I think this crisis would have been worse without
    that. And one of the importance of the reforms that we are
    going to layout is to make sure that large institutions have
    constraints on leverage that are appropriate, given their scale
    and risk. And that will help offset some of the potential
    concerns you raised about a level playing field for community
    banks.
        Senator Tester. Thank you very much.

                  FINANCIAL PRODUCT SAFETY COMMISSION PROPOSAL

        Senator Durbin. Mr. Secretary, I was glad the President
    announced the support for the concept of a Financial Product
    Safety Commission. I first introduced that bill in March and I
    think that to have an agency charged with protecting consumers
    from predatory tricks and traps is a good idea and could have
    spared us some of the problems we are currently going through
    with prepayment penalties on mortgages, for example.
        But, in a way that is the easy part of my question. The
    tougher part gets to the heart of the issue and the heart of
    the issue would be an interest rate charge. Is there too much,
    is there an interest rate that is too high in America? Do we
    have an obligation as a country to say that certain levels of
    interest rates are unconscionable, intolerable, illegal,
    unacceptable?
        I put in a bill to put the usury rates at 36 percent
    because I thought that was so high that we would be just fine.
    As I said, if you wanted to start a snake farm, you should put
    in a usury bill and watch what crawls under your door. The
    folks that came from title loans and payday loans could sit and
    say to me, with a straight face, Senator, you're going to put
    us out of business. Thirty-six percent will put you out of
    business? Yes. I asked them how much do you charge for loans?
    Oh, somewhere between 58 percent and 800 percent. People used
    to go to prison, they called it juice in the old days, when
    people were engaged in that sort of thing, you know, in the
    back alleys. Now it is acceptable, legal in this country.
        Is there, should there be a consideration about limiting
    interest rates charged for certain products in America?
        Secretary Geithner. Senator, I believe that we have to have
    a much stronger set of protections for consumers, particularly
    in the area of financial products that involve debt and credit.
    Those were where the failures were the most stark and I think
    it is going to require more than institutional and I agree with
    you, just establishing a commission doesn't, it just doesn't--
    it may be necessary but it is not sufficient.
        So, I think you need to have stronger protections. I think
    the credit card reform bill is a good step, but it is a not a
    sufficient step. And we're going to propose what we believe and
    the President believes is a necessary set of much stronger
    protections.
        Now, I understand your, the reason why you're supportive of
    a cap on interest rates. You have been exposed to a lot of the
    concerns on the other side of that, in terms of that would have
    unintended effects, in terms of denying people the rights to
    some forms of credit. I think you're right, it's sort of hard
    to make the case as to why some of those products are necessary
    or desirable, but I do not believe that those caps are a
    necessary part of a strong, credible consumer protection
    regime. And what I suggest is, I hope that when we lay out our
    proposals, we will have a chance to look at those and talk to
    you about whether those go far enough to meet your concerns.

                                   USURY CAP

        Senator Durbin. Can I ask you to also consider the
    following? If we can't sell the notion of a usury cap,
    shouldn't we prevail upon institutions? I mean, credit unions
    have been coming to me for over two decades saying we're
    different, we're not greedy like banks, we're just trying to
    serve our little group of people that save there and we loan to
    them.
        Shouldn't we be talking about making credit available to
    the poor people who are lured into these payday loans and title
    loans? Have credit available in lower amounts at reasonable
    interest rates so that these people are not exploited? I just
    don't think we can continue to look the other way. I have
    challenged the credit unions to do it, they haven't responded.
        But perhaps the banks bear some responsibility here. If we
    are going to have credit available for people who are truly
    struggling in this economy, why do we throw them to the wolves
    with these payday loans and title loans?
        Secretary Geithner. I agree. I think people who have spent
    their lives, like you, thinking about these issues believe that
    an important part of the solution is to make sure that all our
    citizens feel that they have the capacity to be part of the
    broader financial system that has these protections. And one
    step toward the objective you laid out is to make sure that
    they have bank accounts, have a relationship that allows them
    access credit which is going to be on forms where they are less
    vulnerable--I think that's an important thing.
        The President's nominee for Assistant Secretary for
    Financial Institutions at the Treasury, his name is Michael
    Barr, has spent his life's work on these kinds of questions and
    he is one of the more thoughtful people in the country thinking
    about to bring about reform in those areas.
        Senator Durbin. Thank you. Senator Collins.

                               REGULATORY REFORM

        Senator Collins. Thank you, Mr. Chairman.
        Mr. Secretary, another issue that keeps coming up is
    regulatory shopping. In other words, financial institutions
    will figure out which regulator gives them the most advantages.
    I saw this on the State level 20 years ago where we would have
    a financial institution come in and threaten to switch to a
    Federal charter because our audits were too tough or our
    consumer protections were too strong.
        I don't think that it's a coincidence that AIG bought a
    small federally chartered thrift, or established a small
    federally chartered thrift, in order to get under the
    regulation of the Office of Thrift Supervision, OTS, which is
    generally viewed as being a weaker regulator than the
    Comptroller of the Currency.
        Are you looking, as part of your reforms, on combining the
    OTS with the OCC? That's what my bill does. And needless to
    say, I think it's a brilliant idea and needs to be done.
        Secretary Geithner. Senator, you're absolutely right that
    one of those things that helped produce this crisis was that,
    in our country, we allowed people to choose their regulator, to
    put risk in areas where they thought it was going to be least
    well-regulated, and that level of unevenness in the basic
    standards and protections in our system proved tragically
    damaging to the stability of our system. And fixing that will
    be critically important.
        And, as part of that, we are looking at the areas in our
    system where we are most vulnerable to that kind of shopping
    for regulators and regulatory arbitrage. You pointed out one
    example, and I think it is one the more compelling examples, of
    that failure and weakness in our system. But just to say that
    we're looking beyond that. Of course, we're looking at that,
    but we know that this is something that we need to do globally,
    too. Because we need to make sure that we're not vulnerable in
    the future to risks if we get the standards better here, risks
    just moving offshore to other areas where there is still risk
    to our system. So, we want to have a level playing field, more
    conservatively set, more evenly enforced across the U.S.
    financial system. And we want to try to bring the world to
    those higher standards as well.
        Senator Collins. You know, you also made an excellent point
    when you talked about the excessive leverage in the system. I
    think when Bear Stearns failed, its leverage ratio was an
    astonishing 30:1. That's something that never would have been
    allowed to happen under our regulatory process for a small
    community bank or a credit union.
        So, I hope, as you look at this issue, that we're going to
    be establishing safety and soundness requirements regardless of
    the type of institution. It seems to me that Bear Stearns, the
    larger investment banks, all of which have either disappeared,
    have been acquired, or no longer exist, should have been
    required to meet the same kinds of capital requirements and
    leverage ratios that we would impose upon a community bank or a
    credit union.
        Secretary Geithner. Senator, I have a lot of sympathy for
    that view and I think that, again, a centerpiece of what we
    need to do for this country is to make sure there are more
    conservative, better designed constraints on leverage applied
    more evenly across those institutions that play a critical role
    in how our markets function, both in normal times and in
    distress.
        Now, it is true that, in the United States, we were
    fortunate to have, across the banking system, a very simple,
    easily enforceable, crude constraint on leverage. And for that
    reason, in many ways our financial troubles today are much less
    acute than they are for countries around the world where that
    kind of constraint did not exist.
        So just an example, banking assets in our country today
    about one times gross domestic product (GDP). They are between
    two and eight times GDP across Europe. In part because they did
    not have in place that kind of simple, crude constraint on
    leverage. So, you are right. That is an important part of the
    reform. We want to have, as I say, thicker shock absorbers in
    the system, thicker cushions of capital against risk, that are
    more simple, more evenly enforced, and are less pro-cyclical,
    you know, that they dampen future crises rather than amplify
    them. And that would be a part of what we propose.
        Now, I want to just say that these are things that--these
    are very complicated things. Of course, we want to get them
    right. And we are going to go through a very careful process to
    bring experts together and thinking about what the right mix of
    those constraints are so that we have them in place before we
    start to see the seeds of next boom.
        Senator Collins. If you haven't already looked at them, I
    would encourage you to look at the Canadian and the Australian
    twin peaks system, which I think also have benefits to them.
        Canada has not had the kind of financial crisis that we've
    had, and it is very interesting to look at the differences in
    their regulatory structure, their mortgage lending, and their
    tax deductions. It's fascinating to look at those differences
    and then look at the results.
        My time has expired, so I am going to submit for the
    record, with the chairman's permission, some questions on our
    debt level because I wasn't able to get to that important issue
    today.
        Thank you.
        Senator Durbin. Of course, Senator Collins, your questions
    will be submitted for the Secretary, along with others, for him
    to consider.
        The last question will come from an organic farmer from
    Montana, Senator Tester.

                       STRESS TESTS AND ECONOMIC RECOVERY

        Senator Tester. Thanks, Mr. Chairman. The Congressional
    Oversight Board issued a report this morning stating that
    additional stress tests may be necessary due to uncertain
    economic conditions. What are your thoughts on that?
        Secretary Geithner. Yeah. I haven't had a chance to look at
    the report, but of course I'll look at it and read it. But I
    did see some of the initial coverage of the report.
        I think I should say that--just two things. The process was
    designed by the Federal Reserve, it was a very conservative
    test. And I want to cite one example. People are focused, like
    the Congressional Oversight Board did, on the unemployment
    assumptions in the initial scenarios. Those were not the
    binding constraint. The loss estimates that the Fed used for
    its estimate were more conservative than the worst 2 year
    period in the Great Depression, when unemployment was in the
    high 20s, 30s for a period of time. Those were the ones, those
    were the parts of that test where the--those were the ones that
    were most important.
        I think it was a reasonably conservative and, in some ways,
    the best test of that was that, in the wake of that conclusion
    of those results, we've seen a very, very substantial amount of
    equity come back into the financial system because it provided
    a level of clarity and disclosure about balance sheets that did
    not exist before. And I think that's a good test.
        Now, markets don't get everything right and, you know,
    we're still going through a deep recession and we are at the
    early stage of repair and recovery. Life is uncertain and there
    are risks ahead. But I think it was a very carefully designed
    conserve test and it has helped play an important role in
    improving confidence in the system.

                   REFORMING GOVERNMENT SPONSORED ENTERPRISES

        Senator Tester. Okay. The administration, you've referenced
    it several times, is going to be sending out a plan for
    Congress on modernization and regulation for financial markets.
    Will there be a recommendation for Freddie Mac and Fannie Mae?
        Secretary Geithner. The future of the GSEs, including
    Fannie and Freddie, will be an important, is an important
    challenge for us, but we are not going to--I'm violating my
    rule of getting ahead of the President, we're not going to
    recommend, in our initial proposals for reform, precisely what
    we think the future of those issues should be.
        We are going to begin the process of consulting with
    Congress and a broad section of housing experts on what we
    think the range of options are. But we are going to defer
    recommendations on those things for a bit longer.
        Senator Tester. Okay. Can you give me any kind of timeframe
    that you're looking at?
        Secretary Geithner. I can't yet, but we probably will next
    week when we lay it out. But it's just a little early, just
    given the scale of the stuff that we are going to get to take
    on. We want to do this carefully.
        Senator Tester. No problem. Thank you.
        Senator Durbin. Mr. Secretary, thank you for your time here
    today. We are going to allow you to leave, of course, and go
    about your business of saving the American economy, or lunch.
    Whatever is on your schedule.

                         ADDITIONAL COMMITTEE QUESTIONS

        But we thank you very much for being here. We'll send you
    some questions that you might consider and, while we're
    changing witnesses here. Mr. Shulman is going to come up here,
    the IRS always has the last word. We will let him take the
    table.
        Secretary Geithner. Thank you. He is doing a great job and
    I hope you will give him the support he needs.
        [The following questions were not asked at the hearing, but
    were submitted to the Department for response subsequent to the
    hearing:]
                Questions Submitted by Senator Richard J. Durbin
                              departmental offices
        Question. Secretary Geithner's testimony stated that the Treasury
    Department will be reducing costs by cutting the number of the
    Department's economic attaches from 20 to 16.
        During this global economic crisis, why has the Department
    requested to eliminate staff tasked with communicating with our
    international economic partners?
        Answer. The Department is working daily to address the current
    economic problems and ensure the quickest path to recovery. The fiscal
    year 2010 budget for the Departmental Offices will improve the
    analytical capabilities at the Department to address these challenges
    while also maintaining fiscal responsibility. We looked to offset some
    of the proposed increases in the Office of Domestic Finance and the
    Office of Tax Policy by identifying savings in the attache program. The
    reallocation of resources will not negatively impact our long-term
    missions.
        Treasury places great value on its international attache presence,
    which helps advance Treasury priorities across a broad range of issues.
    Indeed, the attache program has grown from 8 attaches in April 2007 to
    the 15 attaches currently in the field. Nonetheless, the five attache
    posts in question are currently vacant. By extending the vacancies in
    the four posts in question, Treasury can help free up funding for
    programs focused on the domestic economic situation. We will continue
    to actively communicate with our international partners through our
    existing 15 attaches posted around the world, and we remain committed
    to working with our existing staff and other Executive Branch agencies
    to promote and support economic prosperity at home and abroad.
        Question. The fiscal year 2009 omnibus provided $6.2 million for a
    new Operations Center to provide the Department with a 24/7 capability
    to monitor the global market.
        What is the current status and timetable for full functionality of
    the Center?
        Do you agree with the previous Administration that this 24/7
    capability will enhance Treasury's responsiveness to global partners
    and to financial crises?
        Answer. The Department does support the development of an
    Operations Center. Construction of the Operations Center is set to
    start at the end of September with phase 1 (24/7 call center ops).
        Phase 2, which is ongoing, is to reassess the requirements for the
    Treasury Markets Room in light of the evolving mission of Treasury
    related to financial stability and economic recovery requirements. In
    this context, we are also refining the interaction between the Markets
    Room staff, the executive communications support team, and the
    emergency planning team. Since the original concept of the Treasury
    Operations Center was developed in 2007, prior to the 2008 financial
    crisis and the onset of the recession, Treasury leadership has been
    working to leverage investments in the Operations Center to full
    effect. To do so, we are refining the capabilities needed in the areas
    of financial markets and economic policy analysis as a result of
    financial stability and economic recovery initiatives. Results of this
    assessment will be completed this fall and will inform decisions
    related to staffing and organizational alignment of the Markets Room.
        Phase 3 will reassess the coordination and interaction between the
    Treasury Operations Center and the Intelligence Operations Center.
    Phase 3 should not require additional resources.
                    committee on foreign investment (cfius)
        Question. The Department has seen a significant increase in its
    CFIUS caseload over the last several years. The fiscal year 2009
    omnibus provided additional funds for CIFIUS to address the growing
    backlog of cases.
        To what extent have the additional funds allowed CFIUS to make
    progress in clearing out the backlog of cases?
        Has the caseload dropped off significantly due to the economic
    crisis?
        Answer. Treasury has utilized additional funding to increase
    critically needed staffing for CFIUS to handle the significant increase
    in caseload over the last several years. The number of covered
    transactions reviewed by CFIUS nearly tripled between 2005, when 64
    notices were filed, and 2008, when 155 notices were received. Because
    of the statutory timelines for CFIUS reviews (30 days) and
    investigations (45 days), cases cannot accumulate in a backlog but must
    be reviewed within those required periods regardless of the transaction
    volume at any particular time. This is why adequate staffing to fully
    review each case for potential national security concerns is essential.
    Although there was a decline in the number of cases during the economic
    crisis of recent months, the number of anticipated cases in the
    pipeline has begun to rise. We expect that case volumes will return to
    levels of recent years when merger and acquisition activity picks up
    with economic growth.
                    office of foreign assets control (ofac)
        Question. Building on the lifting of certain travel and trade
    restrictions included in the fiscal year 2009 omnibus, President Obama
    has committed to further opening trade and communication with Cuba.
        What is the economic potential in agricultural trade between the
    United States and Cuba if all agriculture trade restrictions are
    lifted?
        How does that compare to the level of agricultural trade today?
        Answer. The Census Department reports that goods trade between the
    United States and Cuba since 2000 has been as follows:

                           U.S. GOODS TRADE WITH CUBA
                           [Millions of 2008 dollars]
    ------------------------------------------------------------------------
                                                      Exports      Imports
    ------------------------------------------------------------------------
    2000..........................................          8.8          0.4
    2001..........................................          8.8  ...........
    2002..........................................        174.6          0.2
    2003..........................................        303.2          0.4
    2004..........................................        460.6  ...........
    2005..........................................        406.8  ...........
    2006..........................................        363.6          0.1
    2007..........................................        464.3          0.3
    2008..........................................        711.5  ...........
    1Q09..........................................        182.5  ...........
    ------------------------------------------------------------------------
    Source: http://www.census.gov/foreign-trade/balance/c2390.html#2000.

        The Trade Sanctions Reform and Export Enhancement Act of 2000 or
    TSRA allows sales of agricultural commodities to Cuba, while
    prohibiting U.S. government assistance, foreign assistance, export
    assistance, credits, or credit guarantees for purposes of financing
    such exports. TSRA also denies exporters access to U.S. private
    commercial financing or credit; all transactions must be conducted with
    cash in advance or with financing from third countries.
        We do not have an estimate of the potential increase in
    agricultural trade with Cuba if remaining trade restrictions are
    lifted. A July 2007 report by the International Trade Commission
    estimated that the U.S. share of Cuban agricultural, fish and forest
    imports would increase if financing restrictions were lifted.
        Question. In April of 2009, President Obama announced his intent to
    allow U.S. telecommunications network providers to provide phone and
    internet services in Cuba. However, the Cuban government would have to
    allow the presence of U.S. providers in Cuba for U.S. companies to
    enter the Cuban market, and it is unclear if or when that approval will
    occur.
        How do you plan to pursue persuading the Cuban government to accept
    the operation of U.S. telecommunications companies in Cuba?
        Answer. While Treasury is responsible for implementing and
    enforcing the Cuba Sanctions program, this question is more
    appropriately addressed to the Departments of State and Commerce. This
    would likely be part of a larger dialogue between the United States and
    Cuban governments over diplomatic and trade issues.
            community development financial institutions (cdfi) fund
        Question. Like a lot of individuals and businesses, CDFIs are
    having trouble finding financing in this economy. The budget proposes
    to continue a provision in the Recovery Act that temporarily waives the
    matching fund requirement for CDFIs.
        How much of the requested budget increase will fill in the gaps
    left open by the decrease in private financing, and how much will
    actually go toward expanding the reach of CDFI funds?
        Answer. Treasury estimates that private sector capital
    contributions to CDFIs will decline by at least $125 million in fiscal
    year 2010. The requested increase of $136.6 million, or a 127 percent
    increase in fiscal year 2010 for the CDFI Fund, which includes $80
    million for the new Capital Magnet Fund and $113.6 million for the CDFI
    Program, will provide considerable support to CDFI industry. The
    request also includes additional funding to support a more robust
    research and evaluation program and the implementation of operational
    improvements.
        Treasury believes that 100 percent of its CDFI Program award
    dollars allow CDFIs to expand their reach by: (i) introducing new
    financial product offerings; (ii) expanding their geographic service
    areas; and/or (iii) increasing the number of customers served.
        Question. When does the Department project that CDFIs will be able
    to once again secure sufficient private funding so that Congress can
    reinstitute the matching funds requirement?
        Answer. With the onset of the financial crisis in 2008, and
    resulting mergers among major banks, CDFIs have experienced severe
    reductions in capital contributions and investments by the major
    depository institutions in the CDFIs over the last 2 years, as well as
    significant reductions in philanthropic contributions. Declining
    capital contributions from depository institutions, corporations, and
    philanthropic institutions (amounting to a decrease of at least $125
    million in private sector investments in 2010) necessitate a matching
    funds waiver for fiscal year 2010. Treasury is hopeful that conditions
    in the market will change significantly such that the matching fund
    requirements can be reinstated in full in fiscal year 2011. The 2010
    budget requested a waiver only through 2010.
        Question. Even without the matching funds requirement, CDFI grants
    generally only make up part of the financing package for projects such
    as housing units and community centers.
        Considering the economic downturn, is there enough demand from
    high-quality CDFIs to spend the additional funds requested in fiscal
    year 2010?
        Answer. CDFIs have seen a huge increase in loan applications since
    the current economic crisis began from both existing customers and
    customers who had been working with regulated financial institutions.
    Also, many CDFIs are developing neighborhood stabilization programs
    which entail housing and neighborhood rehabilitation, including
    community services. Finally, there is continuing demand for small
    business financing in neighborhoods that are heavily impacted by
    foreclosures and high vacancy rates.
        Given this tremendous need for capital, Treasury believes that the
    $90 million in Recovery Act funding and $113.6 million requested in
    fiscal year 2010 will provide significant support to qualified CDFI
    Program applicants. Including the additional Recovery Act resources,
    the CDFI Fund will make approximately 90 awards totaling $145 million
    through the CDFI Program.
                              capital magnet fund
        Question. The fiscal year 2010 budget requests an $80 million
    appropriation to jump start the Capital Magnet Fund. The Capital Magnet
    Fund will be much like the CDFI program but will focus exclusively on
    the development of affordable housing. When the Capital Magnet Fund was
    created, Fannie Mae and Freddie Mac were required to provide revenues
    to the fund. However, the program has not been started because Fannie
    Mae and Freddie Mac are not currently in a financial position to allow
    them to make any contributions.
        Considering the start-up time needed to administer a new program,
    how soon will Capital Magnet Fund grants be disbursed?
        Answer. In March 2009, the CDFI Fund solicited public comments
    regarding the design and implementation of the Capital Magnet Fund
    (CMF). Over the next several months, the CDFI Fund will develop
    proposed regulations, the Notice of Funding Availability (NOFA) for a
    fiscal year 2010 funding round, a funding application, standard
    operating procedures for application review and awardee compliance/
    performance monitoring, and related automated systems. The CDFI Fund's
    goals are to publish the NOFA and solicit applications in the spring of
    2010 and to make CMF award announcements in the summer of 2010.
        Question. Please describe the major differences between the CDFI
    Fund and the Capital Magnet Fund.
        Answer. The CMF is similar to the CDFI Program, and consistent with
    the CDFI Fund's core mission, in that it provides capital to
    organizations to support their financing activities, rather than
    providing subsidies for specific projects or units, as is the case with
    most other Federal housing programs (e.g., Hope VI; Low-Income Housing
    Tax Credit; Section Eight). However, there are several differences
    between the CMF and the CDFI Program:
      --The CMF targets a broader pool of applicants than the CDFI Program.
            CMF funding is available to CDFIs and to other nonprofits,
            whereas CDFI Program financial assistance is only available to
            CDFIs.
      --The size of CMF awards is expected to be much larger than CDFI
            Program awards. CDFI Program award requests have been capped at
            $2 million per application, and award amounts have actually
            been lower (averaging $1 million per applicant in the fiscal
            year 2008 funding round). By contrast, with an $80 million
            appropriation, the CDFI Fund anticipates that it can make CMF
            awards in much larger amounts.
      --CMF awards may only be used to attract private capital to finance
            the development, rehabilitation, preservation, and purchase of
            housing that is affordable to low-, very low, and extremely
            low-income households, and related economic development
            activities. Thus, the CMF fulfills a distinct need for flexible
            and innovative affordable housing financing such as: pre-
            development grants and loans; loan guarantees; loan loss
            reserves; project equity; subordinated gap financing and bridge
            loans. CDFI Program awards may be used for a broader range of
            activities including, among others: business and
            microenterprise lending; consumer lending; the provision of
            financial services; and CDFI capacity building.
        Question. The Treasury Department is currently overseeing the
    management of Fannie Mae and Freddie Mac.
        When does Treasury project that Fannie Mae and Freddie Mac will
    become healthy enough to begin the mandatory payments into the Capital
    Magnet Fund?
        Answer. The Federal Housing Finance Agency (FHFA) placed Fannie Mae
    and Freddie Mac into conservatorship on September 7, 2008, and as
    conservator is responsible for overseeing the management of Fannie Mae
    and Freddie Mac. Consistent with its responsibilities as conservator,
    FHFA suspended the required Housing and Economic Recovery Act of 2008
    contributions (which include the Capital Magnet Fund) by Fannie Mae and
    Freddie Mac in view of their losses and draws on the Treasury
    Department's Senior Preferred Stock Purchase facility. The ability of
    Fannie Mae and Freddie Mac to begin making these contributions will
    depend on an improvement in their overall financial condition, which is
    closely tied to overall conditions in the housing market.
                 financial crimes enforcement network (fincen)
        Question. The fiscal year 2009 omnibus provided an $865,000
    increase for FinCEN to strengthen its global efforts to combat
    terrorist financing and money laundering, including for addressing a
    large case backlog. FinCEN's work in this area is expanding as the
    global financial intelligence community grows. For example, in May of
    2009, the Egmont group, the international organization of Financial
    Intelligence Units, added nine new members, including Saudi Arabia and
    Sri Lanka.
        Why does the budget request decline to include additional funding
    to continue to enhance the capacity of FinCEN to communicate and
    coordinate with other Financial Intelligence Units around the globe?
        Answer. FinCEN continues to work with FIUs around the world to
    expand and enhance global financial intelligence sharing initiatives
    aimed at combating transnational crime threats facing U.S. financial
    markets. FinCEN's information exchanges and case support workload to
    support the growing number of FIUs continues to grow.
        This is very important work and continues to be a priority for the
    Department, however, we are operating in a tight fiscal environment
    with many competing priorities. The President's budget maintains the
    level of staff and other resources supporting FinCEN's work with
    international partners; it also invests in FinCEN's IT Modernization
    effort, which will improve data integrity and better equip FinCEN
    analysts to provide accurate, complete and timely responses to
    requests.
        Question. The President's fiscal year 2010 budget requests $10
    million to fund an upgrade to the information technology (IT) system
    used for financial reporting under the Bank Secrecy Act. In July 2006,
    FinCEN halted work on BSA Direct, the previous attempt to upgrade its
    IT systems. Treasury spent 2 years of planning and invested $14.4
    million in that failed system.
        What lessons were learned from the previous attempt to replace
    FinCEN's IT systems?
        Answer. An independent review of the BSA Direct program identified
    several key factors that played a part in its failure. The most
    critical of these were: unclear project scope and requirements;
    inadequate program governance; and a lack of demonstrated project
    management experience (both Government and Contractor).
        FinCEN has been diligent in resolving all of these factors, as well
    as taking additional steps necessary to develop a solid foundational
    approach to assure the success of the new BSA IT Modernization
    initiative. Over the last 3 years, FinCEN has developed a comprehensive
    IT Modernization Vision and Strategy that identifies the scope of what
    is required to meet customer needs; an Enterprise Transition Strategy
    that outlines the high level plan for how we plan to accomplish the
    initiative; and employed a System Development Lifecycle, based on a
    model that has been successful within the IRS, to execute and monitor
    the program. FinCEN has committed to transparency and active engagement
    of internal/external stakeholders, working through the Bank Secrecy Act
    Advisory Group (BSAAG) and establishing an active partnership with the
    IRS at both an operational and strategic level. Further, we are
    currently working to establish a project plan that will allow the IT
    Modernization effort to be accomplished in the most cost-effective
    manner.
        Finally, and to address the most critical lesson learned, Treasury
    has emphatically addressed the issue of program governance. FinCEN has
    collaborated with the Department and IRS to establish proper governance
    and oversight for the BSA IT Modernization initiative. In 2008, the
    Modernization Executive Group (MEG) was created and currently serves as
    the highest level, integrated governing body in support of BSA
    information management and is tri-chaired by the Treasury Chief
    Information Officer, the IRS Deputy Commissioner, and the FinCEN
    Director. The MEG established an Executive Steering Committee,
    comprised of senior Departmental, IRS and FinCEN business and technical
    representatives, to provide oversight and guidance to the Modernization
    program. FinCEN also has a new bureau-wide Project Management Office
    and an IT-specific Modernization Management Office to ensure the day-
    to-day project controls are in place for successful execution of its IT
    Strategy. Finally, this initiative was discussed and endorsed as a
    Departmental priority by the Treasury Department's Executive Investment
    Review Board, consisting of representatives of all Treasury components
    for the purpose of providing executive direction and review of
    significant Treasury IT projects.
        Question. What improvements has FinCEN made to the planning and
    implementation process that will avoid problems that plagued the
    previous failed upgrade?
        Answer. FinCEN has established the organization's first enterprise
    business transformation and IT modernization strategy (the BSA IT
    Modernization Vision & Strategy), which serves as the roadmap for
    aligning FinCEN's IT portfolio with business objectives and processes.
    The bureau has also leveraged the IRS Enterprise Life Cycle to develop
    a System Development Life Cycle (SDLC) to ensure a robust, repeatable
    process is in place to manage the projects and overall program efforts
    required to modernize its IT environment. As part of the SDLC, the
    Executive Steering Committee must approve the results of each phase of
    the life cycle before FinCEN can move to the next phase.
        Since fiscal year 2007, FinCEN has hired six seasoned managers from
    industry, Department of Defense, and other Federal Agencies to oversee
    the Technology Solutions and Services Division (TSSD), establishing an
    entirely new senior management team supporting IT. The Chief
    Information Officer and new TSSD management team have extensive
    experience in managing large information technology programs and IT
    Modernization efforts, as well as years of hands-on experience in
    acquisition. Over the past 2 years, TSSD has elevated all critical
    Contracting Officers Technical Representatives (COTRs) responsibilities
    to the new senior staff, while also ensuring each COTR holds the
    requisite Federal Acquisition Certification for COTRs (FAC-COTR). The
    manager responsible for overall program control is a certified Project
    Management Professional from the Project Management Institute and is
    currently undergoing the necessary steps to obtain the Federal
    Acquisition Certification for PM's (FAC-PM) for FinCEN's major IT
    investment (BSA IT Modernization).
        In addition to ensuring the appropriate planning and execution
    processes are in place, establishing appropriate governance and
    oversight, and incorporating an entirely new management team, we are
    continuously involving both our internal and external stakeholders to
    ensure successful project implementation.
        Question. How does FinCEN plan to involve the wide variety of
    stakeholders in the planning for this IT overhaul--including banks,
    federal law enforcement, state and local law enforcement, and other
    federal intelligence agencies?
        Answer. FinCEN has engaged its internal stakeholders by
    establishing a Cross-FinCEN Integrated Product Team (IPT) made up of
    representatives from each FinCEN Office (Regulatory/Policy, Analytics/
    Liaison, International, Office of Counsel, and Management Programs).
    The Data Management Program and Data Management Council (DMC), which is
    comprised of Federal law enforcement and regulatory members, were
    established to engage FinCEN's government stakeholders. These two
    entities have participated in the identification and validation of BSA
    capabilities and requirements. In addition, FinCEN plans to engage the
    IPT and DMC continuously through the modernization initiatives in such
    System Development Life Cycle activities as user acceptance testing,
    training, and communications. When appropriate, FinCEN will also
    leverage the BSA Advisory Group, comprised of Federal representatives
    as well as financial institutions, for feedback pertaining to the
    impacts of the Modernization on their respective user communities.
    Finally, these processes will ensure this investment is leveraged in
    the most efficient manner possible by incorporating the common needs of
    the over 300 agencies at the Federal, State, and local levels that
    depend upon the system.
                           treasury inspector general
        Question. The recent increase in bank failures has forced the
    Treasury Inspector General to defer much of its routine but important
    audit and investigative work in order to meet its statutory
    responsibility to review certain bank failures. For fiscal year 2009,
    Congress provided $26.1 million for the Treasury Inspector General, a
    $7.6 million increase compared to the fiscal year 2008 level, so that
    staff could return focus on critical audit and investigative work.
    However, the budget proposes an increase of just $575,000 over the
    fiscal year 2009 enacted level.
        Considering that analysts anticipate that a significant number of
    bank failures will occur in fiscal year 2010 and over the next several
    years, without a larger funding increase, how would the Treasury
    Inspector General's office be able to fully maintain its oversight work
    while conducting these critical bank reviews?
        Answer. Based on the best information we have to date, we believe
    that the fiscal year 2010 budget request is sufficient for the OIG to
    meet its responsibilities, including material reviews. The fiscal year
    2010 request allows the OIG to retain the larger workforce that was
    approved for fiscal year 2009, an increase of 39 FTEs, or nearly 34
    percent, over the fiscal year 2008 level. We will continue to monitor
    OIG workload and seek additional resources if necessary.
                 alcohol and tobacco tax and trade bureau (ttb)
        Question. The fiscal year 2010 budget proposes to charge producers,
    wholesalers, and retailers of beer, wine, and distilled spirits annual
    regulatory fees. These fees would offset the operating costs of TTB.
        What impact would these new fees have on the industry?
        Answer. Revenue from the proposed ongoing permanent ``licensing and
    registration fee'' starting in fiscal year 2010 would support the
    bureau's mission. Members of the alcohol industry (including retailers,
    wholesalers, breweries, wineries, distilleries, and industrial alcohol
    businesses) would pay fees ranging from $300 to $1,000, depending on
    the type and size of the business entity. Revenue in the first year,
    from annual estimated offsetting receipt collections would start out
    low, but grow in subsequent years to eventually offset the annual
    operating costs of TTB (currently around $100 million).
        Annual fees are shown in the table below. A licensing and
    registration fee of $300 from over 350,000 retailers will generate an
    estimated 90 percent of the yearly revenue collected, while the
    remaining 10 percent would be collected from wholesalers and alcohol
    producers. TTB currently collects over $7 billion in federal excise
    taxes from alcohol producers.
        The licensing/registration fee would shift the burden of paying for
    regulation of the alcohol industry from the general public to
    consumers, producers, wholesalers, and retailers of alcohol beverages.
    Annual Fee Requirement
        The annual fees to be charged under this program are as follows:

    ------------------------------------------------------------------------
                                                                     Amount
    ------------------------------------------------------------------------
    Retailer Dealers in Liquors and Beer.........................       $300
    Wholesaler Dealers in Liquors and Beer.......................        500
    Alcohol Producers............................................      1,000
        Distilled Spirits Plant \1\
        Bonded Wine Cellar \1\
        Bonded Wine Warehouse \1\
        Tax paid Wine Bottling House \1\
    Every Brewer \1\.............................................      1,000
    Denatured Spirits, Recovery and Tax Free Users (Industrial           300
     Alcohol)....................................................
    Non-beverage Domestic Drawback Claimants.....................        500
    ------------------------------------------------------------------------
    \1\ Reduced fees by substituting ``$500'' for ``$1,000'' if gross
      receipts are less than $500.
    $500,000 for the most recent taxable year before the 1st day of the
      taxable period.
    Certain exemptions and exceptions of the annual fee may apply to the
      certain business as outlined under the legislative proposal.

                      troubled asset relief program (tarp)
        Question. TARP places strict limitations on compensation for
    executives of companies receiving financial assistance from the federal
    government, and the Recovery Act strengthened those restrictions after
    weaknesses in the original TARP restrictions emerged. GAO reports that
    Treasury has been working to increase oversight and compliance with
    executive compensation restrictions, including the new provisions
    included in the Recovery Act.
        Please provide an update on the steps Treasury is taking to
    institute a clear, robust process to monitor compliance with the
    executive compensation restrictions.
        Answer. On June 15, 2009, Treasury published an Interim Final Rule
    (``IFR'') entitled ``TARP Standards for Compensation and Corporate
    Governance'' that implements the executive compensation provisions of
    the Recovery Act. The IFR sets forth detailed restrictions on executive
    compensation applicable to TARP recipients, as well as periodic
    reporting and certification requirements and other procedures for
    monitoring compliance. The IFR also provides for the appointment of a
    Special Master, who has the responsibility to (i) review and approve
    the compensation of each of the 25 most highly compensated employees of
    each TARP recipient that has received exceptional assistance, (ii)
    review and approve the compensation plans applicable to the next 75
    most highly compensated employees of each such TARP recipient, (iii)
    review prior compensation paid to Senior Executive Officers by TARP
    recipients and negotiate the return of any payments that are found to
    have been contrary to the public interest, and (iv) issue interpretive
    guidance under the rule. All TARP recipients will be required to submit
    detailed compensation information in order to facilitate the review
    process.
        Question. In light of criticism that Treasury was not requiring
    institutions receiving TARP funds to provide detailed reports on their
    use of taxpayer dollars, Treasury has required that all participants in
    the Capital Purchase Program complete a monthly survey of lending
    activities. Treasury has declined to seek any further details on any
    TARP recipients' use of funds, with the exception of Citigroup and Bank
    of America, citing that such data would not be useful and would be
    difficult to gather.
        However, the Special Inspector General for TARP sought more
    detailed data from over 350 TARP recipients and found that banks were,
    in fact, able to provide a reasonable level of detail on their use of
    funds. The IG reported: ``. . . one thing is clear: Treasury's
    arguments that such an accounting was impractical, impossible, or a
    waste of time because of the inherent fungibility of money were
    unfounded.''
        Why has Treasury declined to require more detailed reporting from
    TARP beneficiaries?
        Answer. It is important to distinguish between Treasury's capital-
    enhancement programs and its other programs. The Capital Purchase
    Program, Capital Assistance Program and institution-specific programs
    for AIG, Citigroup and Bank of America are designed to provide capital
    to cushion against losses and allow financial institutions to continue
    operating in the ordinary course of business, including lending to
    consumers and businesses. In order to serve its purpose, capital must
    be available for any legitimate business purpose. Although Treasury
    requires applicants for the Capital Assistance Program to specify how
    they intend to use the funds, accounting for actual use of particular
    dollars invested as capital is not a meaningful exercise and therefore
    not required. Because banks' double-entry bookkeeping systems do not
    trace the paths from creating liabilities (receiving capital) to
    investing in assets (making loans), we cannot precisely attribute the
    contribution of TARP capital to particular uses. The banks can,
    however, report trends in loans and other uses of funds, and we do
    require that they report such to Treasury.
        On the other hand, Treasury's home ownership preservation program,
    small business lending initiative, auto industry programs, and the
    terms of Treasury's participation in the Term Asset Backed Securities
    Loan program impose specific limitations on the use of TARP funds, and
    require controls and periodic reports to insure that those limitations
    are respected.
        Question. When Congress approved TARP, the expectation was that
    TARP funds would be used to purchase toxic assets--mainly, assets
    related to subprime and other troubled mortgages. Since then, TARP has
    evolved into 12 separate programs aimed at addressing different stress
    points in the market and at rebuilding a basic lending capability for
    domestic markets. The complexity of this program has created a
    communications challenge. GAO reported in March 2009 that TARP is still
    very poorly understood by Congress and the public. GAO reports that
    Treasury has not yet developed an effective strategy for communicating
    with Congress, the public, and other stakeholders.
        How can Treasury's actions support increasing confidence in the
    financial markets if the public does not have a basic understanding of
    the goals of TARP?
        How can the Department better articulate and justify its strategy
    so that Americans and the markets can regain confidence in the economy?
        What can Treasury do to educate concerned members of the public?
        Answer. Treasury publishes a wealth of information about TARP
    investments and the activities of the Office of Financial Stability. In
    addition to transaction reports detailing every transaction, monthly
    financial reports, and tranche reports that review how each $50 billion
    of TARP funds have been spent, Treasury posts on its
    FinancialStability.gov website all program descriptions, guidelines,
    frequently asked questions and answers, contracts, press releases, and
    a variety of other information about TARP. Treasury also maintains a
    separate MakingHomeAffordable.gov website that sets forth extensive
    information about Treasury's homeownership preservation programs.
        Nevertheless, Treasury recognizes that public perceptions of TARP
    could benefit from improved communications. To that end, Treasury is in
    the process of developing and implementing an overall communications
    strategy that will include regular proactive briefings for Congress and
    the press, clearer explanations of TARP programs and OFS activities,
    discussions of progress being made in achieving program objectives, and
    expanded efforts to communicate with and educate the public about the
    goals and achievements of TARP.
        Question. Firms that repay preferred stock purchased under the TARP
    program will also have the option to repurchase warrants that Treasury
    holds at Fair Market Value.
        How is Treasury ensuring that the valuation of the warrants is
    accurate so that taxpayers get a return at fair market value?
        Answer. Treasury will ensure that taxpayers' interest are protected
    by conducting a process to determine whether to accept the bank's
    initial determination of the fair market value of the warrants.
    Treasury has developed a robust set of procedures for evaluating
    repurchase offers, based on three categories of input: market prices,
    financial modeling, and outside consultants/financial agents.
        Question. Contracts for implementing TARP include the primary,
    large contract for the asset manager, Bank of New York Mellon, as well
    as smaller contracts for tasks such as legal and accounting services.
    These contracts have for the most part been priced on a ``time and
    materials'' basis. GAO has warned that such contracts are considered
    ``High Risk'' to the taxpayer dollar. This is because, unlike fixed-
    price contracts, the structure of the time-and-materials contracts
    provides no incentive for the contractor to control for cost or labor
    efficiency. In a recent TARP review, GAO reported that in response to
    GAO's warning, Treasury has converted two time-and-materials contracts
    into fixed-price arrangements and is closely assessing new contracts to
    identify those that may effectively utilize a fixed-price contract.
        What do TARP officials consider when determining the appropriate
    compensation structure for new contracts?
        Is Treasury conducting a thorough, comprehensive review of all of
    its existing contracts so that more can be converted to fixed-price,
    lower-risk arrangements?
        Answer. Treasury considers the degree to which the contract
    requirements can be clearly defined to permit negotiation of a
    reasonable price. In the legal services contracts, the requirement to
    create novel, unprecedented financial structures for government
    investment in private corporations inhibits Treasury's ability to
    accurately predict the level of effort that will be required. Over
    time, as certain transactions are repeated, our ability to reasonably
    predict the level of effort increases. Treasury gathers data on the
    number of hours required to complete transactions and uses the data to
    negotiate fixed prices on a per transaction basis.
        Opportunities have been limited thus far to convert significant
    number of contracts to fixed-price due to the difficulty in estimating
    with a reasonable degree of accuracy the extent or duration of the
    required services. Due to this high degree of uncertainty, fixed-price
    arrangements may not be appropriate for many TARP contracts. Treasury
    selects appropriate contract types based on the risk to successful
    performance and the capacity to negotiate a fair and reasonable price
    for the required services. Given the still-evolving nature of TARP, and
    the challenge of reasonably forecasting the level of effort required to
    design new financial structures and execute transactions, premature
    conversion to fixed price contracts would place Treasury at risk of
    agreeing to too high a price for services rendered. Treasury is
    gathering cost data from all of its time and materials and labor hour
    contracts to identify areas where the level of effort can be reasonably
    predicted, and the costs associated with those efforts, to support the
    future negotiation of fixed pricing for follow-on work where
    appropriate.
                                     ______

                   Questions Submitted by Senator Ben Nelson
        Question. While much of the focus up until recent weeks has been
    placed on the auto manufacturers, the dealerships also have much at
    stake. Considering that the Treasury has provided auto manufacturers
    with a significant amount of funding and has taken on significant
    ownership in these companies, how much of the assistance already
    provided is the Treasury prepared to allow to dealerships that have
    lost their franchise designations and have been left with few options?
        Answer. Both General Motors (GM) and Chrysler and have committed to
    operating with transparency with regard to the dealership closings. The
    plans to consolidate dealer networks were developed by each company
    over a long period of time and were a part of their overall plans to
    restructure in order to achieve financial viability. Without the funds
    provided by the Treasury Department, GM and Chrysler's entire dealer
    network might have been eviscerated. Chrysler has worked to have the
    majority of its inventory off of the rejected dealership lots. GM has
    set up an appeals process for its rejected dealers and is providing
    them with 18 months of support to allow them to dispose of their
    inventory, which GM believes should be a sufficient amount of time
    given current inventory levels.
        Question. No one disputes the importance of the domestic auto
    industry to our country and economy. Everyone understands we aren't
    only talking about the auto manufacturers. For instance in my state we
    are also talking about the dealerships, parts supplier, and a host of
    other industries that are either touched directly or indirectly by the
    auto industry.
        However, I have great concerns about the United States government
    having an open-ended ownership stake in private companies because of
    the assistance that the federal government has provided.
        What oversight is the Treasury Department prepared to take or
    conditions established so that domestic automakers are being good
    stewards of taxpayer money and can ensure the taxpayers of a return of
    their investment?
        Answer. The government expects to protect the taxpayers' investment
    by managing its ownership stake in a hands-off commercial manner. Both
    companies now have new Boards of Directors comprised of distinguished
    business professionals who will help guide these companies through
    their ongoing restructurings. The Treasury Department will continue to
    monitor the taxpayer's investment under the TARP program and will seek
    to dispose of the ownership interest as soon as is practicable.
        Question. While the federal government is a reluctant stakeholder
    in domestic companies, what should the American taxpayer expect when it
    comes to the divestment of funds they've provided to these auto
    companies? Are there benchmarks of solvency that are established or are
    planning on being established that will allow the taxpayers to be
    repaid of their investment in the auto companies? Will repayment of
    federal funds be on a continual basis?
        Answer. The return will depend on the overall market, the economy,
    and the recovery of the auto sector. The decision to provide funds to
    the companies by the current Administration was based upon a
    determination that the companies have viable business plans. As a
    result, we will monitor GM and Chrysler's performance and seek the
    return of taxpayer funds as soon as is practicable.
        Question. How can technology best be utilized to maximize
    transparency with regard to TARP transactions and the use of TARP funds
    by recipients? How can we ensure that this information is available as
    quickly, comprehensively and understandably as possible, for the
    benefit of both taxpayers and market participants?
        Answer. Improving the ways in which the Office of Financial
    Stability (OFS) communicates its activities and shares relevant data
    with the public, market participants, and our oversight bodies is one
    of my highest priorities. Treasury has already improved its ability to
    share information through the development of our website,
    FinancialStability.gov, and I fully expect that the Internet will
    continue to play a central role in our efforts to operate in as
    transparent a fashion as possible.
        We are working to add to the website's functionality, increase the
    resources available through the site, and develop additional features.
    I believe we need to expand the ability of people to interact with OFS,
    such as through a question and answer feature, and offer presentations
    of information tailored to the widest possible audience, including
    those people who do not regularly read the business page or follow the
    financial markets.
                                     ______

                  Questions Submitted by Senator Susan Collins
        Question. An analysis of the Obama administration budget proposal
    by the Congressional Budget Office projects that the public debt ratio
    will double in 10 years, to 82 percent of GDP. This would be the
    highest debt level since World War II.
        The CBO analysis also shows that the Obama budget will produce a
    deficit level averaging 5.3 percent of GDP across the 10-year budget
    window. Worse, the deficit level will be rising--not shrinking--toward
    the end of the 10-year period, reaching 5.7 percent in 2019.
        Last month, you told Bloomberg Television that: ``It's very
    important that this Congress and this president put in place policies
    that will bring those deficits down to a sustainable level over the
    medium term,'' and you added that the proper deficit target is 3
    percent of GDP or smaller.
        What policies do you believe should be put in place to reduce the
    deficit to 3 percent or less of GDP over the long term?
        Answer. When we developed the fiscal year 2010 budget, we projected
    that the budget deficit would shrink to just above 3 percent of GDP on
    average during 2012-2019. The Administration's Mid-Session Review
    projections show a higher deficit outlook, with deficits averaging just
    above 4 percent of GDP over that period. This increase is primarily
    driven by changes in our economic assumptions, based on new data on the
    severity of the recession that weren't available when we developed the
    fiscal year 2010 budget.
        Our first priority is to make sure that we do not choke off
    recovery in the near term by taking actions to reduce the deficit in
    the near term. As the recovery proceeds and the temporary surge in
    spending retreats, the deficit will fall. The process of developing the
    2011 budget will include proposals for further deficit reduction to the
    extent that they are needed to put the nation back on a fiscally
    sustainable path.
        Question. Thinking about our long-term debt situation for the
    moment, do you believe that it will be necessary to raise taxes to
    achieve a 3 percent deficit-to-GDP level?
        Answer. We agree that it is important to keep the deficit at a
    sustainable level relative to GDP in the long term. The proposed fiscal
    year 2010 budget moved the budget deficit to about 3 percent of GDP,
    with a combination of some programs that raise revenue and put fiscal
    restraint on discretionary spending. The updated economic assumptions
    in the Mid-Session Review, which reflect a more severe recession than
    evident when the 2010 budget was developed, have raised projected
    deficits relative to GDP over the 10-year budget window. We would
    consider a wide range of approaches consistent with the President's
    commitment if we see the need to further lower the deficit after the
    economy recovers.
        Question. In his testimony before the House Budget Committee last
    week, Federal Reserve Chairman Bernanke made the point that the debt
    cannot be sustained unless ``debt and interest payments . . . are
    stable or declining,'' with ``tax rates [that] are not so high as to
    impede economic growth.'' Do you agree with the Chairman that higher
    taxes can impede economic growth?
        Answer. Most economists agree that high tax rates can hurt economic
    growth and that taxes should be as low as possible while still funding
    the needs of the United States. But large and rising deficits that
    become a permanent part of the economic landscape also pose a threat to
    economic growth. They destroy confidence in the economy and reduce
    business capital spending, which will lower productivity and the
    standard of living.
        In the longer term, all policymakers will need to balance the goal
    of creating a sustainable fiscal path with the goal of keeping taxes
    low. It does the economy no good overall to have a large deficit that
    saps business and consumer confidence and crowds out business spending
    just to keep taxes low. And likewise, it does the economy no good if
    needed government programs are unfunded--with attendant consequences
    for productivity and quality of life--just to keep taxes low.
        We look forward to working with the Congress to find a sustainable
    balance of policies in keeping with the President's commitments.
        Question. The Treasury Department has an abysmal record for
    implementation of major capital IT investments. Some of these failures
    include FinCEN's Bank Secrecy Act (BSA) Direct System, IRS's web-based
    Electronic Fraud Detection System, and the abandoned Treasury
    Communication Environment.
        As of last week, the Director of FinCEN was unable to explain to
    Appropriations Committee staff the anticipated total cost for the new
    BSA IT system. The FinCEn Director could also not explain how the
    fiscal year 2010 requested budget increase of $11 million would be
    used. Given that this is a complex, multi-year effort, we would like to
    have more details about the fiscal year 2010 request and the long-term
    project costs. Secretary Geithner, can you tell us how the $11 million
    would be spent and what the long-term costs of this project will be?
        Answer. The fiscal year 2010 President's budget request is part of
    a larger, multi-year initiative, that provides the ability to begin the
    integrated BSA IT Modernization Effort, including the full scope of BSA
    IT modernization capabilities. The fiscal year 2010 request of $10
    million will be combined with base resources of $2.5 million to begin
    the project.
        Specifically, the resources included in the fiscal year 2010
    President's budget will be used to complete the planning, requirements,
    architecture and design (Lifecycle Milestone 3) activities for the
    following projects:
      --Infrastructure
        --IT Modernization Development and Test Environment
        --Storage Area Network (SAN)
      --Registered User Portal
        --User portals
        --Access Control
        --Identity Management
      --E-Filing
        --E-Filing
        --E-Forms/Paper Filer Analysis
        --Shared Filing Services/Work in Progress Database
      --System of Record (SOR)
        --SOR
        --Bulk Data Dissemination
        --Basic Query
        --Alerts
      --Query Audit Log
      --Advanced Analysis
        --Proactive Analysis
        --Analytic/Visualization Tool
        In terms of long-term costs, initial estimates are for a 4-year
    project plan estimated at $120 million; however, in order to create the
    most cost-effective solution for the taxpayer's dollar, estimates will
    be refined and adjusted based on the results of the fiscal year 2009
    requirements and alternatives analysis.
        Question. The stimulus provided the CDFI Fund with $100 million for
    additional grants under its core and Native American programs and to
    cover associated administrative expenses. The stimulus also gave the
    Fund an additional $3 billion in new markets tax credits. These new
    resources coupled with the Administration's fiscal year 2010 request of
    $243.6 million represent a huge expansion of the Fund's programs from
    the fiscal year 2009 appropriation of $107 million.
        The last two financial audits issued by the Treasury Office of
    Inspector General cited a ``significant deficiency'' in the CDFI's
    monitoring of grant recipients to determine if those recipients had
    complied with their grant agreements. The auditors reported that CDFI
    managers continued to have difficulty communicating with each other.
    The auditors called this situation a ``significant deficiency.'' I
    understand that the Treasury moved the chief financial officer's
    function out of the CDFI to the Department even though CDFI is required
    to have a CFO. Taken together, it appears that this office has some
    serious management and operational problems.
        Mr. Secretary, in light of the large increase for the CDFI in the
    budget request, could you please comment on these issues? Specifically
    I'd like to know what actions the Department has taken to ensure that
    CDFI is making grants and awarding tax credits in a speedy but
    responsible manner, and how CDFI will monitor those grants to determine
    the money is used for their intended purposes.
        Answer. Although Treasury's Office of the Inspector General (OIG)
    did identify concerns with respect to compliance monitoring and
    management communication, no material weaknesses were identified in
    either the fiscal year 2007 or fiscal year 2008 audits, and the CDFI
    Fund received a clean opinion on its fiscal year 2008 balance sheet.
    Since fiscal year 2007, the Department, in conjunction with the CDFI
    Fund, has taken action to improve the efficiency and operations of the
    CDFI Fund, bolstering: (1) the awardee selection process, (2)
    compliance monitoring, (3) management communication; and (4) other
    areas to better meet the CDFI Fund's mission and provide better service
    to stakeholders and constituents. In addition to improving operational
    efficiency, these steps were taken to ensure that the CDFI Fund is in
    alignment with Treasury directives, orders, policies, procedures, and
    guidelines. Treasury is confident that the CDFI Fund has the necessary
    systems and processes in place to ensure the full integrity of its
    award programs.
    Awardee Selection
        The CDFI Fund has an extremely rigorous application selection
    process that ensures awards are made in an expeditious and responsible
    manner. Further, the Fund has developed compliance monitoring protocols
    and systems to ensure that award funds are used for their intended
    purposes.
        In fiscal year 2008, the CDFI Fund began working with an outside
    consultant to evaluate and streamline the CDFI Program award review and
    selection process. The resultant new Standard Operating Procedures
    streamline the application process and strengthen internal controls and
    accountability. Among other benefits, through these new procedures, the
    CDFI Fund reduced fiscal year 2009 grant selection decisions by about
    60 days and reduced the time from award selection to disbursements by
    120 days. In fact, the CDFI Fund anticipates disbursing substantially
    all of the $98 million in Recovery Act award dollars within 60 days of
    award announcement.
        With respect to its two largest programs, the CDFI Program and the
    New Markets Tax Credit (NMTC) Program, applicants are required to
    submit uniform application materials. Each funding application is rated
    and scored independently by three readers, followed by a Quality
    Assurance reviewer. Applications meeting previously established minimum
    aggregate scoring thresholds are considered eligible for an award.
    These eligible applicants are then reviewed again and an award
    determination is made.
        There are several internal control safeguards that mitigate against
    any one person being able to exercise undue influence over the
    selection of awardees, including:
      --Conflict of interest policies preclude a reader from reviewing an
            application of an applicant for which the reader has a
            previous, current, or potential relationship, financial or
            otherwise.
      --Readers score applications independently and in remote locations.
            They do not discuss their reviews with other team members.
            Reviewers cannot communicate directly with one another
            regarding their applications without first making contact with
            the Quality Assurance reviewer.
      --Review Forms provide instructions to readers with respect to how
            each element is to be scored, thus helping to limit reader
            variance.
      --The relative weight ascribed to each scoring element is computer-
            generated and unalterable by the reader, thereby limiting the
            degree to which a reader can change the outcome of an overall
            application score.
      --Each Review Form is reviewed by a Quality Assurance reviewer to
            ensure that (i) the reader followed the scoring guidelines and
            (ii) the scores are appropriate, given the reader's ratings and
            narrative.
      --If a reader review results in a scoring anomaly, the application is
            re-scored by a fourth reviewer and the anomalous score will
            likely be disregarded.
      --If the Selecting Official varies significantly from the
            recommendation of the review manager, a third person (the
            Reviewing Official) is engaged to make a final determination.
    Compliance Monitoring
        The significant deficiencies noted by the Treasury Inspector
    General for the compliance area focused on a lack of consistency in
    following established written policies and procedures to determine
    awardee compliance. The auditor's recommendation to address these
    significant deficiencies was to increase staff resources dedicated to
    compliance and monitoring. The CDFI Fund implemented these
    recommendations, hiring a compliance manager and additional staff, as
    well as providing additional training to the compliance staff. It also
    updated compliance monitoring policies and procedures related to
    awardee financial statements.
        With respect to awardee compliance and performance monitoring, the
    CDFI Fund has developed automated on-line data collection tools, known
    as the Community Investment Impact System (CIIS) and the CDFI
    Compliance Monitoring System (CCMS), through which CDFI Program and
    NMTC Program awardees report institution- and transaction-level
    information and reports to the CDFI Fund annually, along with their
    audited financial statements. The CDFI Fund uses these reports to
    verify compliance with award agreements, and they are a valuable source
    of data for program evaluation and dissemination of information about
    the CDFI industry.
        In addition to reviewing the annual financial statements and
    reports from all of its awardees, the CDFI Fund engages in ``desk
    audits'' and site visits each year to a small percentage of awardees.
    Desk audits are ordered when a potential issue of non-compliance is
    discovered through standard review of annual reports, and generally
    require the awardee to provide additional clarifying information and/or
    supporting documentation. Site visits may be conducted in response to a
    particular incidence of non-compliance, and are scheduled for a random
    sample of awardees.
    Management Communication
        The Department takes very seriously the Inspector General's
    findings with respect to the need to improve management communication
    within the Fund, and has instituted a number of initiatives to address
    this concern. In addition to weekly meetings with the management team,
    the CDFI Director has established quarterly all-hands meetings and
    monthly brown-bag lunches with the staff to ensure employees have an
    opportunity to raise concerns, receive recognition for exemplary work
    and discuss cross-cutting issues impacting all of the Fund's programs.
        Recently, the Fund established the position of Chief Operating
    Officer to bring together core management and administration functions.
        In addition, the Fund has encouraged program managers to conduct
    offsite planning retreats with their staff. Three out of seven managers
    have already held these sessions; the remaining four will be convened
    within the next 60 days.
    Steps and Actions Taken to Improve CDFI Fund Operations
        Numerous other steps and actions taken to improve CDFI Fund
    operations include:
      --Comprehensive, third-party assessment of the CDFI Fund's financial
            management functions and capabilities, which resulted in the
            appointment of Treasury's Assistant Secretary for Management/
            Chief Financial Officer as the CDFI Fund's Chief Financial
            Officer. Through this action, the CDFI Fund benefits from
            standardized financial management and internal control
            processes, enhanced cost effectiveness, and improved risk
            management.
      --Creation of new programmatic Standard Operating Procedures by Booz
            Allen Hamilton, which were implemented in late fiscal year 2008
            and continue to be refined.
      --Comprehensive skills assessment (conducted by Booz Allen Hamilton)
            of CDFI Fund program staff, to identify the resources necessary
            to carry out the new Standard Operating Procedures.
      --Assessment of the CDFI Fund's human resource functions and the
            transfer of services to the Office of Human Resources, which
            allows CDFI Fund employees and managers to have consistent with
            the rest of the Department's employees, in addition to the
            establishment and implementation of human capital policies and
            procedures approved by the Office of Human Resources.
      --Procurement of a minority-owned vendor to provide support in
            updating position descriptions of all employees, training in
            writing employee specific performance plans using Treasury's
            new performance management system, and tailoring Individual
            Development Plans for all CDFI Fund employees to reflect the
            new Standard Operating Procedures and defined roles and
            responsibilities.
      --Implementation of ``best practice'' recruitment tools so as to
            recruit a diverse talent pool, including the use of multiple
            recruiting mechanisms and hiring authorities.
      --Development and implementation of a new strategic plan for fiscal
            year 2009 with line staff involvement.
      --Establishment of a performance-based awards program to encourage
            continued improvements of the CDFI Fund's programs and
            operations through motivation and reward of employees.
      --Creation of a strong collaborative working relationship with union
            representatives to identify bargaining unit employee needs and
            concerns.
        Question. Mr. Secretary, during your recent trip to China, I was
    troubled by the response you were given by some in China when you
    attempted to assure the Chinese that their investments in U.S.
    Treasuries are ``very safe.'' As the Washington Post put it in an
    editorial on Friday, the fact that the Chinese question the
    trustworthiness of bonds backed by the full faith and credit of the
    United States should serve as a ``wake up call'' for all Americans.
        China is currently the largest purchaser of U.S. Treasurys and many
    high level Chinese officials are worried about the safety of their
    assets and have begun to push for alternatives to the dollar as a
    reserve currency. Such a move would be disastrous for the United States
    and world economy. How do you intend to avoid such a move by the U.S.
    Government's largest creditor?
        Answer. We are confident that the dollar will remain the major
    currency of use in international transactions and thus a major reserve
    currency. The attractiveness of the dollar to foreign investors is the
    unparalleled breadth, depth, and liquidity of U.S. financial markets
    and the confidence that foreign investors have in the long-term
    prospects of the American economy and American economic policy.
        As Secretary of the Treasury, I am committed to ensuring that the
    U.S. economy and U.S. financial markets are vibrant, robust, and open
    to foreign investors. In addition to ensuring a growing economy, the
    President is committed to reducing the medium- and long-term federal
    budget deficit and securing fiscal sustainability.
        Question. Treasury has pumped at least $70 billion into the failing
    multinational corporation, AIG. This insurance company nearly failed
    not because of its insurance business but because it had engaged in
    hundreds of Credit Default Swaps transaction which it could not cover
    when counterparties all came calling for payment at the same time. AIG
    used much of the TARP funds to pay these counterparties, not only
    Goldman Sachs, but many foreign banks, including Deutsche Bank and
    Societe Generale. The Special Inspector General has raised questions
    about whether Treasury could have used its contribution to AIG as
    leverage to monitor these payments and force these counterparties to
    accept a ``haircut'' on their payments. After all, without Treasury's
    injection of funds, AIG would have failed and they likely would have
    received nothing at all. Do you believe Treasury missed an opportunity
    to save taxpayer dollars?
        Answer. When evaluating the costs to the taxpayer of Treasury's
    support of AIG, the benefits also should be taken into account.
        The disorderly failure of AIG would have caused direct damage to
    the system as a whole and would likely have lowered overall risk
    appetite throughout the system due to the heightened uncertainty that
    such an event would have generated. As with all of our TARP programs,
    we have two goals--preserving the stability of the financial system as
    a whole and making sure that the taxpayers are protected and
    appropriately rewarded for the risk they are taking. The mitigation of
    systemic risk generates significant, but difficult to quantify,
    benefits for taxpayers.
        Moreover, Treasury makes every effort to protect the taxpayer.
    Treasury works with AIG to maximize the chances that AIG can repay the
    government for its very significant financial support. In this way, the
    success of AIG as a business and the success of AIG's restructuring are
    very much in the taxpayer's medium- to long-term interest.
        Treasury understands that, as a steward of taxpayer dollars, we
    must work hard to ensure that the financial support offered to AIG is
    not wasted or abused.
        Treasury's ability to impose ``haircuts'' on AIG's derivatives
    counterparties is extremely limited due to the nature of derivatives
    contracts. Most derivatives trades are governed by standardized
    contracts (ISDAs) and many have so-called credit support annexes or
    CSAs, which govern the posting of collateral. The purpose of a CSA is
    to mitigate counterparty credit risk, thereby enabling the parties to
    focus on pricing and trading the underlying risk factors instead of
    worrying about whether their counterparty will be able to pay, should
    the trade swing in their favor. This feature facilitates liquidity,
    price discovery, risk transfer, and the functioning of markets
    generally.
        Under a CSA, the failure to meet a collateral posting obligation in
    full generally constitutes an event of default and results effectively
    in the immediate termination of the underlying trades. Most of the
    governing contracts also contain a provision that a default on any
    other such contract (e.g., with another counterparty) constitutes a
    default on that particular one, which gives rise to so-called ``cross-
    default risk.'' Put simply, if AIG were to unilaterally ``haircut'' one
    of its counterparties by posting less than the contractually obligated
    amount, that would constitute an event of default, trigger cross
    defaults, and result in mass trade terminations. In the fall of 2008,
    AIG had almost 50,000 derivative trades in a wide variety of asset
    classes with over 1,000 counterparties. Defaulting then would have
    destabilized an already fragile market.
        This is why the Administration has proposed a special resolution
    regime to give the government the tools necessary for an orderly
    resolution of complex non-bank firms, in which creditors and
    counterparties may share in the losses.
                                     ______

               Questions Submitted by Senator Christopher S. Bond
                                  toxic assets
        Question. The Administration seems to be still treating the
    symptoms but not the cause of the financial credit crisis. Throwing
    billions of taxpayer dollars at the banks without cleansing the toxic
    assets is simply throwing money down a rat hole. And it appears that
    your plan to address the toxic assets--the so-called PPIP program--may
    never get off the ground given FDIC Chairman Sheila Bair's recent
    announcement to postpone the program. Many people, including myself,
    are highly skeptical of the PPIP program, in the first place, since it
    is voluntary for the banks to participate. Without forcing the banks to
    clean up their balance sheets and expected losses mounting in the
    commercial and residential real estate markets and credit card markets,
    we are simply postponing their day of reckoning.
        In your testimony, you seem to indicate that Treasury intends to
    still move forward with PPIP.
        How do you intend to go forward with the PPIP program given the
    government's inability to attract bank participation since it is
    voluntary? Is there a Plan B?
        Answer. Treasury is committed to the Legacy Securities PPIP, and we
    have been finalizing the details over the past several months. The
    Legacy Securities PPIP will address the market for commercial mortgage-
    backed securities (MBS) and non-agency residential MBS. Treasury
    announced in early July that it had selected nine pre-qualified fund
    managers that will receive up to $30 billion in investments from
    Treasury. As of October 5, 2009, Treasury announced three additional
    closings of Public-Private Investment Funds (PPIFs) established under
    the Legacy Securities Public-Private Investment Program (PPIP),
    bringing the total number of initial closings completed to five. As of
    October 5, total Treasury commitments to these five PPIFs amounts to
    $16.67 billion, of which $9.20 billion has been closed on. Including
    private capital, total PPIP closings to date amount to $12.27 billion.
    Fund managers have established relationships with small, minority- and
    women-owned businesses. Following an initial closing, each PPIF will
    have the opportunity for two more closings over the following 6 months
    to receive matching Treasury equity and debt financing, with a total
    Treasury equity and debt investment in all PPIFs equal to $30 billion
    ($40 billion including private investor capital).
        Financial market conditions have improved since the early part of
    this year, and many financial institutions have raised substantial
    amounts of capital as a buffer against weaker than expected economic
    conditions. However, these legacy assets are still highly illiquid
    despite significant increases in the prices of many of these
    securities. The difficulty of obtaining private financing on reasonable
    terms to purchase these assets has limited the ability of investors to
    reduce liquidity discounts in legacy assets. The lack of clarity about
    the value of these legacy assets has also made it difficult for some
    financial institutions to raise new private capital and has continued
    to clog balance sheets.
        One of the PPIP's primary objectives is to facilitate price
    discovery and reduce excessive liquidity discounts that have been
    embedded in legacy asset prices. As capital is freed up, U.S. financial
    institutions should engage in new credit formation. Furthermore,
    enhanced clarity regarding the value of legacy assets should increase
    investor confidence and enhance the ability of financial institutions
    to raise new capital from private investors. Finally, an inherent link
    exists between the new issue securitization market and the secondary
    market performance of legacy assets. As spreads compress in the legacy
    asset market, new securitization issuance should come to market at
    reasonable borrowing costs. The new issue securitization market is an
    absolutely critical component of lending in the economy.
                               regulatory reform
        Question. Clearly, our financial regulatory system must be
    addressed since it played a role in the current credit crisis. One of
    the core issues is how to address ``too big to fail'' companies. Some
    argue that ``too big to fail'' is now ``too big to exist.''
        Is anti-trust reform being considered as part of the
    Administration's regulatory reform proposal? How are you proposing to
    align the incentives properly to prevent future irresponsible behavior
    by financial institutions and future taxpayer-funded bailouts?
        Answer. While effective enforcement of anti-trust laws is an
    important part of protecting consumers and competition in the financial
    sector, we have not proposed anti-trust reform as part of our
    regulatory reform proposals. We do not believe that the risks we
    propose to address are directly related to competition issues that can
    be addressed through an anti-trust framework.
        In the past 2 years, we learned that the system was not resilient
    enough to bear the failure of a large, interconnected firm or contain
    the damage from such a failure on the broader economy. The problem was
    that such firms had not been required to maintain sufficient capital
    and liquidity cushions and were not supervised on a consolidated basis.
    In other words, they were not required to internalize the risks they
    presented to the financial system. Our plan fixes that.
        Under our plan, firms that could present risks to the stability of
    the financial system if they failed will be subject to much higher
    standards so that the risk of failure will be lower. Moreover, our
    special resolution regime for nonbank financial firms gives the
    government an effective tool for an orderly resolution, in which
    creditors and counterparties may share in the losses rather than a
    bailout. In addition, we will reduce incentives for risk taking by
    reforming and raising capital standards for financial firms and working
    to address misalignment of incentives in specific markets, like the
    securitization markets, through such steps as requiring originators or
    sponsors to maintain an economic interest in the performance of a
    securitization.
        Finally, we have proposed steps to align the compensation of
    executives with the long-term interests of shareholders so that they do
    not have incentives for excessive risk-taking--both through regulation
    and supervision of financial firms and through corporate governance
    reform, such as ``say on pay'' legislation and legislation requiring
    independent compensation committees on corporate boards of directors.
                          social and economic missions
        Question. There is growing concern about asking weakened financial
    institutions to carry out the government's economic and social
    policies. While I understand the pressure to have bailed-out banks more
    engaged in efforts such as foreclosure mitigation, the danger is more
    financial losses that will be covered with more taxpayer funds.
    Further, this leads to more government involvement in dictating private
    business practices.
        What is the Administration's exit strategy when it comes to those
    financial institutions--such as Fannie and Freddie, Citi--who are being
    required by the government to carry out various social policy programs?
    How will you avoid the negative consequences of forcing these entities
    to fulfill the inherent conflicting goals of serving shareholders and
    meeting the needs of the public good?
        Answer. Given the important role that Fannie Mae and Freddie Mac
    play in the mortgage market, their participation in efforts to reduce
    preventable foreclosures is vital to speeding the housing recovery. The
    future of Fannie Mae and Freddie Mac will require careful consideration
    of the appropriate role of the Federal government in the mortgage
    market. The Administration has committed to undertaking a wide-ranging
    initiative to develop recommendations by early next year on the future
    of Fannie Mae and Freddie Mac. There are a number of options for the
    reform of the GSEs, including: (i) returning them to their previous
    status as GSEs with the paired interests of maximizing returns for
    private shareholders and pursuing public policy home ownership goals;
    (ii) gradually winding-down their operations and liquidating of their
    assets; (iii) incorporating the GSEs' functions into a federal agency;
    (iv) introducing a public utility model, in which the government
    regulates the GSEs' profit margin, sets guarantee fees, and provides
    explicit backing for GSE commitments; (v) instituting a conversion to
    providing insurance for covered bonds; or (vi) dissolving Fannie Mae
    and Freddie Mac into many smaller companies.
        The 2008 Housing and Economic Recovery Act (HERA) reformed and
    strengthened the regulation of Fannie Mae and Freddie Mac by
    establishing a Federal Housing Finance Agency (FHFA) as a new
    independent regulator. In addition to the establishment of FHFA, HERA
    also provided FHFA with enhanced authority to develop regulations
    regarding the safety, soundness, and the mission activities of Fannie
    Mae and Freddie Mac.
                                  stress tests
        Question. Many experts question the reliability of the stress tests
    that were conducted on the large banks. Some believe that the results
    are too optimistic because the tests were too lenient and banks
    bargained with the government to reduce their capital needs. Further,
    to meet the capital levels required by the stress test results, it was
    reported that banks are relying on preferred-stock conversions for 22
    percent of their fundraising. One financial expert stated that
    ``Conversions from preferred to common don't do anything; you can just
    ignore them.''
        Do you stand by these tests? If so, can you assure the American
    taxpayer that they will not be asked to fund additional rounds of
    bailouts for these large banks? Will you conduct more stress tests? If
    so, under what circumstances would you conduct more stress tests?
        Answer. The Supervisory Capital Assessment Process (SCAP) or
    ``stress test'' was a carefully designed, stringent test. The test was
    designed to account for the highly uncertain financial and economic
    conditions by identifying the extent to which our largest banks are
    currently vulnerable to a weaker than expected economy in the future.
        Supervisors applied a historically high set of loss estimates on
    securities and loans, as well as a conservative view towards potential
    earnings that could act as a buffer against those losses. For instance,
    the 2-year, loan-loss rate assumed under the ``more adverse'' scenario
    exceeds the observed 2-year loss rates for U.S. commercial banks from
    1920 to present.
        Since the stress test results were announced more than $80 billion
    of total private capital has been raised by the 19 participating
    institutions. This additional private capital reduces the likelihood
    that the U.S. government will need to inject additional public capital
    into the banking system. Treasury must balance the desire to exit its
    investments in private sector entities as quickly as is practicable
    with the need to ensure that such a withdrawal does not put the
    progress that the Obama Administration has made in restoring financial
    stability at risk. To that end, Treasury will continue to provide
    support where it is necessary to sustain confidence in the financial
    system and to support critical channels of credit to households and
    businesses. The SCAP focused not only on the amount of capital but also
    on the composition of capital held by the largest banks. That is, SCAP
    focused on the proportion of capital that is common equity. The SCAP's
    emphasis on common equity reflects the fact that common equity is the
    first element of the capital structure to absorb losses, offering
    protection to more senior parts of the capital structure and lowering
    the risk of insolvency. All else equal, more common equity gives a bank
    greater permanent loss absorption capacity and a greater ability to
    conserve resources. Therefore, while we were particularly pleased with
    the record amounts of new common equity that was raised following the
    SCAP, we also believe that exchanges of preferred stock for common
    stock have enhanced the ability of some of our largest institutions to
    withstand a weaker than expected economic scenario.
        Currently there are no plans to conduct another stress test of the
    largest banks.
                                 protectionism
        Question. Despite history's lessons on how protectionism
    contributed to the Great Depression, there continues to be active
    efforts from some in Congress to push trade protectionism, which will
    clearly endanger our economic recovery. There are reports that the
    ``Buy American'' provision in the stimulus has slowed down some
    projects and has contributed to some job losses. Now, there is an
    effort on the House side that is pushing protectionism further on
    climate change legislation by tying federal aid to companies that only
    develop and produce plug-in cars in the United States.
        What is the Administration's official policy on protectionism and
    free trade? What is the Administration doing to prevent the growth of
    protectionism? Will it work to stop these types of protectionist
    measures?
        Answer. President Obama has clearly stated that trade is a key
    engine for U.S. economic growth and job creation. The President has
    also emphasized the importance of avoiding protectionism in responding
    to the financial and economic crisis.
        As part of the commitment made by G-20 Leaders to avoid
    protectionist trade measures, the World Trade Organization (WTO) was
    tasked to monitor and report on trade and trade policy-related
    reactions to the financial and economic crisis, a process in which the
    United States actively participates. While continued vigilance is
    important, thus far the process appears to be working--in large part
    due to the presence of WTO rules and the effect of very visible
    individual and collective monitoring. Moreover, where protectionist
    measures are identified, the United States will engage our trading
    partners in both bilateral and multilateral settings. Enforcement of
    WTO rules is a top priority.
        With respect to the American Recovery and Reinvestment Act of 2009,
    we appreciate that Congress responded to the President's call to avoid
    protectionism in responding to the financial crisis and included a
    provision in the Recovery Act that ensures that the ``buy American''
    requirement is applied in accordance with U.S. international agreements
    on government procurement. Public comments have been solicited on an
    interim Federal procurement rule and interim OMB guidance implementing
    the ``buy American'' requirement in the Recovery Act. After a thorough
    review of the public comments, a final rule and final OMB guidance will
    be prepared with the aim of ensuring that the law is implemented
    effectively and consistently with the objective of promoting economic
    recovery and job creation.
        As the Congress prepares legislation, the Administration will
    continue to review proposed bills with a view to ensuring that they
    avoid protectionism and that they are fully consistent with our
    international trade obligations.
                            repayment of tarp funds
        Question. The Administration has begun some banks to repay funds
    from the Troubled Asset Relief Program (TARP).
        For these cases--especially those who are still considered ``too
    big to fail''--how can you assure the taxpayer that they will not
    return to the government trough for more bailout funds? Can you
    definitely say that they will not be back for more taxpayer-funded
    bailouts?
        Answer. The government's Supervisory Capital Assessment Program
    (SCAP), the so-called ``stress test'', estimated the capital needs for
    major banks under an adverse economic scenario. In particular, the SCAP
    estimated losses that those banks are likely to incur through 2010 and
    the appropriate level of loan loss reserves at the end of that period.
    The estimated losses and the required level of reserves took into
    account the potential for significant additional declines in housing
    prices and further increases in mortgage defaults resulting from, among
    other things, interest rate resets. We believe that the SCAP captured
    the likely capital needs of the major banks under an economic scenario
    that is more adverse than what we, and private forecasters, expect.
    Since the stress test results were announced, many major banks have
    raised a substantial amount of new private capital. This additional
    private capital reduces the likelihood that the U.S. government will
    need to inject additional public capital into the banking system.
    Treasury must balance the desire to exit its investments in private
    sector entities as quickly as is practicable with the need to ensure
    that such a withdrawal does not put the progress that the Obama
    Administration has made in restoring financial stability at risk. To
    that end, Treasury will continue to provide support where it is
    necessary to sustain confidence in the financial system and to support
    critical channels of credit to households and businesses.
                                  auto rescue
        Question. The Administration has orchestrated and forced the car
    companies into bankruptcy but seems to be reluctant to force failed
    large financial institutions like Citi into restructuring.
        Why are you treating failed financial institutions differently from
    GM and Chrysler? If Citi is not forced into a FDIC-like restructuring,
    how can you assure the taxpayer that they will not return for
    additional bailouts?
        Answer. In acting to help financial institutions such as Citigroup
    and the automotive industry, the overarching goals of the
    Administration have been the same: promote the liquidity and stability
    of the financial system and protect the taxpayer. The actions taken
    have depended on the particular circumstances facing the different
    institutions.
        The Administration took action to help the automotive industry in
    order to prevent a significant disruption to the industry, as
    conditions in the industry posed a risk of creating significant
    disruptions to financial market stability and negative effects on the
    real economy of the United States. One of the conditions on which the
    Administration initially provided loans to these companies was that
    they develop viability plans. As a result of development and
    consideration of these plans, it became clear that the best way to
    achieve viability was for GM and Chrysler to substantially restructure
    their businesses. Due to a variety of factors, Chapter 11 bankruptcy
    proved to be the most effective means of accomplishing this important
    goal.
        Last fall, the Administration and Congress believed quick, forceful
    action was necessary to stabilize the financial system and certain
    financial firms. With Congressional authorization, these actions were
    taken to meet the specific needs of the time and to address the
    distinct difficulties faced by financial firms as a result of the
    crisis. The Treasury initially provided support to Citigroup on the
    same terms as over 650 institutions received funding pursuant to the
    Capital Purchase Program. The Treasury subsequently determined that
    additional assistance was needed to Citigroup pursuant to the Targeted
    Investment Program. This program is used when an institution is
    sufficiently important to the nation's financial and economic system
    that a loss of confidence in the firm's financial position could
    potentially cause major disruptions to credit markets or payments and
    settlement systems, destabilize asset prices, significantly increase
    uncertainty, or lead to similar losses of confidence or financial
    market stability that could materially weaken overall economic
    performance. This assistance is provided on terms that are more
    restrictive than those under the CPP program. These include more
    stringent restrictions related to executive compensation, dividend
    payments, share repurchases, corporate expenses, internal controls and
    other matters.
        Citigroup was also one of the banks examined as part of the
    government's Supervisory Capital Assessment Program (SCAP), the so-
    called ``stress test'', which estimated the capital needs for major
    banks under an adverse economic scenario. In particular, the SCAP
    estimated losses that those banks are likely to incur through 2010 and
    the appropriate level of loan loss reserves at the end of that period.
    The estimated losses and the required level of reserves took into
    account the potential for significant additional declines in housing
    prices and further increases in mortgage defaults resulting from, among
    other things, interest rate resets. We believe that the SCAP captured
    the likely capital needs of the major banks, including Citigroup, under
    an economic scenario that is more adverse than what we, and private
    forecasters, expect. Since the stress test results were announced, many
    major banks have raised a substantial amount of new private capital.
    This additional private capital reduces the likelihood that the U.S.
    government will need to inject additional public capital into the
    banking system. Treasury must balance the desire to exit its
    investments in private sector entities as quickly as is practicable
    with the need to ensure that such a withdrawal does not put the
    progress that the Obama Administration has made in restoring financial
    stability at risk. To that end, Treasury will continue to provide
    support where it is necessary to sustain confidence in the financial
    system and to support critical channels of credit to households and
    businesses.
                            Internal Revenue Service

    STATEMENT OF DOUGLAS H. SHULMAN, COMMISSIONER
        Senator Durbin. I am pleased to welcome Douglas Shulman,
    now well-immersed in his second year of a 5 year term as the
    47th Commissioner of the Internal Revenue Service. Thank you
    for your service and your pledge to lead the IRS from good to
    great.
        Each year, IRS employees make hundreds of millions of
    contacts with American taxpayers and businesses and represent
    the face of our Government to more U.S. citizens than any other
    agency. With approximately 93,000 employees, the IRS is
    effectively the accounts receivable department of the United
    States.
        In fiscal year 2008, the IRS collected $2.7 trillion, 96
    percent of total Federal receipts. Simply stated, the more
    revenue the IRS collects, the more revenue Congress has
    available to deal with some of the challenges facing our Nation
    and the more revenue we have available to ease the tax burden
    on those citizens we believe to be deserving of that.
    Conversely, the less revenue, the less revenue Congress has for
    tax cuts or for worthy expenditures.
        The President's proposed budget of $12.126 billion for the
    IRS is an overall increase of 5.2 percent above the fiscal year
    2009 enacted level, which supports 95,081 full-time equivalents
    (FTEs) and an additional 2,376 above the current fiscal year
    2009 base.
        Mr. Commissioner, thank you for your patience. Thank you
    for joining us. Senator Collins and others may have some
    questions along with mine after you've given your presentation.
    The floor is yours.

                   OPENING STATEMENT OF COMMISSIONER SHULMAN

        Commissioner Shulman. Thank you Chairman Durbin and Ranking
    Member Collins. I appreciate the opportunity to testify about
    the IRS's fiscal year 2010 budget.
        Over the past year, I think the agency has shown that it
    can improve performance and be agile and respond to changing
    situations. I often say that we need to excel at both service
    and enforcement. It's not an either/or proposition. And I
    believe this budget will allow us to make continuous
    improvements in both our service and our enforcement, as well
    as in technology and the workforce.
        As the Secretary mentioned, the President's budget requests
    $332 million in additional enforcement initiatives. This set
    includes a robust set of international enforcement initiatives
    that the President, the Secretary, and I unveiled on May 4.
        Increased resources for IRS compliance initiatives have
    direct measurable results through a return on investment, and
    this $332 million will yield about $2 billion a year once it
    becomes fully operational in 2012.
        In addition, we've asked for money so we can continue to
    improve our service, including face-to-face, telephone, web-
    based, and self-service service models. I believe it is
    incredibly important and fundamental to keeping honest
    taxpayers in the system that we have world-class service. And
    it's a key part of bringing in the $2.5 trillion it takes to
    run the Government every year.
        And as you mentioned, Mr. Chairman, we are the face of the
    American Government to more people than any other agency. In
    this regard, I also want to point out to the subcommittee that
    I plan to deliver recommendations to the President and the
    Treasury Secretary by the end of this year on how we, the IRS,
    can better leverage the tax return preparer community to
    increase compliance and ensure high ethical standards of
    conduct for paid preparers.
        Over 80 percent of the American people use either tax
    software or a paid preparer to prepare their return each year.
    This has been a transformational shift in the way taxes are
    prepared. And because paying taxes is one of the largest
    financial transactions that individual Americans have each
    year, we need to make sure that the professionals who serve
    them are ethical and that they ensure the right amount of taxes
    are paid.
        I'm also pleased to report that we've moved, for the second
    year in a row, to enact stimulus legislation. This year we
    implemented major provisions of the American Recovery and
    Reinvestment Act, getting money into the hands of individuals,
    as well as small businesses.
        Let me turn briefly to our ongoing effort to modernize our
    core taxpayer account database. We have consistently delivered
    on commitments over the last several years. This year I have
    adopted a much more focused strategy, which will allow the IRS
    to complete the taxpayer database conversion on an accelerated
    timeframe. We're doing this by gradually shifting course from
    simultaneously developing the database and the associated
    applications, to a more streamlined focus on completing the
    modernized database. This is going to be key to our future
    success, to future on-line services, and to new compliance and
    enforcement systems.
        This budget also reflects our long-term commitment to
    efficiency savings and productivity. With e-filing going up,
    I'll just note we've consolidated processing centers into 5
    sites instead of 10, and we project 5 year savings to be over
    $100 million.
        And finally, let me just point out three important
    legislative changes in the President's budget. There are many
    on which we worked and I support them all. Three very important
    ones are: one, the robust set of international legislative
    proposals which will be essential to us curbing offshore tax
    abuse; two, the proposal to require tax preparers that have a
    certain volume of tax filings to file electronically; and
    three, the proposal that we eliminate the 20 percent
    downpayment for a taxpayer who comes in trying to enter a offer
    in compromise with us. Those are often taxpayers in financial
    distress and right now they have to put 20 percent down.
    There's been some decrease in the program and we want to get
    the program back up and so we are recommending getting rid of
    that 20 percent payment.

                               PREPARED STATEMENT

        Mr. Chairman and Ranking Member Collins, thank you again
    for the opportunity to testify. I am happy to answer any
    questions.
        [The statement follows:]
                    Prepared Statement of Douglas H. Shulman
                                  introduction
        Chairman Durbin, Ranking Member Collins, and Members of the
    Subcommittee, thank you for the opportunity to appear today to discuss
    the President's fiscal year 2010 budget request for the Internal
    Revenue Service. The President's budget represents a strategic and wise
    investment in the Nation's tax system and will help the IRS stay on a
    path of continuous improvement in such critical areas as service,
    enforcement, technology, and human capital.
        Through its service delivery, the IRS is often the face of
    government to the American people. The IRS is the only agency that
    interacts with every business, every taxpaying individual, and every
    non-profit organization each year. We have that rare opportunity to
    influence how people think about their government.
        In terms of service, I believe that taxpayers want to come to the
    IRS, get their questions answered and issues resolved quickly, and be
    on their way. It sounds simple, but in a time of increasing complexity
    of the tax law, and challenging economic circumstances, achieving this
    goal will require discipline, focus, and resources. Our service
    operations must be designed with the taxpayer experience as the
    ultimate measure of our success.
        We also need a vigorous and effective enforcement program. In
    today's tough economic environment, it is more important than ever that
    every citizen feels confident that individuals and corporations are
    paying the taxes they owe.
        The American people who play by the rules every day expect the IRS
    to pursue those taxpayers who do not pay their taxes, and we are
    vigorously enforcing the tax law. We are focusing on current
    enforcement initiatives, such as in the international arena, while
    seeking to evolve and innovate. We can also hone our enforcement
    techniques by adding new tools, such as more information reporting,
    soft notices, and self-correction.
        Of course, all of our efforts depend upon the people of the IRS. We
    must ensure that we have talented and capable leaders and employees for
    the foreseeable future at the IRS, and that they have the tools and
    resources they need to succeed.
        We also need to continue moving our technology to the next level.
    The tax system, America's taxpayers, and the approximately $2.5
    trillion of revenue depend on it.
        Finally, as I announced last week, I plan to make recommendations
    by the end of the year to Secretary Geithner and the President on how
    to better leverage the tax preparer community to increase taxpayer
    compliance and ensure uniform and high ethical standards of conduct for
    preparers. Today, over 80 percent of taxpayers use either a tax return
    preparer or third-party software to complete their returns. This is
    nothing less than a transformational shift in tax administration. The
    first part of the review I plan to undertake will involve fact finding
    and receiving input from a large and diverse constituent community.
    Paying taxes is one of the largest financial transactions individual
    Americans have each year, and we need to make sure that professionals
    who serve them are ethical and ensure the right amount of tax is paid.
                     a firm foundation upon which to build
        The IRS has a firm foundation upon which to build. Let me briefly
    highlight some key trends that demonstrate both across-the-board
    performance improvements and the IRS' ability to be agile and respond
    quickly to changing situations.
    Service
        As of May 9th, for the 2009 filing season, the IRS has received
    133.2 million total individual returns and has issued 102.3 million
    refunds, for a total of $278.5 billion. A record 91.6 million tax
    returns were electronically filed this year--a major milestone for the
    IRS and testament to our commitment to a robust electronic tax
    administration program. So far this filing season, the e-filing rate is
    almost 70 percent for individuals, as compared to 61 percent for the
    same time period last year.
        This year, there was also a surge in e-file from home computers.
    More than 31 million people prepared their own e-file return,
    representing more than a 19 percent increase from the previous year.
    And there were almost 200 million visits to IRS.gov, comparable to last
    year.
        Taxpayers could also find on the IRS Web site the latest
    information about the American Recovery and Reinvestment Act (ARRA),
    including details on extending health insurance for people who lost
    their jobs and tax breaks for first-time homebuyers. In addition, the
    IRS has developed ``What If'' scenarios and the possible tax
    implications for people who may be facing financially difficult times.
    American Recovery and Reinvestment Act
        The IRS is proud of the role it has played, and will continue to
    play in helping to implement, provide guidance, and publicize many of
    the provisions of the ARRA that will assist both individuals and
    businesses in economic distress and is getting the Nation back on the
    road to economic recovery.
        For example, a mere 4 days after President Barack Obama signed ARRA
    into law, the Treasury Department and the IRS swung into action in
    record time, developing new withholding tables to ensure money would
    get into American's pockets through the Make Work Pay Credit.
        In March, the IRS announced that businesses with deductions
    exceeding their income in 2008 can use a new net operating loss tax
    provision to get an expedited refund of taxes paid in prior years. This
    provision could throw a lifeline to struggling businesses, providing
    them with a quick infusion of cash. We are also making it as easy as
    possible for businesses large and small to take advantage of these
    benefits.
        We have shifted resources to deal with the expected growth of
    bankruptcies and business workouts. Moreover, we worked with the
    Treasury Department on a number of regulations that clarified rules to
    unclog the credit markets.
        On the individual front, we have taken a broad approach. Through a
    series of massive, nation-wide outreach efforts, such as ``Super
    Saturday,'' we wanted to make sure that even more taxpayers are aware
    of every credit, deduction, and exclusion for which they qualify,
    including several new benefits this year.
        Our message to taxpayers was that we are going the extra mile to
    help those in economic distress. We want to get them their refunds as
    quickly as possible. And if they think they can't pay, we ask them to
    come in and talk about it. There are steps we can take to help.
        The bottom line is that we need to be flexible yet principled and
    to empower our employees to use their judgment when dealing with these
    taxpayers in areas such as missed payments and postponing collection
    actions.
        This year there are also a variety of new benefits and tax credits
    the IRS is administering that can also help energize the economy and
    generate much needed jobs. We are working with the media and other
    stakeholder groups to get out the message about their availability.
    Enforcement
        In fiscal year 2008, both the levels of individual returns examined
    and coverage rates rose substantially. We conducted nearly 1.4 million
    examinations of individual tax returns in fiscal year 2008, an 8
    percent increase over fiscal year 2006. This reflects a steady and
    sustained growth over the past 3 years. Similarly, the audit coverage
    rate has risen from 0.58 percent in fiscal year 2001 to 1.01 percent in
    fiscal year 2008.
        While the growth in examinations of individual returns is visible
    in all income categories, it is most apparent in examinations of
    individuals with incomes over $200,000. Audits of these individuals
    increased from 105,549 in fiscal year 2007 to 130,751 during fiscal
    year 2008, an increase of 24 percent. Their coverage rate has risen
    from 2.68 percent in fiscal year 2007 to 2.94 percent in fiscal year
    2008.
        In the business arena, audit coverage rates for small corporation
    returns (assets under $10 million) increased slightly over fiscal year
    2007 by .03 percent. Of note, coverage rates for three classes of large
    corporations with assets between $50 million and $250 million and
    higher all increased. Coverage rates for partnership returns stayed
    even as compared to fiscal year 2007, while Subchapter S returns
    reflected a small .05 percent drop due largely to the increase in
    number of S-corporations. The coverage rate for tax-exempt
    organizations increased slightly.
        IRS Criminal Investigation has also been vigorously attacking
    egregious tax avoidance, money laundering, and other financial crimes
    that have a corrosive effect on our tax system. For example, overall
    number of individuals charged in an information or indictment rose from
    2,323 in fiscal year 2007 to 2,547 in fiscal year 2008.
        Over the same period of time, prosecution recommendations for
    employment tax evasion more than doubled. The incarceration rate in
    these investigations was 81 percent and the average sentence was 29
    months.
        In fiscal year 2008, IRS-developed cases related to foreign and
    offshore issues also resulted in 61 criminal convictions, and the
    average term for those going to jail was 32 months. For the first 4
    months of fiscal year 2009, there were 20 convictions, and the average
    sentence was 84 months.
    IRS Workforce
        In late fiscal year 2008, the IRS established the Workforce of
    Tomorrow task force to address recruitment and retention issues so that
    the IRS has the necessary leadership and workforce in place to address
    future challenges.
        The IRS considers employee engagement fundamental to the overall
    success of the organization and believes that employee engagement is an
    ongoing process. The IRS conducts an annual survey to assess the level
    of engagement of employees. Overall satisfaction showed steady
    improvement from a score of 3.48 in 2002 to a score of 3.79 in 2008, on
    a scale of 1 to 5, with 5 being the most satisfied.
        IRS job satisfaction is higher than most other Federal agencies,
    according to the Office of Personnel Management's Federal Human Capital
    Survey.
        the administration's fiscal year 2010 budget request funds key
                                   priorities
        Total resources to support IRS activities for fiscal year 2010 are
    $12,440,801,000. This amount includes $12,126,000,000 from direct
    appropriations, an estimated $147,101,000 from reimbursable programs,
    and an estimated $167,700,000 from user fees. The direct appropriation
    is a $603,402,000 increase, or a 5.2 percent increase over the fiscal
    year 2009 enacted level of $11,522,598,000. This amount excludes
    funding to implement the ARRA.
        The IRS continues to achieve efficiency savings in its operations.
    Because of the increase in e-filing, the IRS has effectively revised
    base operations and continues to implement savings resulting from the
    consolidation of an additional two of the paper processing sites. This
    consolidation has already resulted in significant savings and will
    continue to do so.
        The IRS Strategic Plan 2009-2013 guides program and budget
    decisions and supports the Department of the Treasury Strategic Plan.
    The IRS Strategic Plan builds on past successes while being innovative
    and adapting to new situations, such as the increasing complexity of
    tax laws, changing business models, expanding use of electronic data
    and related security risks, accelerating growth in international tax
    activities, and growing human capital challenges. I am a firm believer
    that organizations must always be evolving, changing, and improving and
    the strategic plan reflects that philosophy.
        The IRS Strategic Plan has two overarching goals: (1) improve
    service to make voluntary compliance easier; and (2) enforce the law to
    ensure everyone meets their obligation to pay taxes. The IRS must excel
    at both service and enforcement to meet its mission; it is not an
    either-or proposition.
        To improve service and make voluntary compliance easier, the fiscal
    year 2010 President's budget request for IRS provides the necessary
    funding to implement the following key strategic priorities.
    Enforcement Program
        The fiscal year 2010 President's budget request includes program
    increases of $332.2 million for investments in strong compliance
    programs, including a robust portfolio of international enforcement
    initiatives that the President and Treasury Secretary Geithner and I
    unveiled on May 4, 2009.
        The international initiatives include reforming business tax
    deferral rules so that--with the exception of research and
    experimentation expenses that have significant spillover benefits to
    the United States--companies cannot receive deductions on their U.S.
    tax returns supporting their offshore investments until they pay U.S.
    taxes on their offshore profits. The Administration also seeks to
    prevent abuse of the foreign tax credit.
        In addition, getting tough on overseas tax havens is an integral
    part of the Administration's plan. It would reform the so-called
    ``check-the-box'' rules to require certain foreign subsidiaries to be
    considered as separate corporations for U.S. tax purposes. It would
    also crack down on the abuse of tax havens by wealthy Americans. For
    example, the Administration proposes withholding taxes from U.S.
    customer accounts at foreign institutions doing business with the
    United States but which don't share information with the IRS through
    the ``Qualified Intermediary'' program. To further combat abuse, the
    Administration proposes extending the statute of limitations for
    international tax enforcement to 6 years.
        The Administration's full budget describes additional international
    tax reform proposals. Other legislative proposals to improve compliance
    and strengthen tax administration can be found later in this testimony.
    A key focus of our strategy is to shift enforcement resources so we can
    expand programs targeted at non-compliance among large corporations,
    U.S. business with international operations, high net-worth
    individuals, flow-through entities and partnerships.
        Increased resources for the IRS compliance programs yield direct
    measurable results through high return-on-investment activities. The
    new enforcement personnel funded in the fiscal year 2010 President's
    budget are expected to generate $2.0 billion in additional annual
    enforcement revenue once the new hires reach full potential in fiscal
    year 2012. This estimate does not account for the deterrent effect of
    IRS enforcement programs, which are conservatively estimated to be at
    least three times larger than the direct revenue impact.
        The tax law is complex, and even sophisticated taxpayers make
    honest mistakes on their tax returns. Accordingly, helping taxpayers
    understand their obligations under the tax law is critical to improving
    compliance. To this end, the IRS remains committed to a balanced
    program of assisting taxpayers in both understanding the tax law and
    paying the proper amount of tax.
    Taxpayer Service Program
        The fiscal year 2010 President's budget request continues
    improvements to both the quality and efficiency of taxpayer service,
    using a variety of person-to-person, telephone, and web-based and self-
    serve methods to help taxpayers understand their tax obligations and
    pay what they owe. The IRS taxpayer service program is funded in the
    Taxpayer Services and Operations Support appropriations. It should be
    noted that service investments and strategy are guided by the Taxpayer
    Assistance Blueprint--a 5-year plan that outlines the steps the IRS
    should take to improve taxpayer service and the IRS strategic plan.
        Providing quality taxpayer service is fundamental to keeping honest
    taxpayers in the tax system and compliant. It also helps them avoid
    making unintentional errors before returns are filed, which, in turn,
    reduces the need for follow-up correspondence from the IRS.
        The IRS provides year-round assistance to millions of taxpayers,
    including outreach and education programs, issuance of tax forms and
    publications, rulings and regulations, toll-free call centers, the
    IRS.gov web site, Taxpayer Assistance Centers (TACs), Volunteer Income
    Tax Assistance (VITA) sites, and Tax Counseling for the Elderly (TCE)
    sites.
        For example, in the Small Business arena alone, in fiscal year
    2008, the IRS participated in over 2,600 meetings, symposiums, and
    seminars attended by over 162,000 small business owners and tax
    professionals. The IRS also holds national and local Small Business
    Forums which provide an open avenue of communication between IRS and
    trade and industry groups. We held 135 Small Business Forums and
    facilitated 410 Small Business Tax Workshops in fiscal year 2008.
    American Recovery and Reinvestment Act
        As noted in the introduction, the IRS is now implementing a number
    of ARRA tax provisions, including individual tax credits, such as the
    Make Work Pay credit; energy credits for certain appliances, education
    credits, and child credits; tax incentives for business; bond
    incentives; and a tax credit to provide discounted health benefits to
    certain workers who have lost their jobs. The IRS will be able to
    continue to implement and administer these critical tax programs within
    the levels contained in this budget request.
                        explanation of budget activities
    Enforcement
        The fiscal year 2010 President's budget request is $5,504,000,000
    in direct appropriations and an estimated $60,797,000 from reimbursable
    programs, plus an estimated $7,800,000 from user fees\1\, for a total
    operating level of $5,572,597,000. The direct appropriations level is
    an increase of 7.6 percent from the fiscal year 2009 enacted level and
    includes $600,000,000 to support tax enforcement activities funded by
    an allocation adjustment. This appropriation funds the following budget
    activities.
    ---------------------------------------------------------------------------
        \1\ Note that user fees are available to supplement appropriations
    contingent on demand for user fee services and receipt of fees. These
    amounts are subject to change.
    ---------------------------------------------------------------------------
        Investigations ($637,694,000 from direct appropriations and an
    estimated $51,553,000 from reimbursable programs).--This budget
    activity funds the criminal investigations programs that explore
    potential criminal violations of the internal revenue tax laws, enforce
    criminal statutes relating to these violations, and recommend
    prosecution as warranted. These programs identify and document the
    movement of both legal and illegal sources of income to identify and
    document cases of suspected intent to defraud. It also includes
    investigation and prosecution of tax and money laundering violations
    associated with narcotics organizations.
        Exam and Collections ($4,706,350,000 from direct appropriations, an
    estimated $8,783,000 from reimbursable programs, and an estimated
    $7,800,000 from user fees).--This budget activity funds programs that
    enforce the tax laws and compliance through examination and collection
    programs that ensure proper payment and tax reporting. The budget
    activity also supports appeals and litigation activities associated
    with exam and collection.
        Regulatory ($159,956,000 from direct appropriations and an
    estimated $461,000 from reimbursable programs).--This budget activity
    funds the development and printing of published IRS guidance materials;
    interpretation of tax laws; advice on general legal servicing, ruling
    and agreements; enforcement of regulatory rules, laws, and approved
    business practices; and supporting taxpayers in the areas of pre-filing
    agreements, determination letters, and advance pricing agreements.
        The Office of Professional Responsibility is funded within this
    budget activity and is responsible for identifying, communicating, and
    enforcing the Treasury Circular 230 standards of competence, integrity,
    and conduct of professionals representing taxpayers before the IRS.
    Taxpayer Services
        The fiscal year 2010 President's budget request is $2,269,830,000
    in direct appropriations, an estimated $39,000,000 from reimbursable
    programs, and an estimated $127,000,000 from user fees, for a total
    operating level of $2,435,830,000. The direct appropriations level is a
    reduction of 1.0 percent from the fiscal year 2009 enacted level,
    though it does not represent a program reduction due to non-recurrent
    activities and savings. This appropriation funds the following budget
    activities.
        Pre-Filing Taxpayer Assistance and Education ($676,063,000 from
    direct appropriations, an estimated $819,000 from reimbursable
    programs, and an estimated $18,700,000 from user fees).--This budget
    activity funds services to assist with tax return preparation,
    including tax law interpretation, publication production, and advocate
    services. In addition, funding for these programs continues to
    emphasize taxpayer education, outreach, increased volunteer support
    time and locations, and enhancing pre-filing taxpayer support through
    electronic media.
        Filing and Account Services ($1,593,767,000 from direct
    appropriations, an estimated $38,181,000 from reimbursable programs,
    and an estimated $108,300,000 from user fees).--This budget activity
    funds programs that provide filing and account services to taxpayers,
    process paper and electronically submitted tax returns, issue refunds,
    and maintain taxpayer accounts. The IRS continues to make progress in
    decreasing paper returns and increasing the use of electronic filing
    and payment methods. As previously noted, a record 90 million tax
    returns were filed electronically this year.
    Operations Support
        The fiscal year 2010 President's budget request is $4,082,984,000
    in direct appropriations, an estimated $47,304,000 from reimbursable
    programs, and an estimated $32,900,000 from user fees, for a total
    operating level of $4,163,188,000. The direct appropriation level is an
    increase of 5.6 percent from the fiscal year 2009 enacted level and
    includes $290,000,000 of support funding for enhanced enforcement
    activities. This appropriation funds the following budget activities.
        Infrastructure ($900,852,000 from direct appropriations, an
    estimated $155,000 from reimbursable programs, and an estimated
    $16,100,000 from user fees).--This budget activity funds administrative
    services related to space and housing, rent and space alterations,
    building services, maintenance, guard services, and non-Automated Data
    Processing (ADP) equipment.
        Shared Services and Support ($1,296,629,000 from direct
    appropriations and an estimated $32,228,000 from reimbursable
    programs).--This budget activity funds policy management, IRS-wide
    support for research, strategic planning, communications and liaison,
    finance, human resources, and equal employment opportunity and
    diversity services and programs. It also funds printing and postage,
    business systems planning, security, corporate training, legal
    services, procurement, and specific employee benefits programs.
        Information Services ($1,885,503,000 from direct appropriations, an
    estimated $14,921,000 from reimbursable programs, and an estimated
    $16,800,000 from user fees).--This budget activity funds staffing,
    equipment, and related costs to manage, maintain, and operate the
    information systems critical to the support of tax administration
    programs. The IRS business programs rely on these systems to process
    tax and information returns, account for tax revenues collected, send
    notices for taxes owed, issue refunds, assist in the selection of tax
    returns for audit, and provide telecommunications services for all
    business activities including the public's toll-free telephone access
    to tax information.
    Business Systems Modernization (BSM)
        The fiscal year 2010 President's budget request is $253,674,000 in
    direct appropriations. This amount is an increase of 10.3 percent from
    the fiscal year 2009 enacted level. This appropriation funds the
    planning and capital asset acquisition of information technology (IT)
    to continued modernization of the core taxpayer account database.
        This effort is a critical underpinning of the next generation of
    IRS service and enforcement initiatives. The integration strategy
    includes a particular focus on enhanced information technology security
    practices and robust accounting and financial management controls. This
    activity also funds the ongoing development of the Modernized e-File
    platform for filing tax returns electronically. The account also funds
    BSM labor (salaries and expense dollars) and related contract costs.
    Health Insurance Tax Credit Administration (HITCA)
        The fiscal year 2010 President's budget request is $15,512,000 in
    direct appropriations. This amount is an increase of 0.7 percent from
    the fiscal year 2009 enacted level. This appropriation funds costs to
    administer a refundable tax credit for health insurance to qualified
    individuals, which was enacted as part of the Trade Adjustment
    Assistance Reform Act of 2002 (Public Law 107-210).
                      fiscal year 2010 budget adjustments
        The IRS funding increase for fiscal year 2010 is $603,402,000,
    which includes $256,329,000 for maintaining current levels; a net
    decrease of $115,794,000 from efficiencies, savings and reinvestments;
    and a program increase of $462,867,000 to strengthen enforcement,
    address IT security needs and deploy information technology systems.
    These investments also fund increased front-line enforcement efforts.
    By fiscal year 2012, these investments are projected to increase annual
    enforcement revenue by $2.0 billion.
        The budget request supports these activities by proposing:
      --$332,160,000 to target the tax gap by addressing underreporting of
            tax associated with complex international activities; expanding
            enforcement efforts on noncompliance among business and high-
            income taxpayers; and minimizing revenue loss by increasing
            document matching efforts;
      --$108,100,000 to address critical IT operational and security
            infrastructure needs; and
      --$22,607,000 to accelerate efforts to modernize the core taxpayer
            account database.
    Fiscal Year 2009 Enacted Level
        The fiscal year 2009 enacted level for the IRS is $11,522,598,000,
    supporting an estimated 94,209 FTE.
                Maintaining Current Levels
        Adjustments Necessary To Maintain Current Levels +$260,061,000/0
    FTE.--Funds are requested for: fiscal year 2010 cost of the January
    2009 pay increase of $80,054,000, the proposed January 2010 pay raise
    of $148,894,000, and non-labor related items such as contracts, travel,
    supplies, equipment, and GSA rent adjustments of $31,113,000.
        Government-wide Reduction for Productivity Improvements
    -$13,732,000/0 FTE.--The IRS continues to focus on improving the
    efficiency of its operations through a disciplined process of
    productivity improvement. Additional efficiency savings are outlined in
    the next section.
        GAO Audit Reimbursement Pursuant to Public Law 110-323
    +$10,000,000/0 FTE.--This estimated adjustment will provide funds to
    reimburse the Government Accountability Office (GAO) for the audit of
    the IRS annual financial statements. The IRS must pay this cost
    pursuant to Public Law 110-323. In prior years, GAO conducted the
    financial statement audit for which it did not receive reimbursement.
                Efficiency Savings
        Increase e-File Savings -$8,360,000/-182 FTE.--This decrease is a
    result of savings from increased electronic filing (e-File), which is
    projected to lead to 4.6 million fewer returns filed on paper (2.9
    million individual and 1.7 million business) in fiscal year 2010. This
    is projected to result in a savings of 182 FTE in submission
    processing.
        Non-Recur Savings -$27,074,000/0 FTE.--This decrease is the net
    reduction of one-time costs associated with the IRS fiscal year 2009
    enforcement initiatives.
        Non-Recur Stimulus Savings -$67,900,000/-1,322 FTE.--One-time
    resources were provided in fiscal year 2009 to meet the requirements of
    the Economic Stimulus Act of 2008 (Public Law 110-185).
        Non-Recur Fiscal Year 2009 Reduction Adjustment/Correspondence
    Inventory -$13,439,000/0 FTE.--One-time resources were provided in
    fiscal year 2009 to handle the increased adjustment/correspondence
    workload that resulted from diverting staff from paper correspondence
    to telephone service to meet the requirements of the Economic Stimulus
    Act of 2008 (Public Law 110-185).
        Non-Recur Pension Plan Form Processing -$1,352,000/0 FTE.--This
    decrease results from the funding of the one-time cost in fiscal year
    2009 to test the IRS ERISA (Employee Retirement Income Security Act of
    1974) Residual Solution (IERS) system. This system will process the
    electronic Form 5500, Annual Return/Report of Employee Benefit Plan
    from the new Department of Labor ERISA Filing Acceptance system and the
    paper Form 5500EZ, Annual Return of One-Participant (Owners and Their
    Spouses) Retirement.
                Reinvestment
        Submission Processing Consolidation (Andover) +$2,331,000/0 FTE.--
    Increased use of electronic filing options has led to consolidation of
    the individual return processing sites. Increased e-File savings will
    be reinvested to fund one-time severance pay costs for the ramp-down of
    the Andover submissions processing site. As the Andover consolidation
    approaches, the IRS will continue to assist employees in finding
    employment either in or outside the IRS.
                Program Increases
        Reduce the Tax Gap Attributable to International Activities
    +$128,064,000/+784 FTE.--The IRS plans a multi-year investment,
    beginning in fiscal year 2010, to deal more effectively with increasing
    international tax activities of individual and business taxpayers.
        This multi-year investment will improve the identification and
    coverage of international issues and increase issue specialization to
    address increasingly complex international transactions by both
    business and individual taxpayers. It will bring an unprecedented
    increase in international resources with the specialized skills to
    identify and examine international non-compliance.
        The resources will improve the use of data we receive from non-U.S.
    entities and foreign governments, provide the needed legal resources,
    and address aggressive profit allocation activities of multinational
    entities doing business in the United States.
        This effort will also focus on increasing reporting compliance of
    domestic taxpayers with offshore activity. The additional resources
    will allow the IRS to implement a stronger presence in offshore
    activities that will be able to uncover the use of offshore credit
    cards, disguised corporate ownership, brokering activities, and non-
    U.S. financial institutions providing banking services to U.S. and non-
    U.S. persons. This initiative will also fund the anticipated growth of
    collection activities resulting from increases in small and large
    business examination assessments, foreign investment transactions, and
    withholding compliance for nonresident aliens.
        Finally, this initiative will allow the IRS to increase its
    overseas presence by adding attaches in key countries to continue our
    efforts to aggressively combat abusive foreign tax schemes and other
    tax evasion schemes. These resources are also a key component in
    supporting the Department of Treasury's objective of ``Pre-empted and
    neutralized threats to the international financial system and enhanced
    U.S. national security.''
        This multi-pronged approach will aggressively target the many areas
    of offshore tax abuse with the goal of identifying more of these abuses
    and curbing this activity.
        Improve Reporting Compliance of Small Business and High Income
    Taxpayers +$94,215,000/+755 FTE.--This initiative will improve
    reporting compliance by increasing examinations of business and high-
    income returns and exams involving flow-through entities by 47,400;
    audits targeting employment, excise, and estate and gift taxes by
    6,350; and investigations of business non-filers by 183,000. This
    request will generate $567.2 million in additional enforcement revenue
    once new hires reach full potential in fiscal year 2012.
        Expand Document Matching for Business Taxpayers +$26,237,000/+300
    FTE.--This initiative will increase the coverage of the document
    matching program to reduce the number of business taxpayers who
    misreport their income. This request will generate $386.5 million in
    additional revenue once new hires reach full potential in fiscal year
    2012.
        Address Nonfiling/Underpayment and Collection Coverage
    +$83,644,000/+491 FTE.--With expanded enforcement efforts in recent
    years, the IRS must invest in improving its collection operations to
    ensure appropriate overall balance and coverage. This initiative will
    generate $359.4 million in additional revenue once new hires reach full
    potential in fiscal year 2012. In addition, this initiative will fund
    the rent, furniture, telecommunication, and IT costs to build two new
    Automated Collection System (ACS) sites.
        Address IT Security and Material Weakness +$90,000,000/+36 FTE.--
    Improving IT security is necessary to ensure the integrity of the tax
    system and maintain taxpayer confidence. This initiative will allow the
    IRS to enhance enterprise security risk management; harden software
    applications and network infrastructure security; improve security
    compliance monitoring and reporting; and provide an enterprise solution
    to deploy end-to-end audit log collection.
        Implement Return Review Program (RRP) +$18,100,000/+10 FTE.--In
    fiscal year 2008, the Electronic Fraud Detection (EFDS) System stopped
    $1.4 billion in erroneous refunds. This initiative will complete
    modernization of the IRS fraudulent refund detection systems. It will
    deliver an integrated and unified RRP system that will enhance IRS
    capabilities to detect, resolve, and prevent criminal and civil tax
    refund and abuse.
        Business System Modernization (BSM) +$22,607,000/0 FTE.--This
    initiative will provide funding for the continued modernization of the
    core taxpayer account database. This effort is a critical underpinning
    of the next generation of IRS service and enforcement initiatives. The
    integration strategy includes a particular focus on enhanced
    information technology security practices and robust accounting and
    financial management controls.
    Legislative Proposals
        The fiscal year 2010 President's budget includes a number of
    legislative proposals intended to improve tax compliance with minimum
    taxpayer burden. These proposals will specifically target the tax gap
    and generate nearly $10 billion over the next 10 years. The Obama
    Administration proposes to expand information reporting, improve
    compliance by businesses, strengthen tax administration, and expand
    penalties.
        Modify Electronic Filing Requirements.--Electronic filing benefits
    taxpayers and promotes effective tax administration because it
    decreases processing errors, expedites processing and payment of
    refunds, and allows the IRS to efficiently maintain up-to-date records.
    This proposal would require electronic filing by tax return preparers
    (initially defined by a set threshold amount).
        Expand Information Reporting.--Compliance with the tax laws is
    highest when payments are subject to information reporting to the IRS.
    Specific information reporting proposals would:
      --Require information reporting on payments to corporations;
      --Require a certified taxpayer identification number (TIN) from
            contractors;
      --Require increased information reporting on certain government
            payments; and
      --Increase information return penalties.
        Improve Compliance by Businesses.--Improving compliance by
    businesses of all sizes is as important. Specific proposals to improve
    compliance by businesses would:
      --Require electronic filing by certain large organizations; and
      --Implement standards clarifying when employee leasing companies can
            be held liable for their clients' Federal employment taxes.
        Strengthen Tax Administration.--The IRS has taken a number of steps
    under existing law to improve compliance. These efforts would be
    enhanced by specific tax administration proposals that would:
      --Expand IRS access to information in the National Directory of New
            Hires for tax administration purposes;
      --Make repeated willful failure to file a tax return a felony;
      --Facilitate tax compliance with local jurisdictions;
      --Extend statutes of limitations where State tax adjustments affect
            Federal tax liability;
      --Improve the investigative disclosure statute;
      --Repeal the requirement of a partial payment with an application for
            an offer-in-compromise; and
      --Allow assessment of criminal restitution as tax.
        Expand Penalties.--Penalties play an important role in discouraging
    intentional non-compliance. Specific proposals to expand penalties
    would:
      --Impose a penalty on failure to comply with electronic filing
            requirements; and
      --Clarify that the bad check penalty applies to electronic checks and
            other forms of payment.
          improve tax administration and other miscellaneous proposals
        The Administration has put forward additional proposals relating to
    IRS administrative reforms. These proposals would:
      --Require information reporting on expense payments relating to
            rental property;
      --Improve the foreign trust reporting penalty;
      --Apply the Federal Payment Levy Program to contractors before
            providing Collection Due Process; and
      --Clarify that vendor levy on ``goods and services'' would not
            exclude ``property.''
                                   conclusion
        Mr. Chairman, thank you again for this opportunity to testify on
    the President's fiscal year 2010 budget for the Internal Revenue
    Service. We urge its passage. It provides the IRS with the much needed
    resources to provide taxpayers with high quality customer service, and
    bolster IRS enforcement in critical areas, such as unlawful offshore
    tax evasion. It also makes wise investments for the next generation of
    technology and the IRS workforce.
        I also urge this Subcommittee to support the enactment of the
    legislative proposals included in the budget to improve compliance.
    Collectively, they will generate more $10 billion over the next 10
    years if enacted.
        I look forward to working with you and the Subcommittee on this
    important budget request and I will be happy to respond to any
    questions.

                            REGULATION OF PREPARERS

        Senator Durbin. Thank you, Mr. Shulman. Three States that I
    know of here, the staff has found, Oregon, California, and
    Alabama, already regulate tax preparers. Can you find, in their
    State regulation, evidence that the tax preparers in those
    States are doing a better job?
        Commissioner Shulman. Some of this regulation is pretty
    recent and it is a relatively small subset. The Government
    Accountability Office (GAO) has actually done some studies of
    State regulation and what is effective. It kind of is across
    the board, everything from registration, to registration and
    licensing, to actual continuing education.
        What I announced last week is that I'm going to have a
    wide-open discussion about this. We're going to invite the
    industry in; we're going to invite taxpayers in; we're going to
    invite consumer advocates in. I would love to work with the
    subcommittee on this and look and say, ``what's the most
    effective way for us to work with that community to make sure
    there's good compliance?'' And that could include service and
    education. It clearly will include ramped up enforcement of the
    bad preparers, and then regulation is on the table. And we will
    closely look at those States----

                              MISTAKES ON RETURNS

        Senator Durbin. Are there some parts of the 1040 or
    schedules and such where you most often find mistakes being
    made?
        Commissioner Shulman. The most common mistakes occur where
    there's complexity. Refundable credits are one place there's
    quite a bit of mistakes, including the earned income tax
    credit. Another common mistake is math error, like not putting
    your Social Security number right. One of the reasons we
    encourage electronic filing is it often catches math errors.
    You can't submit it until the form is complete.
        Senator Durbin. Years ago, my bookkeeper in Springfield,
    Illinois passed away and I said, listen, I'm a lawyer. I took a
    tax course, I'll do my own tax return. I think every Member of
    Congress should be required to do their own tax return. I think
    we'd have tax simplification in a hurry in this country.
        And, as you might guess, the IRS sent back my tax return
    and said, you did a math error here, Mr. Durbin, which was a
    humbling experience and disqualifies me from service in the
    President's Cabinet. But, having said that, it was an eye
    opener.

                           REFUND ANTICIPATION LOANS

        May I ask you about refund anticipation loans (RAL). I
    don't know if you are familiar with these. I have co-sponsored
    legislation to require companies operating as refund loan
    facilitators that offer loans to register with the Federal
    Government. The National Consumer Law Center found that the
    effective annualized rate, interest rate, for a refund
    anticipation loan can range from 50 percent to 500 percent.
        Is the IRS doing anything at this point to address concerns
    about refund anticipation loans?
        Commissioner Shulman. A couple of things. One of the most
    important things we do is continue to get our technology in
    order, so that we can get refunds out quickly to people, so
    they can get money in their pockets without having to take a
    RAL. Now, if you electronically file and choose a direct
    deposit, you may get your refund back in under 10 days.
    Anecdotally, it may come back in even fewer days.
        If we can finish our modernized taxpayer database, every
    taxpayer will have the opportunity to get a refund back
    quicker. So, one key to addressing RALs is to get rid of the
    need. I personally think that it's incredibly unfortunate that
    people's financials are in a state, many times often not their
    own doing, that they need to take a high-interest loan and that
    they can't wait the 10 days to get this refund. As we look at
    the whole preparer issue, refund anticipation loans are clearly
    an associated service that some preparers provide, and we will
    take a look at this.
        The focus is on preparer conduct, but clearly all the
    related industries will be part of the preparer review.

                      PERFORMANCE ON TOLL-FREE PHONE LINES

        Senator Durbin. What about answering the phone at the IRS?
    You reduced your performance goal from providing telephone
    assistance from 82 percent last year to 77 percent this year. I
    wonder why you did that. And what steps are you taking to
    improve the IRS's telephone performance for next year?
        Commissioner Shulman. Phones have been stressed after
    sending checks out to all the American people last year, this
    year doing the Recovery Act, and the truing up the checks. Just
    to give you a sense, in 2007, we had 48 million calls between
    January and May. In 2008, we actually had 64 million and in
    2009 we had 74 million.
        And so one thing we have done as a result is redone our
    call routing to make it quicker for people to get in the right
    queue and answer important questions quickly for people,
    filing-dependent questions.
        Second is, we're trying to push more taxpayers to the Web.
    So, for instance, one of the reasons for the decline this year
    is about 5 million people called and said, ``what is my
    adjusted gross income?'' Next year, we will have a Web service
    to get your adjusted gross income.
        And then third, we've actually added an estimated wait
    time. So, if you call and it says it is going to be 15 minutes
    before we get to you, you can hang up and call back when it's
    not as busy.
        So, we're doing a lot of refinements. I think the reality
    is lots of Government services are competing for money. We are
    trying to figure out the right number for level of service. I
    think the 77 percent doesn't mean 23 percent are unhappy. Only
    7 percent got a busy signal or disconnected; it's a much
    smaller number. And so we're trying to get better at the Web
    and figure out the right level of service.

                          PHISHING AND DATA PROTECTION

        Senator Durbin. Two weeks ago, I got the best e-mail that I
    could possibly imagine. It was from the IRS! And they told me
    that I had a refund coming. I was elated, $600. It's terrific.
    I'll think of something to do with that.
        Of course you know as I know, right off the bat, there's
    something wrong with this. Can you tell me what it is?
        Commissioner Shulman. We don't send e-mails to people
    soliciting things.
        Senator Durbin. And so there are lots of scams like that
    out there. This person wanted me to send back some information
    so they could send me a refund check, nominally in the name of
    the IRS.
        Do you go after these folks? Do you try to initiate
    prosecution?
        Commissioner Shulman. We're very troubled. We would like to
    get the message out that you are not going to get an
    unsolicited phone call or an e-mail from the IRS telling you
    that you have some special deal with the IRS. So people should
    just delete that. We shut down about 2,000 sites this year. It
    is called phishing, sending out e-mail pretending like they are
    the IRS. We work with law enforcement authorities when we see
    these. We have hot lines. We have lots of people reporting to
    us. Two thousand Internet sites have been shut down just this
    filing season. We are very aggressive about it.
        Some of these are originating from overseas and it's hard
    for----
        Senator Durbin. My friends from Nigeria have an ongoing
    correspondence with me.
        Thank you. Senator Collins.
        Senator Collins. Thank you, Mr. Chairman. I just want to
    associate myself with the chairman's last question to express
    concern about the need for more enforcement and education to
    deal with these scams. They are pervasive. I've talked with the
    Federal Trade Commission (FTC), but the IRS can certainly play
    an important role as well in alerting consumers.
        Consumers are particularly confused because, 2 years ago,
    they received rebate checks from the Federal Government. So
    when they get an e-mail message supposedly from the IRS saying
    that ``your stimulus check is now available,'' they equate it
    to the rebate checks.
        So I just want to second Senator Durbin's concern in that
    area. I think we need to do more both to educate consumers and
    go after the people who are perpetrating these scams, which is
    difficult to do in an Internet world.

                                    TAX GAP

        Let me switch to some other issues. The IRS Oversight
    Board, in its statement to this subcommittee, identified two
    serious weaknesses of our tax administration system. The first
    is the $290 billion tax gap, and the second is what the Board
    referred to as the archaic nature of IRS information systems.
    And I am well aware of that second issue because year after
    year after year, the GAO puts the IRS informations systems on
    its high risk list.
        I'd like to start with the tax gap issue and ask you what
    you think should be done to address the tax gap, in addition to
    better enforcement.
        Commissioner Shulman. I would say that tax gap numbers are
    imperfect and a lot of them are extrapolated numbers from 1980
    data. The only way to really get good tax gap numbers is to do
    random audits. We like to do our audits in a more focused,
    risk-based way, so random audits would be a burden on people.
        With that said, we take the tax gap very seriously. I think
    there are three important things that can be done with tax gap.
    One is simplification. As long as the Tax Code is this complex,
    people are going to make mistakes and people are going to have
    opportunities to use the complexity of the system for evasion.
        Second is information reporting. All our statistics show
    that if we get a W-2 from an employer and tax is withheld at
    the source, we have 99 percent compliance. When people operate
    a cash business, and there's no information reported to us and
    it is all voluntary, the compliance rate is much lower. The
    Congress passed a couple of very important information
    reporting provisions last year, such as credit card reporting
    for small businesses, as well as basis reporting. They will be
    helpful.
        The President's budget this year has very important
    information reporting proposals, especially in the
    international context. So we would get more information about
    across-border wire transfers, and that is going to be
    important.
        And so, the first step is simplification and the second
    step is information reporting. We also are taking a look at
    this whole issue of how to leverage preparers to be part of the
    system. If you think about the image of someone sitting down
    with the 1040 form and a pencil, the chairman notwithstanding,
    not that many people do that anymore. People are using a third
    party, someone as an intermediate. And those people need to be
    part of the solution to getting people to pay the right amount
    of taxes. Because when they don't, it is actually a huge
    disservice to the American people. You know, if you end up
    paying penalties and interest and having trouble with the IRS,
    your preparer hasn't done you any favors. So, I think that the
    whole issue of leveraging preparers is going to be part of our
    tax gap strategy.

                            REGULATION OF PREPARERS

        Senator Collins. Let me follow-up on the issue of so-called
    bad preparers. Do you make referrals to State licensing boards
    when you identify a ``bad preparer'' who is a CPA? Because
    they're the ones who have the ability to impose sanctions.
        Commissioner Shulman. Under Circular 230, we have the
    ability to impose sanctions on anyone who represents a person
    before the IRS. We can also give preparer penalties and then we
    coordinate with States. And so we do all of the above. It is
    such a transformational shift, with so many people using a
    third party, standing between them and the IRS, that we need to
    have this overall strategy. It includes the punitive aspect of
    enforcement, but also includes making sure that we are getting
    the right education, the right services, to preparers so that
    they can serve the American people well.

                     INTERNATIONAL ACTIVITY AND THE TAX GAP

        Senator Collins. Does the IRS have an estimate of the tax
    gap attributable to international activities? The reason I ask
    this is you mentioned in your opening statement offshore tax
    abuses, and it seems that that is the focus of your fiscal year
    2010 enforcement initiative.
        Commissioner Shulman. The short answer is no. We don't have
    a good international tax gap estimate. The reason for that is,
    to get good estimates that we are willing to put out, we
    actually need to do random audits. To do them internationally,
    we have to coordinate with other law enforcement agencies. By
    its nature, the reason that people evade paying taxes by going
    overseas is its hard for the U.S. Government to get to them.
        There are some wildly high estimates that are based on
    total deposits and how many are overseas, and assuming that no
    one is paying taxes on them. There are some numbers that get
    bandied about as part of the debate.
        For me, when I think about tax gap and I think about
    enforcement, I think not only about the dollars that we're
    going to bring in directly, but also about the deterrent effect
    and how we project fairness to all American people.
        And so the international issues that are very important to
    me are to go get the money that is being hidden offshore. And I
    also think ordinary Americans need to know that, if they are
    wealthy and have a lot of assets and are playing the
    international capital markets, they are not going to get a free
    pass while firemen and teachers are paying their fair share of
    taxes. And so it's a long way of saying it's part of collecting
    the $2.5 trillion you need to run the Government. This is a
    matter of fundamental fairness and the deterrent effect, and
    people need to know that the U.S. Government is on the job.

                         BUSINESS SYSTEMS MODERNIZATION

        Senator Durbin. I would like to ask one follow-up question
    here. It is on CADE, customer account data engine. I am kind of
    noticing, I worked with Senator Collins on this issue after 9/
    11 on technology in the Federal Government. And I have to tell
    you, after following it for years, it has been a source of
    frustration of how many bad starts we've had different with
    different agencies, trying to bring modern technology. Maybe
    the private sector has the same problem, but it seems to be
    endemic at the Federal Government.
        Your CADE system, a core component of BSM, Business Systems
    Modernization, was intended to replace the original master
    file. It has now cost over $400 million since work began almost
    5 years ago. But it has only delivered only about 15 percent of
    the full capability intended. The fiscal year 2010 budget
    request proposes a 10 percent increase for BSM, or about $24
    million of the $229.9 million enacted last year.
        Has the IRS taken actions to address GAO's recommendations
    to fully revisit the division's strategy for Business System
    Modernization, including developing long-term plans for
    completing the program?
        Commissioner Shulman. I'm aware of the GAO report that came
    out yesterday and have a couple of thoughts.
        The first thing I did when I came in is I talked to lots of
    stakeholders. I talked to GAO and our auditor and I said, you
    know, tell me about CADE. To put it into perspective, CADE is a
    $50 million or so project each year within a $1.5 billion
    technology portfolio. And so while it's important because it is
    our core database, it is not everything we do on technology.

                          CUSTOMER ACCOUNT DATA ENGINE

        What I was told by overseers is we've made great progress,
    we've proven that we can do systems development, but they don't
    see a path to finishing CADE. And the internal projections for
    finishing were 2015, 2017, 2020. I believe the key to
    technology projects, the way get them done, is you have
    leaders--not just technology leaders, but the people who run
    agencies-- focus on them and drive toward those results.
        And so what we've done is refocus the effort and split
    apart all the application work from the database work. If we
    get the database done, we will get refunds out quicker, we will
    address material weaknesses, and we will be able to use data
    for enforcement purposes. So the real business value of CADE
    comes out of the database; we are focused on getting that done
    now. And we are slowing down the application development and
    just focusing on conversion of the database.
        The other thing that I think is important from that report
    that came out is that the vast majority of that $400 million is
    being put to good use. The key is getting a data model with
    consistent definitions used in all of our systems. That was
    under that umbrella. We put out faster refunds to millions of
    taxpayers using the money that's been spent. Especially in
    these difficult economic times, that has been really important.
    And we are using a huge amount of the software and hardware.
        So, this is a gradual shifting of focus. It is what you do
    with any big technology project, you learn as you go along. I
    certainly would hope it is not put in a category of failure; I
    don't believe it has failed at all. I think it's a step in what
    we can get done during my 5-year tenure. And that is what we
    are trying to get done.
        Senator Durbin. Thank you. Senator Collins.

                        INFORMATION TECHNOLOGY SECURITY

        Senator Collins. Thank you, Mr. Chairman. Just one final
    question and the rest I will submit for the record.
        I appreciate the chairman bringing about the CADE strategy
    because that has been of concern to me. The other issue that
    concerns me has to do with IT security weaknesses. How much
    improvement in data protection do you believe the IRS will be
    able to make with the $90 million that you are requesting for
    IT security? Give us your assessment of the vulnerabilities and
    whether that is, in fact, a sufficient amount to address the
    problem.
        Commissioner Shulman. Senator, when I came in, all everyone
    talked about was modernization. And I actually believe that if
    you have a big technology portfolio, you need to worry about
    the current systems, updating those, so that your workers have
    tools along the way, making sure that there's the right balance
    between security and infrastructure. You need to worry about
    data security, especially when you hold the taxpayer records of
    the United States. And you need to worry about your new
    systems.
        So, one of the things this budget reflects is rebalancing
    the portfolio so we are not myopically focused on
    modernization; we care a lot about security and data. There's
    $90 million in the budget request to upgrade our security
    posture and infrastructure. It is incredibly important. I
    think, knock on wood, we haven't had any major data breaches.
    There is always going to be a spectrum of weaknesses that
    overseers are going to point out, and you have to do risk-
    reward evaluations. You're never going to get every single
    piece of potential weakness but you have to figure out what is
    important.
        I pay a lot of attention to GAO procedure reports. All
    development is now new development. We're seeing a lot of laws
    which are incredibly important for internal threats. We are
    consolidating our access points into our networks so that we
    have perimeter security.
        A lot of data security is cultural. You want people who
    have access to data to wake up every day and feel it's their
    responsibility to lock down the data. So, we had something
    called Operation Red last year where we stood down every
    employee of the IRS for 2 hours to talk about what data is
    under their sphere and what can they do to better protect it,
    everything from file cabinets to safes to technology.
        I would say we are in a better security posture now than
    when I started. The people who are interested in breaching the
    security are always going to be innovating, and so we are going
    to need to stay ahead of the curve. But I think the money
    requested in this budget will allow us to keep improving in
    that vein.
        Senator Collins. Thank you. Thank you, Mr. Chairman.
        Senator Durbin. I'd like to say that the IRS Oversight
    Board has submitted for inclusion in the record and preliminary
    recommendations on the fiscal year 2010 IRS budget proposal.
    The GAO office, at my request, is evaluating the budget
    proposal and will submit its analysis and recommendations.
        Colleen Kelly, president of the National Treasury and
    Employer's Union on behalf of employers has submitted a written
    statement. Without objection, these will all be made part of
    record.
        [The statements follow:]
                 Prepared Statement of the IRS Oversight Board
        The Internal Revenue Service (IRS) Oversight Board thanks Chairman
    Durbin, Ranking Member Collins, and members of the Subcommittee for the
    opportunity to present the Oversight Board's views on the
    administration's fiscal year 2010 IRS budget request.
        This statement presents the Board's recommendations for the IRS'
    fiscal year 2010 budget and why the Board believes this level of
    funding is needed to meet the needs of the country and of taxpayers.
    Created as part of the IRS Restructuring and Reform Act of 1998 (RRA
    98), the Oversight Board's responsibilities include overseeing the IRS
    in its administration, management, conduct, direction and supervision
    of the execution and application of the internal revenue laws. The
    Board is also responsible for ensuring that the IRS' organization and
    operations allow the agency to carry out its mission. To this end, the
    Board was given specific responsibilities for reviewing and approving
    annual budgets and strategic plans.
        The Board has a responsibility to ensure that the IRS' budget and
    the related performance expectations contained in the performance
    budget support the recently published IRS Strategic Plan 2009-2013. In
    addition to this statement, the Board develops a formal report in which
    it explains in detail why it has recommended this budget for the IRS.
    Because of the late budget cycle caused by the change in
    administrations, this report is still under development. The Board
    requests that this report be entered into the meeting record when it is
    sent to the Subcommittee later this month.
                  fiscal year 2010 irs budget recommendations
        The IRS Oversight Board recommends an fiscal year 2010 IRS budget
    of $12.489 billion, an increase of $966 million over the enacted fiscal
    year 2009 amount of $11.523 billion. This recommendation is $363
    million above the President's request of $12.126 billion.
        Tables 1 and 2 at the end of this statement show more information
    on the Board's budget recommendations. Table 1 shows the program
    initiatives or increases the Board is recommending, and Table 2 shows
    the Board's recommended budget by account.
        As the Board stated in its 2008 Annual Report to Congress, our tax
    administration system has two serious weaknesses, the $290 billion tax
    gap and the archaic nature of IRS information systems. As a result, the
    Board recommends that strengthening the system be a national priority.
        Addressing those weaknesses is critical and urgent. The Board is
    fully supportive of the administration's boost in enforcement funding.
    However, the Board recommends greater funding in the areas of Business
    Systems Modernization (BSM) and Operations Support than the President's
    budget requests. While the Oversight Board and the administration's
    budgets agree in many ways, the Board feels that these key additional
    investments are needed sooner--not later--to strengthen our tax
    administration system.
        The effort required to correct the two weaknesses identified above
    is not to be taken lightly. Although the tax gap can never
    realistically be eliminated, it is equally as foolish to suggest that
    nothing can be done to reduce it. As the Board has opined on numerous
    occasions, there is not a single solution to reducing the tax gap.
    Rather, a comprehensive, multi-faceted, multi-year, approach is needed
    that provides for excellent taxpayer service combined with vigorous
    enforcement, along with a long-term investment in IRS information
    technology and infrastructure. It is generally recognized that the IRS
    ``cannot audit its way out of the tax gap.'' Balance between immediate
    expansion of personnel combined with long term investments in
    information technology and infrastructure is needed.
        The second weakness, modernizing the IRS' archaic information
    technology systems, is equally daunting--yet it must be done. As noted
    in the Board's 2008 Annual Report to Congress, the IRS' systems
    modernization program has been on the Government Accountability
    Office's (GAO's) high risk list since 1995. The GAO placed this program
    on its high risk list because it believed that the IRS relied on
    obsolete automated systems for key operational and financial management
    functions. The Board believes that it is unacceptable for this program
    to remain on the high risk list for so long is unacceptable.
        The Board believes strongly that the IRS' BSM program must be in a
    position to move forward in fiscal year 2010 and fiscal year 2011 so
    that program milestones scheduled for 2011 can be achieved. Because the
    President's budget provides little additional funding for the Customer
    Account Data Engine in fiscal year 2010, it puts the fiscal year 2011
    milestones at great risk. In addition, the Board believes additional
    funding is needed to refresh and update the IRS' aging infrastructure.
    In total, of the $363 million difference in the two budgets, about $332
    million is for investments in critical information technology and
    infrastructure.
        The Board would also increase funding for several key initiatives
    to improve taxpayer service. These initiatives are all designed to help
    the IRS plan and implement better taxpayer service in the future.
    Board Fully Supports Increased Enforcement Funding
        The Board's recommendation for the enforcement account, which at
    $5.5 billion is close to half of the IRS total budget, is identical to
    the President's budgets. Both the President's and Oversight Board's
    budgets add $332 million for additional enforcement. This increase
    constitutes a 7.6 percent boost in enforcement funding, and includes
    additional funding to strengthen criminal investigations programs,
    increase examinations and collections, and support a variety of
    regulatory matters.
        This increase in enforcement resources pays for itself; in some
    cases many times over--a consideration that should not be ignored in
    the budget process. In addition, it helps to reduce the tax gap, which
    deprives the nation, and hence its citizens, of $290 billion it is
    legally owed. The tax gap is an affront to honest taxpayers and efforts
    must be made to reduce it.
        The President's request for enforcement funding includes a multi-
    year investment of $128 million, starting in fiscal year 2010, to deal
    more effectively with increasing international tax activities of
    individual and business taxpayers. The Board is pleased with this, as
    the effects of globalization on tax administration are significant and
    must be addressed.
        The Board also strongly supports additional funding to improve
    compliance among ``high-risk'' taxpayer segments. Estimates shows that
    much of the tax gap is due to underreporting of income by businesses,
    mostly run by individuals. It is imperative that the IRS not only
    ensure that all individuals understand their tax obligations, but that
    they report their income and pay their taxes.
    Taxpayer Service Increase Recommended
        For the taxpayer service account, the Oversight Board's and
    President's budgets are within 0.2 percent of one another. The
    President's budget request for taxpayer service benefits from
    congressional action taken during consideration of the fiscal year 2009
    budget. By adding additional funding to the IRS taxpayer service budget
    in fiscal year 2009, Congress raised the base amount for taxpayer
    service in fiscal year 2010, giving the IRS additional resources to
    serve taxpayers in an increasingly more complex economic environment.
        The need for taxpayer service is especially acute during periods of
    economic hardship, as taxpayers may find themselves facing challenging
    financial situations. In addition, taxpayers need additional help to
    understand new tax provisions and programs designed to help them during
    difficult times. Every change in the tax code causes the tax
    administration system to become more complex, with more taxpayers in
    need of help to understand and meet their obligations. It is especially
    important during this recession that the IRS be able to follow through
    on its strategic goal to ``make voluntary compliance easier.''
        Despite a higher funding base for taxpayer service, there are
    several areas where the Board recommends additional funding. In 2005,
    Congress asked the IRS, National Taxpayer Advocate, and the IRS
    Oversight Board to develop a 5-year plan to improve taxpayer service.
    The result was the Taxpayer Assistance Blueprint (TAB), which was
    completed in April 2007. In the Board's opinion, the IRS needs
    additional resources to more fully carry out the TAB by expanding its
    on-line capabilities. Additional funding is also needed to optimize the
    use of Taxpayer Assistance Centers, also known as walk-in sites, which
    traditionally serve lower income taxpayers who depend more on walk-in
    services. Overall, the Board recommends an additional $31.6 million be
    appropriated for taxpayer service, all of which will be focused on
    improving taxpayer service in the future.
    Strategic Funding Needed for Business Systems Modernization
        The IRS' archaic computer systems are a serious challenge facing
    the IRS. The Board is dismayed by the long-term under-funding of the
    BSM program, forcing the IRS to stretch out its efforts at a painfully
    slow pace, to the detriment of taxpayers.
        The Board is pleased that the IRS has revised its BSM approach to
    put more focus on completing the program, and considers it a critical
    foundation of service and enforcement in the future.
        However, the Board questions whether the President's budget will
    allow for substantive progress in the coming years. The Board has
    opined in past years that the BSM account is fundamentally under-
    funded, and despite the additional $7.3 million added by Congress in
    fiscal year 2009 and the President's fiscal year 2010 requested
    increase of $22.6 million, the fiscal year 2010 request for BSM
    continues to be far too low. Progress will come slowly should that
    trend continue. The Customer Account Data Engine project, in
    particular, has funding needs that go far beyond what was requested in
    fiscal year 2010, and those needs will only grow in fiscal year 2011.
        The Board's recommended BSM budget of $400 million is 58 percent
    higher than the President's BSM budget of $253.7 million. At $253.7
    million, the President's BSM budget consumes 2.1 percent of the IRS
    total budget of $12.126 billion. This compares to the Board's
    recommendation of a $400 million BSM budget, which consumes 3.2 percent
    of its total $12.489 billion budget. Although the difference is quite
    small when viewed as a portion of the total budget, the vision
    presented by these two BSM budgets is quite different. The Board
    believes that funding decisions for the IRS must look beyond
    consideration of short term benefits and immediate return on
    investment. Serious consideration must also be given to the long term
    benefits to taxpayers and the tax administration system that will
    result from a modernized information technology system. These
    investments will result in fundamental changes to tax administration
    that will benefit both taxpayers and tax administrators alike.
        The Board recommends that a total of $400 million be appropriated
    for the BSM program so that the pace of progress is increased, allowing
    the IRS to achieve key milestones in fiscal year 2011, such as the
    deployment of a daily Individual Master File capability and a Customer
    Account Data Engine relational database.
    More Funding for Operations Support
        Another important aspect of the IRS' performance is the state of
    its legacy infrastructure: the technology and tools used by IRS
    employees to do their work. IRS laptops, software, the
    telecommunications systems, and the buildings themselves are aging and
    must be updated and maintained. In addition, the IRS must protect its
    hardware and data infrastructure from threat, whether it comes from bad
    weather or cyber-attack.
        The administration's fiscal year 2010 budget calls for $108.1
    million in program increases to address information technology security
    and material weaknesses and to strengthen the Electronic Fraud
    Detection System. The Board supports this funding, as both can help
    ensure the integrity of the tax system and maintain taxpayer confidence
    that its returns remain private and safe from security risks.
        However, more needs to be done. The Board recommends a total of
    $292 million in infrastructure program initiatives, compared to the
    $108 million requested by the President's IRS budget. The Board
    recommends an additional $164 million in technology initiatives and a
    $20 million initiative related to workforce development. This funding
    is needed to refresh and maintain the IRS' infrastructure, strengthen
    its ability to protect the personal information of taxpayers, increase
    the productivity of its workforce by leveraging information technology,
    and upgrade its financial services accounting system that uses a
    software application product that is so old the vendor will no longer
    support the program in 2013.
        In addition, workforce development cannot be ignored, especially
    during a period when the IRS is losing experienced employees to
    retirement and is hiring a significant number of new employees.
    Frontline supervision plays a key role in employee satisfaction,
    quality, and productivity, and the IRS lacks funding to properly train
    frontline managers in a timely fashion. Approximately $15 million of
    the workforce initiative is for frontline management training, with the
    remaining $5 million for succession planning and executive development.
    Long-Term Investment Key to IRS Strength
        Although the magnitude of the Board's budget recommendations for
    the IRS are not vastly different from the President's budget request in
    amount, they do focus more on the IRS' strategic goals and call for
    investments that are needed today for a stronger tax administration
    system in the future. The Oversight Board believes that its approach
    represents a meaningful long-term investment to benefit our Nation in
    the decades to come.

    TABLE 1.--IRS OVERSIGHT BOARD RECOMMENDED FISCAL YEAR 2010 IRS BUDGET BY
                               PROGRAM INITIATIVE
                            [In thousands of dollars]
    ------------------------------------------------------------------------

    ------------------------------------------------------------------------
    Fiscal Year 2009 Enacted...............................      11,522,598
    Changes to Base:
        Maintaining Current Levels.........................         256,329
        Efficiencies/Savings...............................        (118,125)
        Reinvestment.......................................           2,331
                                                            ----------------
          Subtotal Changes to Base.........................         140,535
                                                            ================
          Total Fiscal Year 2010 Base--Current Services....      11,663,133
                                                            ================
                       Program Increases

    Taxpayer Service Initiatives:
        TAB Technology Enhancements........................           6,000
        Optimize TAC Footprint.............................          17,880
        Research and Analysis to Improve Taxpayer Service..           7,750
                                                            ----------------
          Subtotal, Taxpayer Service Initiatives...........          31,630
                                                            ================
                       Program Increases

    Enforcement Initiatives:
        Reduce the Tax Gap Attributable to International            128,064
         Activities........................................
        Improve Reporting Compliance of SB/SE Taxpayers....          94,215
        Expand Document Matching for Business Taxpayers....          26,237
        Address Nonfiling/Underpayment and Collection                83,644
         Coverage..........................................
                                                            ----------------
          Subtotal, Enforcement Initiatives................         332,160
                                                            ================
    Infrastructure Initiatives:
        Address IT Security and Material Weakness..........          90,000
        Implement Return Review Program....................          18,100
        Refresh/Sustain Infrastructure.....................          75,000
        Training and Certifying Project Managers...........           5,000
        Enhance Privacy, Information Protection and Data              9,154
         Security..........................................
        Technology Investments to Enhance Operations.......          35,000
        Upgrade Integrated Financial System (IFS)..........          40,700
        Leadership Training and Development................          20,000
                                                            ----------------
          Subtotal, Infrastructure Initiatives.............         292,954
                                                            ================
    BSM Initiative:
        Fund BSM to Accelerate Taxpayer Benefits...........         168,933
                                                            ----------------
          Subtotal, BSM....................................         168,933
                                                            ================
          Subtotal Fiscal Year 2010 Program Initiatives....         825,677
                                                            ================
          Total Fiscal Year 2010 Request...................      12,488,810
                                                            ================
    Fiscal Year 2010 President's Request for IRS...........      12,126,000
    Increase Over President's Request......................         362,810
    ------------------------------------------------------------------------

                                     TABLE 2.--SUMMARY OF OVERSIGHT BOARD RECOMMENDED IRS FISCAL YEAR 2010 BUDGET BY ACCOUNT
                                                                     [Dollars in thousands]
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                                                               Taxpayer
                                                               Service        Enforcement     Ops Support          BSM            HITCA           Total
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    Fiscal Year 2009 Enacted Budget......................      $2,293,000       $5,117,267      $3,867,011         $229,914         $15,406     $11,522,598
    Changes to Base:
        Maintaining Current Levels Adjustment............         $60,195         $133,815         $61,060           $1,153            $106        $256,329
        Efficiencies/Savings.............................        ($90,918)  ..............        ($27,207)  ..............  ..............       ($118,125)
        Reinvestment.....................................          $2,025   ..............            $306   ..............  ..............          $2,331
                                                          --------------------------------------------------------------------------------------------------
          Subtotal Changes to Base.......................        ($28,698)        $133,815         $34,159           $1,153            $106        $140,535
                                                          ==================================================================================================
          Total Fiscal Year 2010 Base--Current Services..      $2,264,302       $5,251,082      $3,901,170         $231,067         $15,512     $11,663,133
                                                          ==================================================================================================
                      Program Increases

    Taxpayer Service Initiatives:
        TAB Technology Enhancements......................            $592   ..............          $5,408   ..............  ..............          $6,000
        Optimize TAC Footprint...........................          $4,238   ..............         $13,642   ..............  ..............         $17,880
        Research and Analysis to Improve Service.........  ...............  ..............          $7,750   ..............  ..............          $7,750
                                                          --------------------------------------------------------------------------------------------------
          Subtotal, Taxpayer Service Initiatives.........          $4,830   ..............         $26,800   ..............  ..............         $31,630
                                                          ==================================================================================================
    Enforcement Initiatives:                               ...............  ..............  ...............  ..............  ..............  ...............
        Reduce the Tax Gap Attributable to International           $3,124         $104,113         $20,827   ..............  ..............        $128,064
         Activities......................................
        Improve Reporting Compliance of SB/SE Taxpayers..            $267          $75,114         $18,834   ..............  ..............         $94,215
        Expand Document Matching for Business Taxpayers..          $1,425          $17,955          $6,857   ..............  ..............         $26,237
        Address Nonfiling/Underpayment and Collection                $712          $55,736         $27,196   ..............  ..............         $83,644
         Coverage........................................
                                                          --------------------------------------------------------------------------------------------------
          Subtotal, Enforcement Initiatives..............          $5,528         $252,918         $73,714   ..............  ..............        $332,160
                                                          ==================================================================================================
    Infrastructure Initiatives:
        Address IT Security and Material Weakness........  ...............  ..............         $90,000   ..............  ..............         $90,000
        Implement Return Review Program (RRP)............  ...............  ..............         $18,100   ..............  ..............         $18,100
        Refresh/Sustain Infrastructure...................  ...............  ..............         $75,000   ..............  ..............         $75,000
        Training and Certifying Project Managers.........  ...............  ..............          $5,000   ..............  ..............          $5,000
        Enhance Privacy, Information Protection and Data   ...............  ..............          $9,154   ..............  ..............          $9,154
         Security........................................
        Technology Investments to Enhance Operations.....  ...............  ..............         $35,000   ..............  ..............         $35,000
        Upgrade Integrated Financial System (IFS)........  ...............  ..............         $40,700   ..............  ..............         $40,700
        Leadership Training and Development..............  ...............  ..............         $20,000   ..............  ..............         $20,000
                                                          --------------------------------------------------------------------------------------------------
          Subtotal, Infrastructure Initiatives...........  ...............  ..............        $292,954   ..............  ..............        $292,954
                                                          ==================================================================================================
    Business Systems Modernization Initiative:             ...............  ..............  ...............  ..............  ..............  ...............
        Fund BSM to Accelerate Taxpayer Benefits.........  ...............  ..............  ...............        $119,133  ..............        $119,133
                                                          --------------------------------------------------------------------------------------------------
          Subtotal, Business Systems Modernization.......  ...............  ..............  ...............        $168,933  ..............        $168,933
                                                          ==================
          Subtotal Fiscal Year 2010 Program Changes......         $10,358         $252,918        $393,468         $168,933  ..............        $825,677
                                                          ==================================================================================================
          Total Fiscal Year 2010 Board Recommendation....      $2,274,660       $5,504,000      $4,294,638         $400,000         $15,512     $12,488,810
                                                          ==================================================================================================
    Fiscal Year 2009 Enacted.............................      $2,293,000       $5,117,267      $3,867,011         $229,914         $15,406     $11,522,598
    Fiscal Year 2010 President's Request for IRS.........      $2,269,830       $5,504,000      $4,082,984         $253,674         $15,512     $12,126,000
    Increase Over President's Request....................          $4,830   ..............        $211,654         $146,326  ..............        $362,810
    Percent Increase Over President's Request (Percent)..             0.2   ..............             5.2             57.7  ..............             3.0
    --------------------------------------------------------------------------------------------------------------------------------------------------------

                                     ______

     Prepared Statement of Colleen M. Kelley, National President, National
                            Treasury Employees Union
        Chairman Durbin, Ranking Member Collins, and distinguished members
    of the Subcommittee, I would like to thank you for allowing me to
    provide comments on the administration's fiscal year 2010 budget
    request for the Internal Revenue Service (IRS). As President of the
    National Treasury Employees Union (NTEU), I have the honor of
    representing over 150,000 federal workers in 31 agencies, including the
    men and women at the IRS.
                      irs fiscal year 2010 budget request
        Mr. Chairman, NTEU strongly supports the administration's fiscal
    year 2010 budget request of $12.1 billion for the IRS, a roughly $600
    million increase over fiscal year 2009 levels. We believe that the
    President's request will allow the IRS to continue providing taxpayers
    with top quality service and will assist efforts to enhance taxpayer
    compliance and close the tax gap.
        We are particularly pleased the administration's budget request
    would provide $5.5 billion for IRS tax enforcement, including
    additional resources made available through a program integrity
    allocation adjustment. According to the administration, IRS enforcement
    efforts recoup $5 for every $1 dollar invested and the program
    integrity savings from increased investment for IRS enforcement efforts
    will be more than $13 billion between 2010-2014.
        We are also pleased to see the recently passed budget resolution
    fully funds the President's budget request for the IRS and includes the
    President's request for additional resources for IRS tax-law
    enforcement.
        I would also note that in previous years, NTEU has supported the
    budget recommendations proposed by the IRS Oversight Board which have
    generally called for additional resources above that requested by the
    administration. For fiscal year 2010, the Oversight Board has
    recommended $12.961 billion in funding for the IRS. While we have not
    seen the specific details of the Board's updated proposal, we would be
    inclined to support providing additional funding for the IRS above the
    administration's request and look forward to reviewing the Board's
    final recommendation.
                                major challenges
        Mr. Chairman, NTEU believes the President's request will allow the
    IRS to meet its customer service and enforcement challenges while also
    addressing some of the most immediate challenges it will face in the
    coming years, including the growing human capital crisis, increasing
    complexity of tax administration, and a burgeoning tax gap.
                              human capital crisis
        NTEU believes that IRS employees are the most valuable asset in
    effective tax administration. We are glad to see that the IRS Strategic
    Plan for 2009-2013 recognizes this fact and stresses the importance of
    investing in the workforce in order to achieve its service and
    enforcement goals. But as the IRS notes, they face several major
    challenges such as large numbers of retirements and competition with
    both the public and private sectors for critical talent. According to
    the IRS, more than half of IRS employees and managers are age 50 or
    older. The expected large scale retirements of thousands of Service
    personnel over the next several years will only further deplete the
    decimated IRS workforce that is down by more than 23,000 since 1995.
    According to a report by the IRS Oversight Board, an independent body
    charged with providing IRS with long-term guidance and direction,
    roughly 4,000 IRS employees a year for the next four years are expected
    to retire, taking with them years of experience and valuable skills.
    The dramatic decline in staffing levels coupled with the pending
    retirement wave has caused the Oversight Board to identify human
    capital issues as one the most important strategic challenges facing
    the IRS.
        In the face of an aging workforce and looming wave of retirements,
    Commissioner Shulman created the Workforce of Tomorrow task force to
    ensure that in five years the IRS has the leadership and workforce
    ready for the next 15 years and to help make the IRS the best place to
    work in government.
        NTEU was happy to see that the President's budget request
    acknowledges the human capital crisis at the Service and provides for
    major increases in Service staffing, particularly in the area of
    enforcement. According to the administration, the new enforcement
    personnel funded in the President's budget will generate $2.0 billion
    in additional annual enforcement revenue once the new hires reach full
    potential in fiscal year 2012.
                  increasing complexity of tax administration
        Under the President's budget request, the IRS will also be better
    equipped to handle the challenges associated with the increasingly
    complexity of tax administration. For example, one of the biggest
    challenges the IRS confronts each year is identifying new tax law and
    administrative changes as well as expiring tax provisions. According to
    the IRS, in 2007 alone, 41 tax provisions expired affecting a wide
    range of taxpayers.
        During the 2009 Filing Season, the IRS was presented with
    additional challenges due to the enactment of two significant new tax
    laws, the ``Housing and Economic Recovery Act of 2008,'' which includes
    a refundable homebuyer credit as well as an additional standard
    deduction for real property taxes, as well as the ``Emergency Economic
    Stabilization Act of 2008,'' which included 116 different tax
    provisions.
        In the future, the IRS will also be confronted with the challenges
    presented by the increasing globalization of individual taxpayers and
    businesses. As more and more U.S. taxpayers and businesses expand into
    global markets, it will be important that the IRS has the technical
    expertise to identify and understand the proliferation of complex
    international activities and the emerging global nature of tax
    administration.
                                    tax gap
        Recent and projected large Federal budget deficits have generated
    congressional and executive branch interest in raising revenue by
    reducing the tax gap, that is, the difference between what taxpayers
    should have paid and what they actually paid on a timely basis. For tax
    year 2001, the IRS estimated a gross tax gap of $345 billion, equal to
    a noncompliance rate of 16.3 percent.
        NTEU believes that efforts to close the tax gap must focus on
    improving compliance activities and enhancing taxpayer service. By
    improving document matching, examination, and collection activities,
    the IRS will be better able to prevent, detect, and remedy
    noncompliance. And providing taxpayers with assistance and clear and
    accurate information before they file their tax returns will help
    reduce unnecessary contacts afterwards, allowing IRS to focus
    enforcement resources on taxpayers who are intentionally evading their
    tax obligations.
        In addition to generating additional revenue for the Federal
    Government, reducing the tax gap will help strengthen public trust in
    the fairness of the tax system which will positively impact voluntary
    compliance with tax laws.
        That is why NTEU supports the President's request for an additional
    $332 million to help close the tax gap by strengthening compliance and
    allowing the IRS to better address the main components of the tax gap
    including, underreporting, non-filing and underpayment.
                                  enforcement
        Mr. Chairman, as you know enforcement of the tax laws is an
    integral component of IRS' effort to enhance voluntary compliance and
    close the tax gap. IRS enforcement activities, such as examination and
    collection, target elements of the tax gap and are a high priority for
    the Service. In fiscal year 2008, the IRS initiated additional
    information reporting requirements for large partnerships and foreign
    corporations, soft notices and self-correction to improve compliance.
        These efforts helped the IRS bring in $56.4 billion in enforcement
    revenue in 2008, a 65 percent increase over fiscal year 2002. The $56.4
    billion in collections in 2008 represents a 5 to 1 return on investment
    for all IRS activities. In addition, the IRS showed consistent
    improvement in its enforcement results meeting or exceeding 78 percent
    (14 of 18) of its program targets.
        Most impressively, the IRS continues to bring in record amounts of
    enforcement revenue despite severe cuts to enforcement staffing over
    the past 13 years. In particular, the number of revenue officers and
    revenue agents--two groups critical to closing the tax gap and thereby
    reducing the Federal budget deficit--have shrunk by 33 and 20 percent
    respectively. Revenue officers went from 8,139 to 5,481 and revenue
    agents fell from 16,078 to 12,951. As noted previously, these drastic
    cuts have come at a time when the IRS workload has increased
    dramatically due to the increasing complexity of tax administration.
        NTEU believes it is essential that the IRS continue to direct
    resources toward enforcement activities that have the greatest overall
    impact on compliance and can best aid the Service's efforts to close
    the tax gap. One such activity is the IRS Automated Underreporter (AUR)
    program which has evolved as an important Service compliance initiative
    using third-party information returns to identify income and deductions
    that were not reported on tax returns. NTEU believes the program is an
    effective way to detect taxpayer underreporting which accounts for
    roughly 82 percent of the gross tax gap.
        In fiscal year 2008, increased AUR contact closures increased by
    almost 4 percent from the previous year and dollars collected through
    AUR and information return processing increased by 22 percent.
        The administration's budget request acknowledges the import role
    the AUR program can have in closing the tax gap by reducing the number
    of taxpayers who underreport their income and proposes an increase of
    $26.2 million and 300 FTE to increase coverage of the AUR document
    matching program. According to the administration, this request will
    generate $386.5 million in additional revenue once new hires reach full
    potential in fiscal year 2012 resulting in a return on investment (ROI)
    of 17 to 1.
                                taxpayer service
        Mr. Chairman, NTEU strongly believes that providing quality
    customer service to the taxpayer is an important part of IRS efforts to
    help the taxpaying public understand their tax obligations while making
    it easier to participate in the tax system. Through many sources, the
    IRS provides year-round assistance to millions of taxpayers, including
    outreach and education programs, issuance of tax forms and
    publications, rulings and regulations, toll-free call centers, the
    IRS.gov web site, Taxpayer Assistance Centers (TACs), Volunteer Income
    Tax Assistance (VITA) sites, and Tax Counseling for the Elderly (TCE)
    sites. These efforts have helped the IRS raise their standard of
    service to America's taxpayers and assisted in efforts to improve
    voluntary compliance. The IRS has continued to make great strides in
    recent years in the quality of the service it provides despite
    relatively flat budgets, that when adjusted for inflation, have
    provided the IRS with fewer resources over the past several years
    compared to fiscal year 2002.
        But despite receiving fewer resources and continued reductions in
    the number of customer service representatives at the Service, the IRS
    was able to deliver a successful 2008 filing season. As you know, the
    2008 filing season was particularly challenging due to late enactment
    of the AMT legislation and implementation of the Economic Stimulus
    Payment program. Despite these challenges, the IRS carried out another
    successful filing season during which IRS employees processed more than
    155 million individual returns including returns filed solely to claim
    an economic stimulus payment, an increase of 11 percent over last year
    and issued 107.6 million refunds, totaling $369 billion; answered over
    40.4 million calls, an increase of 21 percent due to a large increase
    in taxpayer inquiries about the economic stimulus checks; completed 52
    million automated calls, an increase of over 123 percent; maintained
    account and tax law accuracy rates of over 90 percent and expanded
    return preparation at IRS Taxpayer Assistance Centers (TACs) preparing
    over 575,000 returns, a 42 percent increase over last year.
        Mr. Chairman, while IRS employees were able to continue providing
    quality service to taxpayers in fiscal year 2008, we do have concerns
    about the potential negative effect on IRS' ability to continue doing
    so should the ``efficiency savings'' assumed in the administration's
    budget request not materialize. For fiscal year 2010, the budget
    request identifies ``efficiency savings'' of more than $118 million at
    the cost of 1,504 FTE's. If, as sometimes been the case in previous
    years, IRS fails to realize all expected savings then the funds
    available for critical Service personnel, such as those working at the
    401 TACs located nationwide, would be further reduced.
        As stated previously, NTEU strongly believes providing quality
    service to taxpayers is critical to ensuring taxpayers understand their
    tax obligations while making it easier for them to participate in the
    tax system. And in the current economic climate, we believe it is more
    important than ever that taxpayers be able to deal with the IRS
    directly to work through any financial difficulties they may encounter.
    IRS employees have a wide range of tools and information at their
    disposal, which allow them to work with taxpayers to address their
    financial hardships and to become compliant.
        Above all else, the IRS employee's interest is in assisting
    struggling taxpayers to meet their tax obligations in a way that will
    not exacerbate their financial distress. When an IRS employee works
    with a taxpayer, the employee has access to all of the taxpayer's
    information and can answer questions and offer advice. For example,
    they can see whether a taxpayer has not filed a return and explain that
    the sooner the taxpayer makes arrangements to address filing and
    balance due issues the less penalty and interest they will owe. They
    can look at the taxpayer's records and answer questions about why they
    owe a balance and what they can do about it. They can also tell the
    taxpayer that they are not having enough taxes withheld by their
    employer and need to address that or that if an ex-spouse is claiming a
    child as a dependent they will not also be able to receive an
    exemption. If a simple mistake, like a math error, has occurred, they
    can fix it. They can provide an extension of the time period for
    payment. They can make a determination that the taxpayer meets the
    currently not collectible requirements or whether the taxpayer may be
    eligible for an Offer in Compromise, in which part of the balance due
    is foregone.
        NTEU believes providing quality services to taxpayers is an
    important part of any overall strategy to improve compliance and that
    the President's request for taxpayer services will enable the IRS to
    deliver another successful filing season, improve the responsiveness
    and accuracy of taxpayer service, and support Service efforts to
    enhance taxpayer compliance.
                                  section 1203
        Mr. Chairman, while meaningful funding for the IRS is important to
    operations, NTEU also believes that in order to maximize efficiencies
    at the IRS, Congress must act to modify Section 1203 of the IRS
    Restructuring and Reform Act of 1988 (RRA 98). Commonly known as the
    ``Ten Deadly Sins,'' Section 1203 outlines ten infractions for which
    IRS employees must be fired, including the untimely filing of Federal
    income taxes even when a refund is due. No other Federal or
    congressional employee is subject to similar mandatory termination.
        Without question, Section 1203 has had a negative impact on the
    morale of the IRS workforce and is impeding the ability of the IRS to
    perform its mission. According to numerous GAO reports, IRS employees
    greatly fear the threat of being fired under Section 1203. This in turn
    has had a chilling effect on the ability of IRS employees to do their
    jobs. In particular, employees specifically attribute the decrease in
    recommending a seizure of taxpayer's assets to Section 1203. Clearly,
    Section 1203 impedes IRS' enforcement mission and is unfair to the IRS
    employees who must work under the constant threat of losing their jobs.
        NTEU believes mandatory termination for Section 1203 violations is
    unduly harsh and should not be the only disciplinary action available.
    We advocate amending RRA 98 to allow for appropriate penalties other
    than mandatory termination for Section 1203 violations and to allow for
    independent review of determinations.
        To be clear, NTEU does not condone any violation of law or rules of
    conduct by its members at the IRS or in any other government agency.
    Violations of some rules clearly warrant termination of employment.
    However, one group of Federal employees should not be singled out and
    required to be fired for offenses that do not subject other executive,
    judicial, or legislative branch employees to the same penalty.
        Mr. Chairman, the large majority of IRS employees work hard, follow
    the rules and pay their taxes on time. It is patently unfair to hold
    those who are charged with enforcing the tax laws to a higher standard
    than those who write them. NTEU asks for your support for changes to
    section 1203 of the IRS Reform and Restructuring Act, so that tax
    fairness applies to all Americans, even those who work at the IRS.
                                   conclusion
        Mr. Chairman, thank you for the opportunity to provide NTEU's
    thoughts on the administration's fiscal year 2010 budget request for
    the IRS. We believe that by investing in the IRS workforce and
    demonstrably effective enforcement and taxpayer service programs, the
    administration's request will ensure the IRS continues to meet its
    mission of providing America's taxpayers top quality service by helping
    them understand and meet their tax responsibilities and by applying the
    tax law with integrity and fairness to all.

                         ADDITIONAL COMMITTEE QUESTIONS

        Senator Durbin. The record will remain open, Mr.
    Commissioner, until Wednesday, June 17, for subcommittee
    members to submit statements and questions to be submitted to
    you for consideration.
        [The following questions were not asked at the hearing, but
    were submitted to the Service for response subsequent to the
    hearing:]
                Questions Submitted by Senator Richard J. Durbin
                measuring return on investment: new initiatives
        Question. In your fiscal year 2010 budget request, the IRS seeks
    $332 million for new enforcement initiatives projected to yield direct
    measurable results through high return-on-investment. The proposed
    investments in enforcement personnel in fiscal year 2010 are expected
    to yield $2 billion in additional annual enforcement revenue once new
    hires reach their fully trained potential in fiscal year 2012.
        GAO's review and written assessment of the proposed budget
    observes, with concern, that the IRS has no plans to compare the actual
    performance to the projections.
        Would it not be prudent and beneficial to determine the extent to
    which your revenue forecasts were accurate and the yield was realized?
        Answer. The IRS maintains a historical record of enforcement
    revenue produced by its enforcement programs at an aggregate level, and
    the IRS uses this historical revenue information to estimate future
    revenue produced from proposed enforcement initiatives in budget
    requests and to compare its estimated revenue projections with actual
    revenue. Actual annual enforcement revenue is analyzed to determine
    factors causing variance from expected results. For example, analysis
    of fiscal year 2007 enforcement revenue indicated that the increase
    from $48.7 billion in fiscal year 2006 to $59.2 billion was primarily
    the result of two large settlements.
        While the IRS does compare the actual performance to the
    projections at the aggregate revenue level, specific examination and
    collection activities are fungible, and therefore, it is difficult to
    isolate the revenue attributable to a specific initiative. The IRS uses
    its existing suite of performance measures as a tool for managing its
    activities. IRS performance measure results, including examination and
    collection coverage, are a better gauge of the efficiency and
    effectiveness of existing programs.
        Question. Assuming that Congress is able to provide these funds as
    requested and the IRS proceeds with the initiatives planned, how will
    we know whether this was a wise investment?
        Answer. At full performance levels in fiscal year 2012, the
    additional enforcement personnel will produce additional revenue and
    increases in performance measures in examination and collection as
    presented in the fiscal year 2010 budget request. For example, the
    number of audits in targeted categories is projected to increase, and
    the number of collection accounts resolved is expected to increase,
    both resulting in increased revenue. The IRS expects these initiatives
    to yield a return-on-investment (ROI) of 7.8 to 1 once they reach full
    potential.
        Question. Do you agree that knowing what actually happens as a
    result of these targeted investments would be a helpful indicator of
    success and useful in making future spending decisions and resource
    allocation plans?
        Answer. The IRS will continue to collect actual cost and revenue
    data associated with high-level enforcement programs, and will continue
    to analyze actual enforcement revenue results to refine future
    projections for budget initiatives, as needed.
        The IRS uses actual enforcement revenue from prior years to
    calculate its Return on Investment figures (ROIs) for proposed
    enforcement initiatives. The ROIs are based on rolling, 10-year
    averages of enforcement revenue produced by specific enforcement
    functions with greater weight placed on the most recent year revenue.
    The IRS bases revenue estimates on historical yield per FTE, which it
    evaluates and updates annually.
        Question. Will IRS collect data to determine the actual costs,
    revenues, and ROI to determine whether the investment produced the
    anticipated results? If ``NO''--what is the IRS's rationale for not
    keeping track of the actual return on investment of these new
    initiatives?
        Answer. As stated above, the IRS does collect actual cost and
    revenue data associated with high-level enforcement programs and uses
    the cost and revenue data to develop its proposed budget initiatives.
    Tracking the revenue produced by each initiative hire is not possible.
    For example, each new international examiner will work on a mix of
    cases which could include audits that are not associated with the
    initiative because of shifting work priorities or the emergence of new
    international issues. Additionally, the new international examiner will
    work on cases as part of an audit team. Apportioning actual revenue
    resulting from a team audit to various audit team members, who may or
    may not be an initiative hire, is not feasible. Initiative hires work
    on a variety of tasks and on group audits, and as a result, tracking
    the revenue derived from a specific initiative hire is not possible,
    but the revenue is tracked and analyzed for high-level enforcement
    programs.
                  deterrent effect of enforcement initiatives
        Question. In addition to the direct revenue impact of such an
    investment, isn't there a deterrent effect?
        Answer. Yes. Several empirical studies have indicated that the
    ``deterrent'' effect from enhanced enforcement efforts could be larger
    (perhaps much larger) than the direct revenue effect.
        Question. How does IRS measure deterrent effect? What is the
    estimate?
        Answer. By the ``deterrent'' effect of an IRS activity, we mean the
    change in voluntary compliance--both subsequent compliance by a person
    directly contacted as a part of that activity and changed compliance
    behavior by the population in general--that is prompted by an expansion
    or intensification of that IRS activity. More generally, the IRS refers
    to this phenomenon as the ``indirect'' effect since deterrence may not
    always be the mechanism at work. For example, the general population
    may demonstrate improved voluntary compliance in response to expanded
    prosecutions of tax criminals, but not because they fear being caught
    committing tax crimes; rather, the expanded prosecutions may reassure
    the average taxpayer that criminals are receiving justice, which makes
    the average taxpayer more likely to pay his or her taxes in full.
    Likewise, IRS's services to taxpayers may have a positive effect on the
    voluntary compliance of those who do not receive those services, but
    who hear positive reports from those who do.
        We can observe the compliance behavior of each taxpayer, but that
    behavior is driven by a complex set of factors (including things
    outside of IRS control, such as economic, demographic, and socio-
    political factors) that vary widely across the population. We cannot
    observe how many dollars are paid as a result of each of those factors
    separately; we can only attempt to estimate that. Several academic
    studies have attempted to estimate the indirect effect of audits, and a
    few have also estimated the effect of criminal investigations and other
    IRS activities, but since all of these statistical studies have
    limitations and weaknesses, there has not yet formed a consensus as to
    the true indirect effect of these or other IRS activities. The
    estimates that exist for the indirect effects range from approximately
    zero to over 10 times the magnitude of the direct effect.
        Question. Are there particular remedial actions or collection
    interventions that IRS uses that you have found to be more conducive or
    effective than others when it comes to deterrent effect?
        Answer. There is some limited statistical evidence that audits of
    individuals are quite cost-effective in generating an indirect effect
    (partly because they are less costly to complete than activities such
    as criminal investigations or complicated corporate audits). The IRS is
    continuing to research the indirect effects of both enforcement and
    service activities in an effort to allocate resources optimally.
                       electronic filing--staffing shifts
        Question. The IRS budget for fiscal year 2010 reflects that due to
    increased e-filing options there will be an expected decline of 4.6
    million in the number of paper returns filed, resulting in a savings in
    submission processing of 187 FTE. The IRS is also consolidating its
    individual return processing centers to achieve efficiency as the paper
    return volume drops. The IRS is slated to ramp-down its processing
    center in Andover, Massachusetts and plans to reinvest $2.3 million to
    fund a one-time severance payment for employees.
        How is the IRS transforming its workforce to adapt to 21st century?
        As the volume of e-filing grows, what is the IRS doing to
    facilitate retraining of processing staff to perform different
    activities and functions?
        Answer. One of the IRS' top priorities is to support the Submission
    Processing employees whose jobs are affected by site consolidation.
    Though some of the information included below is specific to the
    Andover, MA site that is scheduled to close in September 2009, the
    actions taken are representative of the efforts that have been made
    with each consolidation and demonstrate the IRS' strong commitment to
    provide all employees with a wide range of options.
    Mitigation Strategies to Minimize Employee Impact
        A number of mitigating strategies are used to assist employees in
    minimizing the impact of consolidation. These strategies are generally
    broken down into two distinct groups:
        Formal strategies--outlined in Article 19 (Reduction in Force and
    Mitigation Strategies) of the 2006 National Agreement between IRS and
    NTEU, these strategies are available to employees 1 year prior to the
    projected Reduction in Force date.
        Other strategies--undertaken outside of Article 19 to focus on
    preparing employees for the consolidation. Many of these strategies
    begin prior to the onset of the required Article 19 strategies.
        Formal strategies include:
      --Reassignment Preference Notice (RPN)--entitles directly affected
            employees to priority selection for vacant positions for which
            they apply and qualify, either at their same or lower grade
            Servicewide, i.e. both within and outside the employee's
            commuting area.
      --Voluntary Early Retirement Authority/Voluntary Separation Incentive
            Payment (VERA/VSIP)--provides an opportunity for eligible
            employees to separate from the Service early and receive a
            buyout.
      --Severance Pay--received by those employees who are separated via a
            RIF and are not eligible to retire.
      --Job Swaps--per Article 19, directly affected employees may swap
            jobs into other occupied positions, either inside or outside
            the commuting area.
      --Outplacement Services--employees are granted administrative time to
            participate in outplacement and career services.
      --Relocation to ``Follow Your Work''--allows directly affected
            employees who occupy positions to be abolished to voluntarily
            relocate and be realigned to a vacant position in a continuing
            site to perform the work that the employee is currently
            performing.
      --Career Transition Assistance Program (CTAP)--grants the affected
            employee selection priority for any internal vacancy for which
            s/he applies and is determined to be well-qualified.
      --Inter-Agency Career Transition Assistance Program (ICTAP)--grants
            affected employees selection priority for any external Federal
            Government vacancy for which s/he applies and is determined to
            be well-qualified.
      --Grade and Pay Retention--provided to affected employees who are
            selected for a position not more than three grades below their
            current grade.
        Other Strategies include:
      --Identifying work that can be consolidated or redirected into
            continuing sites. The following summarizes the positions
            created through these efforts:

    ------------------------------------------------------------------------
                                                                  Positions
    ------------------------------------------------------------------------
    Brookhaven:
        Centralized Offer in Compromise........................          325
        Campus Support Department..............................          140
    Memphis:
        Centralized Offer in Compromise........................          350
        Case Processing........................................          325
        Campus Support Department..............................           90
    Philadelphia:
        Centralized Insolvency.................................          280
        Case Processing........................................          230
        Campus Support Department..............................          180
    Andover:
        Automated Underreporter................................      \1\ 200
        Campus Support Department..............................           89
    ------------------------------------------------------------------------
    \1\ Wth plans to grow to about 300-400 total.

      --Communications--numerous vehicles are used to keep employees
            updated on the consolidation plan and to assist employees in
            minimizing the impact of consolidation, including:
        --Newsletters--the Andover campus developed and distributed a
                publication titled ``Changing Times'' to employees on a
                regular basis beginning in February 2008. The issues have
                addressed various consolidation issues and include employee
                Q&A's.
        --Webpage--info included on Andover SP webpage includes
                newsletters, FAQ's, and information on Article 19.
        --Employee Meetings--management holds routine meetings with
                employees to provide consolidation updates and ensure
                employees are aware of the effect consolidation will have
                on their current and future positions.
        --Flyers and handouts--will cover topics such as buyouts, early
                outs, and job swaps.
        --Info to employees in non-work status--pertinent information is
                mailed to seasonal employees in non-work status.
      --Training--provided on various topics to assist employees in
            continuing with or finding new employment, including:
        --How to apply for positions on USAJobs, the official job site of
                the federal government.
        --How to a prepare a resume.
        --How to interview for a job.
        --How to apply for a job swap (will be conducted in Andover at a
                later date).
      --Term Hiring--In an effort to minimize the employee affect from
            consolidation, sites scheduled to consolidate began hiring Term
            employees at least 2 years prior to consolidation. The Andover
            site initiated this practice in 2003, 6 years prior to
            consolidation. This hiring practice has helped to mitigate the
            effect of consolidation on our career and career conditional
            employees by limiting the number of potential applicants for
            continuing positions on the campus. Andover is the first
            consolidating site where the number of Term employees exceeds
            the number of career conditional employees.
      --Job Fairs--job fairs include employers from the private sector and
            IRS Business Units that will remain at the campus after
            consolidation.
      --Tuition Assistance--program offered to all IRS employees to assist
            them in gaining the skills needed for continued employment.
      --Mock Interview Cadre--established to assist Andover employees with
            upcoming interviews.
      --Link Line--a phone number established for Andover employees in non-
            work status to receive information on W&I job openings in
            Andover Posts of Duty.
      --Career Link--Andover IRS is partnering with local Department of
            Labor to establish an office within Andover IRS office to
            provide career guidance, employment workshops, and reemployment
            assistance.
      --Computer Kiosks--set up in Andover Posts of Duty for employees
            without access to a computer to look for job vacancies or
            update their Merit Promotion Questionnaire's (MPQs).
      --Employee Meetings--One-on-One meetings have been held with every
            employee in Andover SP to determine future plans (i.e.
            continued employment, retirement, etc.) and provide information
            related to MPQ assistance, Mock Interviews, etc.
      --Job Vacancies--Weekly Career Opportunity Listing (COL) and USAJobs
            vacancy announcements distributed to SP Operations for
            dissemination to all employees, in order to keep them informed
            of potential jobs, both internally and throughout the
            government.
      --Employee Assistance Program (EAP) representatives are in attendance
            at each RIF briefing and have committed to provide extended
            services to SP employees during this transition.
                                     ______

               Question Submitted by Senator Frank R. Lautenberg
        Question. Federal receipts at the U.S. Treasury have declined
    nearly 19 percent for the first 7 months of fiscal year 2009 as
    compared to the same period in fiscal year 2008. A significant portion
    of this revenue loss is due to a decrease in tax receipts as a result
    of the current economic recession. To what extent do you expect tax
    revenues to increase as a result of federal efforts to create jobs and
    spur economic recovery?

                                   FEDERAL RECEIPTS, FISCAL YEAR TO DATE (APRIL 2009)
    ----------------------------------------------------------------------------------------------------------------
                                                                                        Comparable
                                                                       Year to date,     period in
                                                                        fiscal year     fiscal year   Percent change
                                                                           2009            2008
    ----------------------------------------------------------------------------------------------------------------
    Total...........................................................      $1,256,066      $1,549,720           -18.9
    Individual Income Tax...........................................        $566,369        $747,558           -24.2
    Corporation Income Taxes........................................         $70,781        $171,142           -58.6
    ----------------------------------------------------------------------------------------------------------------

        Answer. The IRS does not predict the effect legislation will have
    on tax revenues. The Joint Committee on Taxation and the Department of
    the Treasury under certain circumstances will provide estimates of the
    revenue effects of proposed but un-enacted tax legislation.
                                     ______

                    Question Submitted by Senator Ben Nelson
        Question. In a Ways and Means Subcommittee hearing on June 4, 2009,
    you said you would like to work with Congress to provide the Internal
    Revenue Service with more discretion regarding imposition of the 6707A
    penalty for failure to include reportable transaction information with
    a taxpayer's return. Can you elaborate on what kind of discretion would
    be appropriate, especially in cases where taxpayers acting in good
    faith unknowingly failed to file--or, worse, were mislead into
    believing they did not need to file information about such
    transactions?
        Answer. As we have stated before, the IRS is concerned there are
    taxpayers who have been caught in a penalty regime that was not
    intended by the legislation. Many taxpayers are subject to this penalty
    and the amount due significantly exceeds the tax benefit resulting from
    the transaction. Furthermore, the statutory language does not allow for
    any adjustment to the penalty based on the tax benefit to the taxpayer.
    We may be open to changes that allow sufficient flexibility for a 6707A
    penalty to be proportional to the tax benefit associated with the
    reportable transaction giving rise to the penalty. This change could
    improve the fairness of the penalty, provide some measure of relief for
    virtually all taxpayers, and simplify tax administration.
                                     ______

                  Questions Submitted by Senator Susan Collins
        Question. The IRS is in the midst of a significant hiring
    initiative for enforcement staff as a result of its fiscal year 2009
    budget. What enforcement areas will the new staff be focused on and
    what do you anticipate the resulting increased revenues to be?
        Answer. The enforcement staff hired in fiscal year 2010 will be
    focused on the activities listed below and will generate over $2
    billion in additional revenue once they reach full potential in fiscal
    year 2012.

                                                          RETURN ON INVESTMENT ENFORCEMENT INITIATIVES
                                                                      [Dollars in millions]
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                        First year (fiscal year 2010)         Full performance (fiscal year
                                                                                --------------------------------------------              2012)
                      Fiscal year 2010 enforcement investment                                                               --------------------------------
                                                                                  FTE \1\      Cost     Revenue      ROI        Cost     Revenue      ROI
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    Direct Revenue Producing Initiatives.......................................      2,330     $332.1     $611.1        1.8     $262.8   $2,049.7        7.8
        Reduce the Tax Gap Attributable to International Activities. This              784      128.1       93.8        0.7      103.4      736.6        7.1
         initiative funds a multi-year investment to deal more effectively with
         increasing international tax activities of individual and business
         taxpayers. This effort addresses the underreporting of tax associated
         with international transactions as well as domestic taxpayers involved
         in offshore activities. It expands the IRS presence in the tax-exempt
         and governmental sectors and confronts international tax evasion
         schemes...............................................................
        Improve Reporting Compliance of SB/SE Taxpayers. This initiative               755       94.2      159.6        1.7       72.6      567.2        7.8
         improves reporting compliance among Small Business/Self Employed (SB/
         SE) taxpayers by increasing examinations of business and high-income
         returns, exams involving flow-through entities, audits targeting
         employment, excise, and estate and gift taxes, and investigations of
         business non-filers...................................................
        Expand Document Matching for Business Taxpayers. This initiative               300       26.2      191.8        7.3       22.8      386.5       17.0
         increases coverage of the document matching program to reduce the
         number of taxpayers who misreport their income. Matching third party
         information such as W-2s and 1099s against tax returns is critical to
         ensure compliance.....................................................
        Address Nonfiling/Underpayment and Collection Coverage. This initiative        491       83.6      165.9        2.0       64.0      359.4        5.6
         improves voluntary compliance and decreases nonfiling by broadening
         collection coverage with a focus on repeat non-filers and non-filers
         with high income. Additional collection staff will increase the number
         of collection actions against unpaid assessments and allow the IRS to
         close more collection cases...........................................
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    \1\ Total includes revenue and non-revenue generating FTE.

        Question. Commissioner Shulman, how can we address the tax gap?
        Answer. The Internal Revenue Service and Treasury issued an update
    of the 2007 Tax Gap Strategy report in early July. That report
    addressed this question in detail.
        Question. Does IRS have an estimate of the tax gap attributable to
    international activities?
        Answer. No. The data on which we base our tax gap estimates do not
    generally allow us to separate international and domestic issues.
    Moreover, some forms of noncompliance do not lend themselves to a clear
    characterization based on geography.
        Question. If there is not an estimate of the effect of
    international activities on the tax gap, why is that the focus of the
    fiscal year 10 enforcement initiative?
        Answer. Globalization has led to an increase in international tax
    activity, which has historically been an area of significant concern to
    the IRS. For example, foreign tax credits claimed by U.S. corporations
    increased by 71 percent between Tax Years 2000 and 2007, while foreign
    tax credits claimed by U.S. individuals increased by 133 percent during
    that time period. Likewise, between 2001 and 2006, foreign-source gross
    income of individuals grew 86.6 percent in real percentage terms,
    whereas worldwide income reported on all individual U.S. tax returns
    grew only 14.8 percent during that period.
        Question. Please describe any plans the Service may have to develop
    an international tax gap estimate.
        Answer. We are conducting a pilot study, beginning with Tax Year
    2006, to extend our National Research Program (NRP) reporting
    compliance studies of individual returns to include a small sample of
    returns with international addresses. We hope to determine from this
    pilot how best to compile representative compliance data for this
    population. If successful, this approach may allow us to estimate this
    portion of the international tax gap. Future studies of corporation
    income tax reporting compliance will need to address this concern, as
    well.
        Question. IRS reduced its performance goal for providing telephone
    assistance from 82 percent last year to 77 percent this year.
    Commissioner Shulman, why was the goal reduced and what does it mean
    for taxpayers? In your opinion, does this lower level allow for
    sufficient access for taxpayers to speak directly with an IRS assistor?
        Answer. The IRS is dedicated to providing the best possible service
    regardless of the channel the customer chooses. Although the goal and
    actual CSR LOS was lower this year than in prior years, the IRS funded
    the Toll-free program in 2009 at higher levels than in prior years by
    allocating more staffing (full time equivalents (FTEs)) during filing
    season than in 2007 and 2008. The actual toll-free FTEs for 2007, 2008,
    and 2009 filing seasons were 3,067, 3,100 and 3,344, respectively.
    However, increased customer demand, the introduction of new programs
    such as the Identity Protection Specialized Unit, and increased
    complexity of the calls handled by assistors resulted in lower service
    levels, despite increased resources. From January 1st through April 18,
    2009, the IRS serviced over 39 million taxpayers through both assistor
    and automated telephone service during the 2009 filing season. This
    level compares to just over 35 million taxpayers serviced during the
    same time period during the 2008 filing season and 32 million serviced
    in 2007. On most days, taxpayers were able to get to an assistor if
    they chose to wait. We provided an estimated wait time to the vast
    majority of callers, so they could make an informed decision about
    whether to wait or call back at a later time.
        Question. This year, IRS's average actual telephone performance has
    been well below its goal. Next year, IRS can expect another year with
    high call demand given the Recovery Act tax law changes. What specific
    steps are you taking now to improve IRS's telephone performance for
    next year should call volume could remain high?
        Answer. We are taking numerous steps to prepare for the coming
    year. During the 2009 filing season, there were 4.8 million calls from
    taxpayers asking for their prior year Adjusted Gross Income (AGI) or
    Personal Identification Number (PIN), which is required by online
    filers to submit their returns electronically. For 2010, we are
    developing both a web and automated telephone application to provide
    this information to taxpayers without requiring interaction with an
    assistor. This enhancement will free up assistors to handle more
    complex taxpayer questions. We will be implementing improvements in our
    Toll-free menus, which will get customers to the right resource faster.
    We will be expanding the use of estimated wait time announcements to
    more applications and customers. Lastly, we are planning to increase
    the number of staff on-rolls at times of peak customer demand during
    the filing season, through seasonal hiring.
        Question. IRS has spent $2.6 billion on its business systems
    modernization effort since 1999. Its Customer Account Data Engine
    (CADE), a part of BSM intended to replace the Individual Master File,
    has cost over $400 million since work on it began almost 5 years ago,
    but CADE has only delivered about 15 percent of the full capability
    intended. Please explain this small return on investment?
        Answer. The IRS has received approximately $309.3 million in
    funding for CADE over the past 5 years. With that funding, the IRS has
    delivered a complete tax return processing system for approximately 40
    million taxpayers who are enjoying the benefits of substantially faster
    refunds. In addition, the CADE project has proved the IRS is capable of
    delivering a modern database with significant functionality, including
    improved financial accounting capabilities, which have allowed the IRS
    to make progress against addressing its material weakness in this area.
        CADE also already includes capabilities to process Forms 1040,
    Schedules A, B, C, D, E, F, R, SE and Form 1040A, Schedules 1 and 3 for
    single and married filers and filers with certain dependents; extension
    Forms 4868; decedent and surviving spouse returns; certain math error
    notices; online address changes; returns with disaster area
    designations; receipt processing; and last name changes. In addition,
    CADE has supported legislative tax refund programs, such as Telephone
    Excise Tax Refunds and the recent Economic Stimulus payments.
        The IRS created the statistic referenced in your question for
    different purposes during a very specific engineering analysis, and we
    never intended to reflect a holistic assessment of the status of the
    effort. It understates nearly half the percentage of taxpayers that are
    in the new system, and it also does not reflect that a substantial
    portion of the overall effort is expended in setting up infrastructure
    to process the very first tax return.
        Finally, any discussion of return on investment should recognize
    the public's return on IRS IT investments. Because of the IRS's
    progress on CADE, approximately $58 billion in refunds went out on
    average 5 days faster that they would under legacy systems. This
    improvement has real economic value to taxpayers, particularly those in
    difficult economic situations.
        Question. Of the vast extent of IT security weaknesses that exist
    in IRS current and modernized systems, how much improvement in data
    protection can the IRS make with the requested $90 million for IT
    Security and what data and systems are still vulnerable?
        Answer. The way IRS business is transacted, the way the Service
    operates, and the way core tax administration is conducted have
    changed. These activities now rely on an interdependent network of
    information technology infrastructures. At the same time, threats from
    cyberspace have risen dramatically and are growing increasingly more
    complex, harder to detect and prevent. In order for the Service to keep
    abreast of the latest security threats from cyberspace and elsewhere,
    more strategic and tactical investments will have to be made to protect
    against the debilitating disruption of the operation of the IRS'
    information systems or breaches of the sensitive personally
    identifiable information entrusted to us by the American taxpaying
    public.
        This initiative requests an increase of $90.0 million and 36 FTE to
    improve IT security and address specific components of the Computer
    Security Material Weakness. At the more strategic level, this budget
    initiative will:
      --Better ensure the integrity of the tax system and maintain taxpayer
            confidence;
      --Allow the IRS to improve the privacy and security of taxpayer
            information;
      --Segregate securely the development, testing, and production
            environments for IT systems, and;
      --Implement the Federal Information Security Management Act (FISMA)
            security compliance controls on all enterprise-wide Windows and
            UNIX computing assets.
        At the more tactical levels, specific activities that will be
    included in this initiative are:
      --Implementation of Network Access Control to better manage what
            devices are permitted to connect to the internal network. This
            change will specifically strengthen controls over many of the
            700+ remote places of duty.
      --Bolsters the disaster recovery capabilities for the enterprise.
      --Improve the replication of our production environment in our test
            and development environments. This improvement will enable more
            complete testing of security controls and their impact before
            moving new applications into production.
      --Improving the real-time ability for the IRS to monitor and report
            on the security posture of all devices on the IRS network. This
            enhancement will allow the IRS to better understand how new and
            developing threats could potentially affect core business
            systems.
      --Implementing data leakage protection tools to monitor and control
            the movement of sensitive information in and out of the IRS
            network.
      --Providing an enterprise solution to deploy end-to-end audit log
            collection, storage, and reporting to directly address a major
            component of the Computer Security Material Weakness.
                                     ______

               Questions Submitted by Senator Christopher S. Bond
                                  enforcement
        Question. In the 1998 IRS Restructuring Act, Congress directed the
    IRS to refocus its mission not only to enforcement of the tax laws, but
    also serve the public and meet the needs of taxpayers. With the
    emphasis that you and the Administration has placed on enforcement, it
    appears that the pendulum is swinging further back to the ``bad old
    days'' of heavy handed IRS enforcement that led to the restructuring
    legislation in the first place.
        Are the enforcement initiatives that the IRS has announced this
    year coming at the cost of taxpayer service? What steps are you taking
    to ensure that taxpayer service remains an equal part of the IRS'
    mission?
        Answer. The IRS remains committed to a balanced program of
    assisting taxpayers in both understanding the tax law and paying the
    proper amount of tax.
        The fiscal year 2010 President budget request of $2.27 billion for
    taxpayer service will allow the IRS to continue improvements for both
    the quality and efficiency of taxpayer service, using a variety steps
    including, person-to-person, telephone, and web-based and self-serve
    methods to help taxpayers understand their tax obligations and pay what
    they owe.
        The IRS provides year-round assistance to millions of taxpayers
    including: Outreach and education programs; issuance of tax form and
    publications; rulings and regulations; toll-free call centers; IRS.gov
    web site; Taxpayer Assistance Centers (TACs); Volunteer Income tax
    Assistance (VITA) sites; and Tax Counseling for the Elderly (TCE).
        The IRS will continue to implement and administer these critical
    programs within the levels contained in the budget request.
                         business systems modernization
        Question. For many years, the IRS has struggled to update its
    computer systems to improve processing, enhance collections, and
    strengthen customer service. To address IRS' computer system problems,
    the Business Systems Modernization (BSM) was created. The center-piece
    of BSM is the Customer Account Data Engine (CADE) project.
        What is the status of BSM?
        Answer. The BSM program is a critically important component of the
    IRS's overall technology portfolio. In recent years, the IRS has
    consistently delivered on its commitments and is providing systems that
    deliver concrete benefits to taxpayers. Some of these benefits include:
      --CADE.--Issuing refunds for nearly 40 million taxpayers on average 5
            days faster than existing legacy systems;
      --Modernized e-File.--Dramatically reduced processing error rates,
            which eliminates rework for taxpayers and the IRS;
      --E-Services.--Delivering value-added, web-based services for
            taxpayers and the tax practitioners who serve them;
      --Account Management Services.--Providing IRS customer service
            representatives (CSRs) with faster and improved access to
            taxpayer account data with real-time data entry, validation and
            update of taxpayer addresses; and
      --Filing and Payment Compliance.--Placed more than 203,800 taxpayers
            with Private Collection Agencies since September 2006,
            facilitating the collection of more than $90 million on cases
            formerly unassigned for active collection.
        The Modernized e-File project is on track to begin delivery of Form
    1040 and certain schedules in 2010, which will extend the benefits of
    this program to individual taxpayers.
        The CADE project has delivered a modern database with significantly
    more functionality than the Individual Master File, including improved
    financial accounting capabilities, which have allowed the IRS to make
    progress against addressing its material weakness in this area. In
    2008, the IRS refined the program focus to target an accelerated
    integration of the legacy and modernized databases to get all 140
    million taxpayers into a common relational database, and into a faster
    processing cycle. That database will serve as a strategic foundation
    for the IRS's next generation taxpayer service and compliance programs.
        Finally, as the IRS proceeds with its modernization efforts, we are
    mindful of maintaining a holistic, overall portfolio approach to our
    technology programs. In particular, we are focused on balancing our
    work on modernization with appropriate investments in core IT
    operations, and in particular, IT security.
        Question. When will the CADE system be able to handle all
    individual and business tax returns?
        Answer. The Commissioner has set a goal of completing the
    development of the taxpayer account database for all individuals, and
    moving to a faster processing cycle within 5 years. The team has
    developed and delivered a long-range plan, and is in the process of
    developing the BSM expenditure plan for fiscal year 2010, each of which
    provide further details on the interim deliverables for 2010 and 2011.
        In the interests of prioritization and focus, the IRS plans to
    deliver on the individual account database before upgrading the
    business tax account database.
                            private debt collection
        Question. With the start of the new Administration, the IRS
    abandoned its private debt collection program.
        What is your justification from a purely business case perspective
    for abandoning this program for collecting small-dollar, non-complex
    collection cases? Are we to assume that these tax debts will now just
    go uncollected, since IRS officials have previously testified that the
    agency does not have the staff to work these cases? Or, do you plan to
    pull staff off of more complex, higher-dollar cases to work the ones
    that were handled by the private debt collection program?
        Answer. In early 2009, the IRS completed a cost effectiveness study
    of the Private Debt Collection (PDC) program, supported by an
    independent review, which showed that it is reasonable to conclude that
    when working similar inventory, collection efforts are more cost-
    effective using IRS employees rather than outside contractors. In
    addition, from 2002 to 2008, the percentage of potentially collectible
    inventory in active IRS collection status increased from 62.2 percent
    to 71.4 percent, and the dollar amount of potentially collectible
    inventory shelved due to lack of IRS resources declined from $7.6
    billion to $3.6 billion. These elements contributed to the March 2009
    decision not to renew contracts with the private collection agencies
    (PCAs).
        The IRS plans to work the types of cases that were assigned to PCAs
    as part of its overall collection strategy, which includes notice,
    telephone, and in-person contact. A part of this strategy is supported
    by a fiscal year 2010 IRS budget initiative which requests funding for
    two new Automated Collection System sites.
                                    tax gap
        Question. The Administration's budget includes a number of
    proposals aimed at closing the so-called ``tax gap,'' many of which
    originated in the last couple of budgets submitted by the previous
    Administration. Yet, the last estimate that the IRS undertook to
    quantify the tax gap was in 2001.
        When is the IRS going to update its tax gap estimates so we can
    measure accurately the success of these initiatives?
        Answer. We do not have plans to update estimates of all components
    of the tax gap simultaneously for a common year since new data will not
    be available for all components at the same time. Furthermore, any
    post-initiative tax gap estimates will require compliance data to be
    compiled and analyzed for a tax year in which the initiatives are fully
    implemented. Since the tax gap estimates are, of necessity, very
    approximate, it would probably be more effective to estimate the effect
    of the initiatives by analyzing trends of observable tax data, such as
    tax revenue or enforcement revenue, accounting for other factors that
    have caused the trends to vary over time.
        Question. Does the IRS plan to estimate the extent to which the
    current tax gap is associated with taxpayers' intentional efforts to
    evade the tax law as opposed to honest mistakes due to the incredible
    complexity of our tax code today?
        Answer. The IRS seeks to be able to distinguish intentional
    noncompliance from unintentional mistakes. Several of our reporting
    compliance studies have tried to address this question. However, we
    have found that it is virtually impossible for auditors to know for
    sure what motivated an error. It is relatively easy for a taxpayer to
    claim that an error was an unintentional mistake (e.g., ``I lost my
    receipts,'' or ``I forgot about that income.''), whether that is true
    or merely an attempt to avoid penalties and more detailed scrutiny.
    Moreover, even if IRS employees could distinguish between intentional
    and unintentional errors, the unintentional errors among all returns
    would likely include both overstatements and understatements of tax in
    roughly equal amounts. Since the tax gap is defined as the aggregate
    amount of understatements net of overstatements, those unintentional
    overstatements and understatements are likely to cancel each other when
    added to the tax gap. If so, the tax gap likely includes very little
    net unintentional noncompliance. Having said that, though, the IRS
    seeks to minimize unintentional noncompliance since it represents
    unnecessary burden on both taxpayers and the IRS. It is also important
    to point out that, in addition to spawning unintentional errors, the
    complexity of the tax code undoubtedly creates opportunities for
    willful noncompliance.
        Question. Does the IRS plan to produce an estimate of how much of
    the tax gap is associated with international transactions, since the
    Administration has placed so much emphasis on this compliance area?
        Answer. We are conducting a pilot study, beginning with Tax Year
    2006, to extend our NRP reporting compliance studies of individual
    returns to include a small sample of returns with international
    addresses. We hope to determine from this pilot how best to compile
    representative compliance data for this population. If successful, this
    approach may allow us to estimate this portion of the international tax
    gap. Future studies of corporation income tax reporting compliance will
    need to address this concern, as well.
                       implementation of tax gap strategy
        Question. In 2006, the Treasury Department and the IRS prepared a
    strategy for addressing the tax gap, and in 2007, the IRS released a
    progress report on the implementation of that strategy.
        Please provide me an update on the implementation of the tax gap
    strategy, including new initiatives that the IRS plans to implement
    over the next 5 years to close the tax gap.
        Answer. The Internal Revenue Service and Treasury issued an update
    of the 2007 Tax Gap Strategy report in early July. That report
    addressed this question in detail.

                              SUBCOMMITTEE RECESS

        Senator Durbin. We thank you for your appearance today and
    thank Senator Collins.
        This subcommittee stands recessed.
        [Whereupon, at 12:33 p.m., Tuesday, June 9, the
    subcommittee was recessed, to reconvene subject to the call of
    the Chair.]

      FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR FISCAL
                                   YEAR 2010

                                  ----------

                             TUESDAY, JUNE 16, 2009

                                           U.S. Senate,
               Subcommittee of the Committee on Appropriations,
                                                        Washington, DC.
        The subcommittee met at 3:30 p.m., in room SD-138, Dirksen
    Senate Office Building, Hon. Richard J. Durbin (chairman)
    presiding.
        Present: Senators Durbin, Nelson, and Collins.
        Also present: Senator Bennett.

                         SMALL BUSINESS ADMINISTRATION

    STATEMENT OF HON. KAREN G. MILLS, ADMINISTRATOR

                 OPENING STATEMENT OF SENATOR RICHARD J. DURBIN

        Senator Durbin. Good afternoon. I am pleased to convene
    this hearing to consider the fiscal year 2010 funding request
    of two agencies within the jurisdiction of the Appropriations
    Subcommittee on Financial Services and General Government--the
    Small Business Administration (SBA) and the General Services
    Administration (GSA).
        My distinguished ranking member, Senator Collins, will be
    here shortly, along with others.
        SBA and GSA are both playing key roles in the Federal
    Government's efforts to stimulate the economy. The Recovery Act
    provided SBA with $730 million to expand access to capital for
    small business. As the lifeblood of the American economy, small
    businesses must be the main driver of our Nation's economic
    recovery. The Recovery Act also provided $5.5 billion for GSA
    to initiate new Federal building projects.
        These projects employ architects, engineers, electricians,
    plumbers, carpenters, and many others. They provide an indirect
    benefit to local economies by spurring increased economic
    opportunity. Capital construction projects led by GSA are
    important investments, not only for the Government, but also
    for the communities in which the projects take place, including
    many small businesses.
        Small businesses are at the heart of many sectors of the
    economy, including information technology, retail, and green
    jobs. In fact, in fiscal year 2008 alone, small businesses were
    awarded over $1 billion in GSA contracts. In addition to
    Recovery Act initiatives and implementation, we are also going
    to discuss the fiscal year 2010 funding requests for SBA and
    GSA.
        Joining us for our first panel is Karen Mills, the new
    Administrator of the Small Business Administration. I welcome
    you to the subcommittee.
        Ms. Mills. Thank you, Senator.
        Senator Durbin. The budget request for fiscal year 2010 for
    SBA is $779 million, which will provide funding for a wide
    array of programs supporting small business lending and
    entrepreneurial development. SBA has been on the front lines of
    the economic crisis, working to help small business owners as
    they face difficulty gaining access to capital. SBA oversees a
    loan portfolio of $85 billion and in a typical year makes or
    guarantees loans to $20 billion for small businesses.
        We will discuss the good news regarding the performance of
    new programs, as well as an array of entrepreneurial
    development programs that can help small businesses stay on
    their feet and even grow in this tough environment.
        Administrator Mills, I look forward to hearing your
    testimony on your fiscal year 2010 budget request and on SBA's
    progress on implementing new Recovery Act programs, and I give
    you the floor.

                    SUMMARY STATEMENT OF HON. KAREN G. MILLS

        Ms. Mills. Well, thank you very much, Senator Durbin.
        Chairman Durbin and Ranking Member Collins, who I know is
    going to be here, and members of the subcommittee, it is an
    honor to testify here before you. And I am very pleased to be
    here to support the President's 2010 budget for the Small
    Business Administration.
        First, though, I would like to briefly update you on the
    progress that we have made with the Recovery Act.
        With the launch yesterday of the ARC loans, that is
    America's recovery capital, the SBA has implemented more than
    $645 million of the $730 million in our Recovery Act funding.
    So, on March 19, we announced that we were going to raise the
    guarantees--that we'd raise the guarantees on most of the 7(a)
    loans--and that we also would reduce or eliminate the fees on
    7(a) and 504 loans.
        The results actually are quite encouraging. The problem we
    are trying to address is that we had an environment of very,
    very tight credit for small business, and small businesses were
    suffering because they couldn't get any liquidity and any
    credit. And we were able to, with these two programs, increase
    our loan volume by more than 30 percent compared to the weeks
    before the Recovery Act.
        And just as importantly, we have been able to bring back
    over 500 banks who had not been lending, some of them since
    2007, and who are now lending through the SBA programs. So, at
    this pace, the funding for the 90 percent guarantee and the fee
    reductions will last through December 2009.
        As I said, on Monday, we began the ARC loans, and actually,
    30 were approved yesterday. We actually expect there to be
    10,000, but we are off to quite a lot of demand. These are
    loans that are going to provide relief for some viable small
    businesses that are struggling.
        They are 100 percent guaranteed by the SBA. They are
    $35,000, or up to $35,000. They have no interest for borrowers.
    And they have over 12 months before any repayment begins, and
    then the repayment is over 5 years.
        Overall, the SBA is here to ensure that small businesses
    will continue to drive the American recovery and also to be
    able to build a strong foundation for America's competitiveness
    and for the creation of what we call 21st century well-paying
    jobs.
        The 2010 SBA budget request is $779 million, and it is in
    support of these objectives. There are four basic functions of
    the SBA, and they are included, each one, in this budget.
        First is our disaster assistance programs, and they are to
    ensure that communities will recover from a disaster and begin
    to again contribute to the economy. We actually have more than
    1,200 trained standby employees, and they go from the ice
    storms in Maine to the wildfires in California, and then they
    go to the tornadoes in the Midwest and the floods. And now they
    are ready to go down to the gulf coast or the eastern seaboard
    for hurricane season.
        And they help communities. They are deployed to communities
    who are affected by disaster, and they process and give out
    both homeowner and business loans. And I am pleased to say that
    they are ready to go for this season and that our processing
    times in this disaster center, which we have worked very hard
    to bring quite lower, are on target, and that is 14 to 18 days.
        Our 2010 request in this area is $101 million for
    administration of the direct loan program.
        The second area is our Capital Access Division, and that
    oversees our business loans. And I heard Senator Durbin
    mention--I was going to say more than $80 billion--you actually
    said $85 billion. Thank you. That actually is right where we
    are.
        We are requesting the same authorization levels that were
    enacted in 2009 to support more than $28 billion in small
    business financing. This is through our 7(a), 504, our SBIC
    investments, and our microloan programs. The total subsidy
    request for this is $83 million in fiscal year 2010.
        Our third division is our Government Contracting Division,
    and that helps small businesses that have the opportunity--
    helps them have the opportunity to participate in Government
    contracting and subcontracting. This budget requests an
    additional $2 million. We are going to revise the certification
    process for our HUBZone and 8(a) business development programs,
    and we are going to make sure that only eligible businesses
    participate, and we are going to be able to determine when our
    site visits and our oversight is necessary.
        Our fourth division is our Entrepreneurial Development
    Division, and that is really the backbone of the agency. We
    have over 900 small business development centers, SBDCs. We
    have more than 100 women-owned business centers. And we have
    more than 350 chapters of SCORE, which is our retired executive
    program.
        Overall, we have 14,000 affiliated counselors. And one of
    the partner organizations said to me the other day that he
    thinks that we are within 45 minutes to an hour of most small
    businesses with counseling assistance.
        The performance of these operations is quite strong. We
    have seen 34,000 clients since October, and that is a 5 percent
    increase, as you can imagine in these times, compared to last
    fiscal year.
        So, as you can see, we are a small agency with a big
    mission, especially in today's economic climate. Already,
    Federal agencies throughout the administration are turning to
    the SBA. They are looking for ways to tap into our network of
    staff and our partners who are already on the ground and
    working with small business owners.
        One recent visible example of our work has been with the
    auto task force and where we have helped devise dealer floor
    plans, the financing for dealer floor plans. This budget is
    going to allow us the flexibility to build more of these
    partnerships in response to these challenging times.
    Specifically, $20 million in the 2010 budget allows us to
    create three important collaborations.
        The first initiative is on veterans. We are going to
    provide an additional $5 million to focus throughout our agency
    on serving veterans. We have 12,000 troops returning this
    summer. We have tens of thousands over the next coming year,
    and we have to be ready to serve these veterans who are or who
    want to become small business owners.
        So already we have eight specialized veterans centers, but
    we actually need to be serving veterans in all of our other
    partners. There are 2 million women veterans. We need to be
    ready to serve them in our women-owned business centers. We are
    already in conversations with the Secretary at Veterans Affairs
    on how to coordinate our efforts, and this is part of an
    overall objective at the SBA and across the administration to
    collaborate, to break down sacred turf in order to make Federal
    dollars work more efficiently for those who need our help.
        The second initiative is $10 million, which is requested to
    form a ready reserve, or SWAT team. This is an interagency
    collaboration with SBA. At the request of a community, these
    teams will go into areas that have been disproportionately
    impacted by the economy and help them plan for jobs and growth.
    The focus is going to be on the manufacturing sector, on the
    automotive industry, on communities that are reinventing their
    economy from the ground up.
        I went to Kokomo, Indiana, which is one of the highest
    concentrations of Chrysler employment, 2 weeks ago, and the
    mayor, Greg Goodnight, asked me for just this kind of help.
    Could we send this kind of team in?
        The ready reserve teams are going to work closely with this
    network, this bone structure of SBA partners to help leverage
    the local assets, create jobs, grow small businesses.
        The third initiative in this budget is $5 million to
    support small businesses through regional economic clusters. An
    example that I like to talk about is the Maine boat builders,
    and the Maine boat builders have formed a cluster with the
    University of Maine, working on new composite technology. This
    is a 400-year-old industry now competing across the globe.
        Maine's small boat builders are one example, and I know
    that Senator Collins has actually been working with this group
    for a long time, even longer, much longer than I have.
        So clusters like this are forming in every State. They are
    going to be fueled by efforts in the Department of Commerce.
    The Department of Commerce has $50 million in their budget for
    these cluster activities. The SBA resources on the ground will
    coordinate with Commerce's manufacturing and export centers,
    with Labor's trade assistance programs, and a number of other
    programs to assist the clusters' needs.
        In the coming year, my personal commitment with all our
    efforts at the SBA is that we will measure our progress on an
    agency-wide basis and transparently report our activities to
    Congress and to taxpayers.

                               PREPARED STATEMENT

        Already, we are tracking our progress in a systematic and
    integrated way. We have a dashboard of data on a weekly basis
    and on a monthly basis. And we are going to continue to use
    these metrics in our objectives of implementing the Recovery
    Act, reinvigorating the agency, and serving as the strongest
    possible voice for small business.
        Thank you very much. I would be happy to----
        Senator Durbin. Thank you, Administrator Mills.
        [The statement follows:]
                       Prepared Statement of Karen Mills
        Chairman Durbin, Ranking Member Collins and Members of the
    Committee, it is an honor to testify before you. I am pleased to be
    here to support the President's 2010 Budget for the SBA, but first I
    would like to briefly update you on the SBA's progress with the
    Recovery Act.
        With the launch of the America's Recovery Capital (ARC) loan
    program yesterday, the SBA has implemented more than $645 million of
    the $730 million in total SBA Recovery Act funding. On March 19, we
    announced that we would raise guarantees on most 7(a) loans to 90
    percent and reduce or eliminate fees on both of our flagship loan
    programs. The results are encouraging. In this environment of tight
    credit, we were able to increase our loan volume by more than 30
    percent compared to the weeks before the Act was passed. Just as
    importantly, we have brought nearly 500 banks and credit unions back to
    the program who had not participated since 2007.
        By and large, the stimulus money is out in the marketplace--in the
    hands of entrepreneurs and small business owners--and it is working. At
    this pace, funding for the 90 percent guarantee and the fee reductions
    will last through December of this year.
        Yesterday, we opened up applications in our ARC loans program.
    These will provide the relief that many viable but struggling small
    businesses need. The ARC loans are up to $35,000 with no interest for
    borrowers and no repayments for 12 months. We expect these loans to be
    in high demand. We have taken steps to ensure that smaller lenders and
    community banks have access to these loans before the supply runs out.
    Specifically, we have limited the number of loans a lender can give to
    50 a week, with a total from any lending institution of no more than
    1,000. And if a bank doesn't use all of the loans one week, they can
    roll them over to the next week.
        The SBA is here to ensure that small business will continue to
    drive America's economic recovery and build a stronger foundation of
    American competitiveness while creating well-paying jobs in the 21st
    century.
        The 2010 SBA Budget request of $779 million is key to moving
    forward with that overarching goal in mind. There are four basic
    functions of the Agency that are supported by this budget.
        First, our disaster assistance programs ensure that businesses and
    communities can recover quickly from disaster and once again contribute
    to the local economy. We have a direct loan volume of more than $1
    billion for this area and the processing times for our disaster loans
    are on target. We also have more than 1,200 trained standby employees
    who can be deployed to communities affected by disaster, and we
    continue to find ways to improve operations and planning in this area.
        The total fiscal year 2010 request in this SBA function is $101
    million for administration of the direct disaster loan program.
    Disaster loan subsidy funding is available through unobligated
    balances.
        The budget request also includes $1.3 million in administration
    expenses for the disaster assistance programs and $1.7 million in
    credit subsidy funding to conduct two pilots of guaranteed disaster
    loan programs authorized in the 2008 Farm Bill.
        Second, our capital access division oversees our business loan
    programs which now support a portfolio of more than $80 billion in loan
    guarantees. We have requested the same authorization levels as enacted
    in fiscal year 2009 to support more than $28 billion in small business
    financing through our 7(a), 504, Small Business Investment Company and
    Microloan programs.\1\
    ---------------------------------------------------------------------------
        \1\ $17.5 billion, $7.5 billion, $3 billion and $25 million,
    respectively. In addition, $12 billion in authority is requested for
    the Secondary Market Guaranty program.
    ---------------------------------------------------------------------------
        The total subsidy request for this is $83 million for 2010, of
    which $80 million supports $17.5 billion in 7(a) volume and $3 million
    supports $25 million in Microloan volume.
        Also, we continue our multi-year investment in the SBA's Loan
    Management Accounting System, an effort to replace our outdated
    computer system. The budget requests $5 million in additional funds for
    this effort.
        Finally, $3 million is requested for Capital Access to conduct a
    study on the next generation of equity capital programs to help
    stimulate innovation and job creation.
        Third, the SBA's Government Contracting Division helps small
    businesses receive opportunities to participate in Government
    contracting and subcontracting, with a goal of delivering 23 percent of
    all Federal prime contracts to small firms. These contracts serve as
    stepping stones for small business growth while allowing Federal
    agencies access to quality products and services with high levels of
    innovation, service, and responsiveness.
        This budget requests an additional $2 million to revise the
    certification process for the HUBZone and 8(a) Business Development
    programs, so that only eligible businesses participate in these
    programs. The money will also improve training programs which target
    both small businesses and procuring agencies to ensure that small
    businesses have the opportunity to compete.
        Fourth, our entrepreneurial development division is the backbone of
    the agency, harnessing the entrepreneurial spirit of entrepreneurs and
    small business owners across the country. We manage this effort through
    nearly 900 Small Business Development Centers and more than 100 Women's
    Business Centers, 350 chapters of SCORE, our mentoring program that
    matches experienced executives with small businesses, and other
    programs which comprise about 14,000 affiliated counselors in total.
    Entrepreneurial Development also includes major initiatives to reach
    small business owned by veterans, Native Americans, minorities and
    other populations, such as those in rural areas. Our role is to be
    there for those who need help accessing capital and advice to pursue
    small business opportunities.
        I should note that the performance of our counseling operations is
    strong, with our Small Business Development Centers serving nearly
    34,000 clients since October, a 5 percent increase compared to last
    fiscal year.
        The major focus of this division in fiscal year 2010 will be not
    only to maximize the impact of the linkages the SBA has with our
    extensive network of partners, but also to improve the coordination
    between our partners. In addition, we will take advantage of the
    collaborative opportunities we are seeing with Federal agencies as well
    as state, local and private sector players who can help us serve
    entrepreneurs and small businesses.
        The SBA is also engaged in new collaborations with the Departments
    of Veterans Affairs, Commerce, and others that I will describe further
    shortly.
        As a foundation to support each of these four areas, the SBA is
    renewing its focus on investing in its people, technology, and other
    core agency investments that are critical to the agency's future.
        With technology, the Recovery Act provides $20 million to move
    forward with efforts such as automating old paper-based systems,
    boosting data transfer speeds and a new web portal and a customer
    relationship management system.
        The fiscal year 2010 budget request includes $3 million for
    additional IT improvements related to technical training, off-site data
    storage, a better SBA Internet presence, and more email storage
    capabilities for employees.
        Our people, of course, are our strongest asset.
        This budget request includes $13.6 million in additional funds for
    salaries and benefits, $10 million of which will go to hire about 80
    additional employees, bringing total salary expenditures to $268
    million with 2,203 employees. These new hires will be largely focused
    on loan purchases and processing.
        This budget also requests an additional $2 million to help the
    agency address much needed efforts in this training, mentoring and our
    succession planning efforts. Our hope is that these investments in SBA
    staff will allow us to build on our recent Most Improved Agency award
    related to job satisfaction in the Federal Government. We rose from
    30th to 26th, but there is still much room for improvement.
        As you can see, we are a small agency with a big mission,
    especially in today's economic climate.
        Already, Federal agencies throughout the Administration are turning
    to the SBA, looking for ways to tap into our vast network of staff and
    partners who are already ``on the ground'' interacting with small
    business owners across the country.
        The most visible recent example of this has been our work with the
    Auto Task Force. We are moving rapidly to implement a new program to
    finance dealer floor plans. We have also been engaged more recently in
    the health care discussion to ensure that the needs of small business
    employees will be met in the future.
        This budget allows us the flexibility to build more of these
    partnerships to adapt to the needs of these challenging times.
    Specifically, $20 million is allocated in the 2010 budget to allow the
    SBA to create truly powerful collaborations through three major
    initiatives.
        The first initiative provides an additional $5 million to focus on
    veterans business issues. We have 12,000 troops coming home from Iraq
    this summer and tens of thousands more in the coming year. We must be
    ready to serve these veterans who are, or who want to become, small
    business owners.
        Already, we have 8 specialized veterans resource centers, but we
    need to be serving veterans throughout our 900 Small Business
    Development Centers, our 350 SCORE chapters and our other partners.
    Also, there are nearly 2 million women veterans, and we need to ensure
    that our Women's Business Centers are well-equipped to serve all of
    them.
        The $5 million requested in the 2010 budget will leverage our
    existing networks to serve veterans. We are already in conversations
    with the Secretary at Veterans Affairs on how to coordinate our
    efforts. This is the part of an overall objective at the SBA and across
    the Administration to collaborate and break down ``sacred turf'' in
    order to make our dollars work more efficiently for those who need our
    help.
        Secondly, a $10 million initiative is requested to create a program
    of ready reserve teams or SWAT teams. This will be an interagency
    collaboration with SBA experts and experts at other Federal agencies.
    At the request of the community, this team will go into areas that have
    been disproportionately impacted by the economy and help them plan for
    growth.
        This will include regions that have been hit in the manufacturing
    sector, the automotive industry, and other communities that are
    reinventing their local economy from the ground up.
        I recently went to Kokomo, Indiana, a town with 25 percent
    unemployment. The mayor, Greg Goodnight, asked me for exactly this kind
    of help as they work to grow new companies in electronics and
    engineering.
        The ready reserve teams will work closely with our existing
    partners to leverage the local assets in communities like Kokomo and
    uncover possible new opportunities. They will find ways to grow a
    broader knowledge base, to learn new skill sets, and to create 21st
    century jobs.
        Third, the Budget contains a $5 million initiative is to support
    small businesses who participate in Regional Economic Clusters.
        An example is the Maine boatbuilders who are working with new
    composite technology to create lighter, faster boats that are
    competitive in global markets. Senator Collins has been working with
    this group for some time. Maine's small boatbuilders have clustered
    together to be a new driver of the State's economy.
        Clusters are forming in every State and will be fueled by efforts
    in the departments of Commerce and Energy. The SBA's resources on the
    ground will coordinate with Commerce's manufacturing and export
    centers, Labor's trade assistance programs, and others to serve each
    cluster's particular needs.
        This budget will allow us $5 million for this effort to identify,
    grow and expand the partnerships that will allow us to maximize the
    national economic impact of regional clusters.
        In sum, this $20 million budget request will allow the SBA to be a
    strong voice for small business across the Administration while
    reaching out to underserved populations such as veterans . . .
    emphasizing innovation in areas hard-hit by the recession . . . and
    building on the strengths that already exist in small business
    communities.
        As you can see, we are a small agency with a big mission,
    especially in today's economic climate.
        In the coming fiscal year, my personal commitment with all of our
    efforts--both new and existing--is that the SBA will measure our
    progress on an agency wide-basis and transparently report our
    activities to taxpayers. Already, we are tracking our overall progress
    in a systematic and integrated way, reviewing a dashboard of data on a
    weekly and monthly basis. We will use these metrics to continue
    implementing the Recovery Act, reinvigorating our agency and serving as
    the strongest possible voice for small business.
        Provided with the resources, the SBA can continue to be a true
    catalyst for the growth and innovation--helping entrepreneurs and small
    business owners lead us out of this recession, stimulate the economy,
    strengthen U.S. competitiveness, and create new, well-paying 21st
    century jobs.
        Thank you and now I'm pleased to take your questions.

                       SMALL BUSINESS DEVELOPMENT CENTERS

        Senator Durbin. I welcome my colleague Senator Collins.
        I would like to ask a question or two. First, you have
    requested some $20 million for new entrepreneurial development
    initiatives, and your testimony says this money will be used in
    part for increased focus on veterans, SBA SWAT teams, and small
    business clusters. I like the idea of innovative thought and
    new approaches. However, there is something that I find I can't
    resolve.
        Also in this budget is a proposed $13 million decrease in
    the small business development centers. They have an
    established network of connections across the country, and they
    are already on the street, ready to address the challenges that
    you have identified. I could give you the list of
    accomplishments of these SBDC associations, but I think you
    would know them.
        So here is what I am trying to struggle with. Why would you
    cut back on an established network that has proven that it can
    help businesses and then start a new function to go after three
    specific business needs? It would seem to me that we wouldn't
    want to sacrifice the SBDCs to create a new experimental
    program, and also will there be SWAT uniforms for the SBA
    employees?
        Ms. Mills. Well, yes, on the SWAT uniforms, of course.
        Well, you are absolutely right to point out this anomaly in
    the data. And let me be very clear, it is not our intention to
    cut the SBDC programs. So here is how the anomaly appeared.
        When we proposed our 2010 budget, proposed $97 million for
    SBDCs, that was level funding for this absolutely critical
    program. So 2009 was $97 million. We proposed in our 2010
    budget the same amount.
        This is a critical program, and it is what we call the bone
    structure, the foundation stone, as you have pointed out, of
    how we are executing, how we are on the ground. The numbers,
    the metrics on this are very, very good. Not only are they up 5
    percent, but we have--or we document how--when they serve
    clients on a long-term basis, the performance of these clients
    increases versus the control group who are not served. So these
    are really critical elements of our plan.
        The reason that you see $110 million in 2009 is that
    Congress passed the actual 2009 after we had submitted the
    2010, and there was an increase for the SBDCs, which we are
    very grateful for.
        Senator Durbin. So you are saying that the $97 million is
    flat funding from the previous fiscal year?
        Ms. Mills. Yes, and our intention was never to cut this
    program. We rely on this program. It is a backbone program. So
    there was no replacement contemplated.
        Senator Durbin. It would seem that flat funding would not
    anticipate just ordinary increase in cost of living and the
    like?
        Ms. Mills. Well, as I said, we are very, very happy to talk
    about supporting this program because this program is a
    foundation stone of everything that we want to do.

                               EMPLOYEE TRAINING

        Senator Durbin. Let me ask you about one of the--since you
    are brand new to the agency, I will just ask you what your
    thought is about this particular issue.
        OPM did a survey in 2008 of the best places to work in the
    Federal Government. The Small Business Administration in 2008
    ranked 26th out of 30 agencies. That is low, but an improvement
    over the previous year, where it ranked 30th out of 30
    agencies, dead last.
        So when it comes to this issue of morale and the like, I
    would like to know what your thoughts are on how you are going
    to change that particular--or at least address that particular
    challenge. One of the things that has been suggested is more
    money into employee training so that there is a notion that if
    they do train and improve their skills, that there is a chance
    for advancement within the organization.
        However, the report states the agency has not yet
    documented a comprehensive plan for training that links core
    competency to your goals. So can you tell us if you are aware
    of this problem, what you are doing to address it, whether it
    involves any training component or things like student loan
    forgiveness?
        Ms. Mills. Senator, I am very happy to talk about this.
    When we talk about the priorities, when I talk about my
    priorities for the agency, one of the most important ones is
    reinvigorating the agency, and there are two components of
    this--investing in our people and investing in information
    technology. And what you have just described is at the core of
    our plan to invest in our people.
        It is unacceptable to be 30th out of 30. We won an award
    last month for most improved agency, and we are only at 26.
    This is not good enough.
        So we have embarked on a revision of our training program,
    and this is a priority for me as the Administrator and for our
    whole team because we have terrific people. And we ask them, as
    I said, to do a lot of jobs, to carry a big load. And we need
    to prepare them and invest in them in order for them to be
    great managers, in order for them to be great counselors. And
    we actually have some excellent programs in the planning
    process that we plan to begin to implement in the next month.
        So we are also looking at student loan forgiveness, and I
    am pleased to tell you that we are going to do that as well,
    and that is going to be implemented within the next 30 days.
        Senator Durbin. Do you have the legal authority to do that?
        Ms. Mills. Yes, I believe we do.
        Senator Durbin. Good.
        Senator Collins.
        Senator Collins. Thank you. Thank you, Mr. Chairman.
        I would ask unanimous consent that my opening statement be
    entered into the record.
        Senator Durbin. Without objection.
        [The statement follows:]
                  Prepared Statement of Senator Susan Collins
        Thank you, Mr. Chairman.
        Administrator Mills, welcome and thank you for being here today.
    Before I discuss your new role as head of the Small Business
    Administration, I want to thank you for your service to our State of
    Maine. Your efforts to promote economic development and investment in
    small businesses in our State have helped retain and create jobs, and
    have helped small manufacturers increase efficiency and
    competitiveness.
        I am sure that you will bring the same leadership and vision to the
    SBA as you brought to our home State.
        As we all know, small businesses are the backbone of our economy.
    Our economic strength and future are tied to the strength of small
    businesses.
        During the last decade, America's small businesses have created
    about 70 percent of all new jobs. Small businesses employ about half of
    U.S. workers and create more than half of nonfarm private GDP.
        In Maine alone, we have 154,000 small businesses. About 112,000 are
    self-employed individuals, and another 42,000 of these small businesses
    have employees. These Maine entrepreneurs created nearly 5,000 new jobs
    in 2007 alone.
        Administrator Mills, I look forward to working with you to give
    small businesses the support and assistance they need to emerge from
    this recession strong and nimble. I am eager to hear about the progress
    you are making in implementing the SBA's portion of the Recovery Act,
    which contained many provisions aimed at helping small businesses
    recover, grow and expand. I also look forward to hearing your fiscal
    year 2010 proposals and how they will continue SBA's core services of
    entrepreneurial assistance and access to capital for small businesses.
        Mr. Prouty, the Recovery Act provided $5.5 billion to GSA for
    construction of new facilities, and for renovation and modernization of
    old ones to create more energy efficient Federal buildings. There are
    plans to spend these funds in all 50 States and 2 U.S. territories--
    creating jobs, constructing buildings the Nation needs, and reducing
    the energy consumption of the Federal Government. The Recovery Act also
    included $300 million for the purchase of energy efficient motor
    vehicles for the Federal fleet. These funds were intended to help
    stimulate the economy and maximize economic benefit for the ailing auto
    industry. I look forward to hearing from you about the progress GSA is
    making in executing this enormous investment.
        The President's fiscal year 2010 budget provides funds for
    construction projects in many States, including my own. However, I am
    concerned that the President's request does not follow the Judicial
    Conference's Five-Year Courthouse Construction Plan. In fact, the
    fiscal year 2010 request does not fund a single courthouse on the
    Judicial Conference plan. Mr. Chairman, I am pleased that we have
    invited Judge Bataillon to testify about the selection process for
    courthouse construction. As Chair of the Space and Facilities Committee
    for the Judicial Conference, Judge Bataillon will be able to discuss
    how the fiscal year 2010 Budget request will affect the design,
    construction, and completion of our Nation's courthouses.
        Mr. Chairman, before I conclude, I would like to submit for the
    Record a letter that Mr. James Duff, Secretary of the Judicial
    Conference, sent to you and me on June 9, 2009. (Pause for Senator
    Durbin to accept the letter into the Record.)
        This letter expresses the Judicial Conference's concerns about the
    President's budget request. It states, in part, that ``if these
    projects are not funded in fiscal year 2010, we are concerned that all
    projects in 2010 and subsequent years will be delayed at least another
    year-seriously impacting the judicial process where courthouses are
    already out of space, and critical security deficiencies currently
    exist.''
        Mr. Chairman, thank you for calling this hearing. I look forward to
    working with you as we consider the fiscal year 2010 budget requests of
    SBA and GSA, as well as the other agencies within our subcommittee's
    jurisdiction.

        Senator Collins. Thank you.
        I want to apologize to you, Mr. Chairman, and to our
    witness for my late arrival. Since the witness is from the
    State of Maine, she can appreciate that I was at the Seapower
    Subcommittee of Armed Services, which is also a very high
    priority for our State.

                       SMALL BUSINESS DEVELOPMENT CENTERS

        Administrator Mills, let me first associate myself with the
    remarks made by the chairman about the small business
    development centers. As a former regional administrator of the
    SBA, I know personally how valuable those centers can be in
    providing advice and guidance, which can be at least as
    important--well, maybe not as important, but almost as
    important as money to a new business or a business that is
    thinking of expanding. So I, too, hope we are not seeing a
    cutback in those valuable centers.

                     AMERICAN REINVESTMENT AND RECOVERY ACT

        I would like to ask you for an update on the implementation
    of the Recovery Act. This subcommittee gave the SBA some $730
    million to help get small business lending going again through
    a variety of means, including increasing the amount of a loan
    that the SBA could guarantee, cutting fees, a variety of
    programs.
        What is the status of the SBA's efforts to implement the
    Recovery Act?
        Ms. Mills. Thank you, Senator Collins.
        The status of the Recovery Act is that as of yesterday,
    with the implementation of the ARC loans, we have implemented
    $345 million of the $730 million of Recovery Act money now
    available for funding. The first stage went out on March 19,
    which was the increase of guarantees to 90 percent and the
    reduction of fees. And the reaction--we really have to thank
    you for putting this money forward because the reaction was
    immediate.
        When small businesses had been having difficulty getting
    credit, we were able to see our loan volume go up by 30
    percent. And actually, I am told as of yesterday, it is now 35
    percent over the weeks before the Recovery Act.
        In addition, we were able to attract 500 new banks into the
    program who had not made a loan since--some of them since 2007.
    So the formula in that Recovery Act is exactly right, and we
    are seeing the loan volumes increase and increase. We are not
    back yet to pre-October, pre-2008 levels. But money is in the
    hands of small businesses, and the Recovery Act is working to
    keep those jobs.
        Senator Collins. That is great to hear.
        Ms. Mills. It is good.

                        SMALL BUSINESS ACCESS TO CREDIT

        Senator Collins. I will tell you, and I know you hear it
    back in Maine as well, that there is still a lot of small
    businesses that are having their lines of credit terminated,
    that are having loans called, and this infuriates me because a
    lot of times the financial institutions that are cutting off
    lending to small businesses are those that have received
    billions of dollars in TARP money.
        So it is just infuriating to me that they are cutting off
    credit to small businesses that, in many cases or in most
    cases, are paying on time. They have not violated the terms of
    their loan agreements, but it is just a matter of the bank
    trying to build up its capital or reduce its exposure.
        When I was the regional administrator in New England in
    1992 or 1993--I can't remember which year--banks were failing
    throughout New England, and we initiated a New England lending
    and recovery project, which I have discussed briefly with you.
    And what this project did is go into failed banks and take out
    the credit-worthy loans and place them with a new lender with
    an SBA guarantee. And the result was that we were able to
    intervene in cases where, through no fault of its own, a small
    business was losing its credit.
        Is SBA looking at some sort of proactive program like that,
    where you would go in and offer to put a guarantee on a loan in
    order to keep it from being called or the credit line
    terminated?
        Ms. Mills. Well, yes. We absolutely have, and in fact, you
    had mentioned this a while ago. There are two programs that are
    really going to be helpful to this quite distressful problem of
    credit lines being cut to small businesses.
        The first is actually the ARC loans. What is happening to
    many of these small businesses is that the credit lines that
    are being cut are actually credit card, business credit card
    lines. And the availability on those lines has been cut, and
    therefore, they have no liquidity to run their business.
        The ARC loans, which went out yesterday and became
    available, are $35,000 lines of loans to businesses to pay down
    any loan they want, including credit card loans. And that would
    give them an additional $35,000 line of credit.
        These are 100 percent guaranteed by the SBA. They have no
    interest to the borrower. The SBA pays the interest. And they
    have no repayment due for at least 18 months--6 months to give
    the loan, then 12 months after. So this will be very good for
    smaller borrowers who particularly have this issue of their
    lines of credit cut on credit card loans.
        The second--and it will give them a much cheaper option--
    the second thing that we are implementing and have implemented
    is that you can refinance a bank loan into an SBA guaranteed
    7(a) loan today. And in the next couple of weeks, you are going
    to be able to implement, to refinance into a 504 loan.
        So if you meet the criteria for a 504 expansion loan, you,
    in the past, could not refinance existing debt into that
    guaranteed loan. But because of the provisions of the Recovery
    Act, we are going to be able to implement new rules. And so,
    those will be available for exactly the kind of great
    businesses that, for various reasons, the bank is not able to
    be the provider of enough liquidity and putting it with an SBA
    bank with a guarantee.
        Senator Collins. Thank you, Mr. Chairman.

                      DEALER FLOOR PLAN FINANCING PROGRAM

        Senator Durbin. I understand, Administrator Mills, that on
    July 1, SBA will begin guaranteeing loans to dealerships to
    finance inventories of cars, trucks, RVs, boats, and even
    manufactured homes, that this is because of recent changes to
    old regulations that used to prohibit this kind of lending.
        This is kind of a bold step for the SBA, and it clearly
    will be needed by some. But it is a stressed marketplace, and I
    am just wondering as the SBA considers these loans, what steps
    are you taking to mitigate the risks that are part of this new
    loan program?
        Ms. Mills. We worked very hard to do a number of things in
    response to the crisis in the automotive industry. The first
    was to provide some kinds of financing that the distressed
    dealers were looking for, and this goes to not just dealers at
    Chrysler and GM, but, of course, to all dealers, including used
    car dealers. And it goes to boat builders--boat dealers, RV
    dealers, as you said, and also motorcycle dealers, in fact.
        And the steps that we have taken, what we needed to do was
    make sure we were taking no more risk with these loans than
    with our normal 7(a) portfolio. So we actually constructed
    credit criteria, including our guarantee on this, for instance,
    is 75 percent, not 90 percent. And the advance rates are of a
    certain level.
        So we have been quite careful to balance the need to step
    up and provide liquidity to the sector and also to not take on
    additional--to manage our risk at the appropriate level.

                           SMALL BUSINESS CONTRACTING

        Senator Durbin. I would like to ask you about one issue
    that you are going to face and we have all faced in the Federal
    Government. Federal agencies reported a total of $78 billion in
    Federal prime contract dollars went to small businesses in
    2006. Many of these were obtained using contracting
    preferences, such as sole-source awards and set-asides for
    small businesses.
        The SBA's inspector general and others have reported flaws
    in this procurement system related to the contracts. There is
    evidence that large firms are awarded contracts reserved for
    small businesses. In addition, Federal agencies have
    inappropriately been counting contracts performed by large
    firms toward their small business procurement goals.
        SBA introduced a scorecard to rate small business
    procurement practices at Federal agencies, including the
    accuracy of reporting, and issued regulations to require small
    businesses to regularly recertify. How is the SBA working with
    Federal agencies to ensure contracting personnel are properly
    trained to understand what is a small business, what is a
    masquerading large business, and how we meet our goals to
    actually do business with smaller entities?
        Ms. Mills. Well, Senator, our Government contracting
    program is designed to have the SBA help ensure that 23 percent
    of all Federal contracts throughout all of the agencies go to
    small businesses. And the purpose of this is--it should be--we
    believe it should be a win-win situation. These are very good
    for small businesses, particularly some of the high-growth,
    innovative businesses because it allows them to get to the next
    level of volume, and then after that, they can export and they
    graduate and they become job creators and sort of the mainstays
    of the growth in our economy.
        From the Federal agency point of view, it is a win-win also
    because they get access to some of the most innovative
    companies and technologies. And when you contract with a small
    business, very often you get top management and you get the CEO
    at the table working on these issues.
        However, as you point out, it is difficult sometimes for
    Federal agencies to know how to access great small businesses,
    and they worry: Will the small business that I am contracting
    with be there? Is it financially stable?
        So one of the things that we are focusing on, in answer to
    your question, is increased training and activities that
    improve the reach and access and availability of small
    businesses to speak to these procurement agents and connect to
    these procurement agents.
        The second issue you raise, though, is that we have had a
    series of issues relating to whether this is really reserved
    for small business. This program is for small businesses. It is
    not for big businesses masquerading as small businesses. There
    have been a series of findings on this, and we are engaged in
    addressing every single one that has come out of the report.
        And in the budget you will find funding for our HUBZone
    program and our 8(a) certification programs so that we can re-
    look at a number of ways we do business, certifying that
    sometimes it is good for big business to be affiliated and
    mentor a small business, but it is not good if the small
    business is not actually the one engaged in the contract and in
    fulfilling the contract.
        So we are working very hard on these issues that you have
    described and consider them one of our important priorities
    because we think, actually, this can be a win-win for small
    businesses and for the Federal Government.
        Senator Durbin. Thank you.
        Senator Collins.
        Senator Collins. Thank you, Mr. Chairman.

                                LENDER OVERSIGHT

        I want to follow up on the questions that the chairman has
    just raised about the ability of your agency to guard against
    fraud. You have had an enormous budget increase as a result of
    the stimulus bill, and yet I am told that SBA's nondisaster
    staffing has decreased by about 28 percent since 2001. Your
    loan portfolio went up by 59 percent during that period.
    Information that you have given us today shows that it has gone
    up even further.
        How is the SBA going to ensure, when you have over 5,000
    lenders and 270 certified development companies that are making
    loans, how are you going to ensure the integrity of that
    process when your nondisaster staff is shrinking?
        Ms. Mills. Well, thank you, Senator Collins, for asking
    that.
        In fact, this agency went from 3,000 people 8 years ago to
    2,000 people now. The budget has gone down by 24 percent. But
    to answer your question, I said there are two areas that we
    were going to invest heavily in in reinvigorating the agency.
    And the first is our people. The second is information
    technology.
        A large part of the information technology investment that
    we are making, and we got some money in the stimulus act--in
    the Recovery Act to look at this--is for lender oversight and
    risk assessment. We have formed a new committee on risk
    assessment, and we are beginning the process of understanding
    how we can use technology as well as people to identify risk,
    to collect better data on risk, and to be more proactive about
    our understanding of how we go after risk-based solutions.
        And I think we do--at this moment, we have some very good
    components, but we are raising the level of this activity to
    really my level, to the administrator level. So I am getting
    very involved in this myself.
        Senator Collins. Speaking of human capital, I am told that
    the chief financial officer of the SBA as well as three senior
    staff who were involved in estimating credit subsidies all
    recently left the agency. That concerns me at a time when you
    are working so hard to expand your lending programs. What are
    you doing to fill that particular gap at a critical time?
        Ms. Mills. Well, thank you for that question because it
    gives me an opportunity to brag about our people a little bit.
        Our financial staff did at the period of January-February
    largely go over to the Troubled Asset Relief Program (TARP).
    But we have been able to actually build inside a first-rate,
    crackerjack chief financial officer's office and staff who are
    doing just a terrific job.
        So I am pleased to say that the staff has totally risen to
    the occasion, and we are very confident about our numbers. As
    you know, I am a metrics-oriented person. So that is a first
    priority for us.

                            SMALL BUSINESS CLUSTERS

        Senator Collins. Thank you.
        And finally, you and I share a common interest in helping
    to develop business clusters, particularly in rural areas of a
    State such as in our State of Maine. Does this budget have
    support for the development of small business clusters?
        Ms. Mills. Yes, Senator Collins.
        There is $5 million in this budget, and Senator Collins put
    forth a bill last year which designed a program for clusters.
    And much of that is now incorporated in the Commerce
    Department's $50 million cluster program. This $5 million is
    designed to have the SBA resources, the footprint that we have
    on the ground, which is so substantial, be linked and leveraged
    and aligned with those cluster programs.
        Senator Collins. Thank you.
        Senator Durbin. Thank you, Senator Collins.
        And Administrator Mills, thank you for your testimony
    today. We certainly appreciate it. We will be working with you
    and your staff on your budget for the next fiscal year.
        Ms. Mills. Thank you.

                         ADDITIONAL COMMITTEE QUESTIONS

        Senator Durbin. We will probably submit written questions,
    and if you can take a look at them and send us some replies on
    a timely basis, it would help us to do our work.
        Thank you for being here today.
        Ms. Mills. Yes, we will do that. Thank you very much.
        Senator Durbin. Appreciate it.
        [The following questions were not asked at the hearing, but
    were submitted to the Administration for response subsequent to
    the hearing:]
                Questions Submitted by Senator Richard J. Durbin
                 recovery act: impact on small business lending
        Question. The American Recovery and Reinvestment Act of 2009
    (Recovery Act) provided $375 million to stimulate lending in Small
    Business Administration (SBA) loan programs, supporting, on a temporary
    basis, reduced-fee loans for borrowers and a higher federal guarantee
    under the 7(a) program. SBA's loan data shows that since the Recovery
    Act, the volume of weekly lending under these new programs has
    increased by 32 percent. In addition, private lenders who had stopped
    partnering with SBA to make small business loans are returning to the
    7(a) program in large numbers.
        How long will SBA be able to continue making these reduced-fee
    loans?
        Answer. The $375 million in Recovery Act funds will support a
    program level of approximately $8.7 billion for the 7(a) program and
    approximately $3.6 billion for the 504 program with fee elimination and
    90 percent guarantees for 7(a) loans. Initially, SBA projected that
    these funds would last until the end of calendar year 2009. Given the
    higher-than-expected increase in lending volume, we now believe those
    funds might run out in early December 2009 for the 7(a) program, and
    will last through the middle of December for the 504 program.
        Question. To what extent does SBA estimate that lending volume will
    bounce back from the large drop-off that occurred early in fiscal year
    2009?
        Answer. Lending volumes are steadily increasing to more historic
    average levels. As the overall economy recovers, we believe the lending
    volume will recover as well. In July 2009, the combined 7(a) and 504
    volume rose to $1.4 billion, which is approaching the 2008 monthly
    average of approximately $1.5 billion.
        Question. What steps is SBA taking to ensure that lenders stay in
    the 7(a) program once the fees and guarantee level return to normal
    levels?
        Answer. We have heard from lenders that the higher guarantee has
    helped them extend credit to small businesses in the current economic
    environment. SBA continues to work with lending partners to identify
    areas of improvement in SBA programs. At the same time, the Agency is
    working to continue to revise and streamline operating procedures and
    to provide good customer service to lenders, making the agency a better
    long-term partner. This includes development of a much more robust and
    modern customer relationship management system, allowing SBA to
    systematically track its interactions with lenders.
                 recovery act: american recovery capital loans
        Question. The Recovery Act provided $255 million for a bridge loan
    program to help distressed small businesses make it through the
    economic downturn. These American Recovery Capital loans--or ``ARC''
    loans--are risky because they are intended for small businesses that
    are already experiencing financial trouble. SBA estimates that the
    total volume of ARC loans will be around $350 million.
        In deciding which small businesses are eligible to borrow under the
    ARC loan program, how does SBA determine if a distressed small business
    is strong enough to weather the economy?
        Answer. SBA's ARC loan program is uniquely designed to meet the
    needs of viable businesses facing immediate financial hardship. SBA
    asks businesses to demonstrate their viability by showing evidence of
    profitability or positive cash flow in at least one of the past 2
    years. Future cash flow projections based on reasonable growth going
    out 2 years should show that the business will be able to meet current
    and future debt obligations, including future repayment of the ARC loan
    once the disbursement and deferred payment period end, and operating
    expenses. Also, the borrower must certify that they are currently no
    more than 60 days past due on any loan being paid with an ARC loan and
    they must have an acceptable business credit score as determined by
    SBA.
        Question. How does this compare to SBA's estimated demand for the
    program?
        Answer. Since it was launched last month, the ARC program has been
    steadily ramping up. Through August 4, SBA has approved over 1,000
    loans totaling over $34.5 million. SBA estimates that the funding
    provided will support approximately 10,000 loan approvals through
    fiscal year 2010, and the agency believes the program is on track to
    meeting that projection.
        Question. How is SBA ensuring that smaller lenders, like community
    banks, are able to participate in the program before funding is
    exhausted?
        Answer. SBA trained over 3,300 lending officers at over 1,300 banks
    on how to make these loans and how to use SBA's electronic lending
    systems. So far, smaller, community based lenders have made most of the
    loans in the ARC program. In addition, we have limited lenders to no
    more than 25 loans per week on a cumulative basis and no more than
    1,000 loans in total to help ensure access to the program.
                             liquidity of sba loans
        Question. The secondary market for SBA's loans is showing initial
    signs of improvement due to Recovery Act programs and other changes in
    capital markets. In May, sales into the secondary market reached the
    levels of months prior to the economic downturn. The Federal Reserve
    has, through May, made about $170 million in loans to investors to
    purchase pooled SBA loans, and Treasury expects to soon make $15
    billion in TARP funds available for the federal government to directly
    purchase SBA loans.
        How will the TARP purchases and the Federal Reserve's loan program
    complement or support the recent improvements in the marketplace?
        Answer. The programs from Treasury and the Federal Reserve have
    been important in the fragile recovery of SBA's 7(a) secondary market.
    Treasury's announcement that it would serve as a backstop for the
    market has provided lenders, brokers and investors with confidence
    around the market's overall liquidity. Over the past 3 months, the
    average monthly loan volume settled from lenders to broker-dealers has
    been $335 million, moving the market closer to pre-recession averages.
    In July, $324 million settled. At the same time, prices for these loans
    have begun to recover. In July, 67 percent of the loans settled (50
    percent of the dollar volume) were sold at or above premiums of 106.
        Similarly, the Federal Reserve's TALF program has now supported
    over $419 million in SBA-backed securities. SBA continues to work with
    Treasury and the Federal Reserve to ensure long term health of its
    secondary markets.
                   subsidizing 7(a) loans in fiscal year 2010
        Question. In a typical year, the fees SBA collects on 7(a) loans
    fully offset the cost of payments the agency makes on defaults.
    However, SBA's budget request states that in fiscal year 2010, those
    fees will not be sufficient to keep the 7(a) program operational. SBA
    is requesting an appropriation of $80 million to keep 7(a) loans
    flowing to small businesses throughout fiscal year 2010.
        What changes will occur between 2009 and 2010 that will cause the
    risk of 7(a) loans to increase?
        Answer. In the current economic environment, SBA has seen an
    increased number of defaults in its loan portfolio, and this historical
    performance is factored into the model that estimates the fiscal year
    2010 subsidy rate. This increasing default rate means that the risk of
    a subsequent SBA purchase of a 7(a) loan is more likely than it may
    have been in previous years. The risk of default in the 7(a) program is
    actually closely correlated to the unemployment rate in the macro
    economy. With unemployment on the rise, and projected to remain
    elevated for some time, we expect a higher default rate in fiscal year
    2010.
        Question. Does SBA expect that once the health of the economy
    improves, defaults in the program will return to a level fully
    supportable by fees?
        Answer. The econometric subsidy model that is used to determine the
    subsidy rates in SBA loan programs uses historical loss rates and
    defaults in SBA's portfolio as well as macro economic estimates related
    to unemployment rates and interest rates. Unemployment rates are the
    most significant indicator of loan default in the SBA 7(a) program
    credit subsidy model. Once the overall economy improves, and
    unemployment decreases, SBA may be able to run a zero subsidy 7(a)
    program. However, this could take several years and depends on many
    other broad market and economic factors.
                                lender oversight
        Question. SBA's Inspector General has identified deficiencies in
    SBA's oversight of lenders. The President's request for SBA's lender
    oversight activities is $11.3 million, a 3.7 percent increase over the
    fiscal year 2009 enacted level of $10.9 million.
        How will the budget request enhance SBA's efforts to ensure lenders
    are properly overseen?
        Answer. The request will allow the SBA to continue expanding upon
    its goal of ensuring stewardship and accountability over taxpayer
    dollars through financial portfolio management and prudent oversight.
    The Agency will achieve this goal by: (1) continuing to perform on-site
    lender reviews with the objective of reviewing all large and mid-size
    lenders and community development companies generally on a bi-annual
    basis; (2) ensure that these lenders and CDCs whose portfolios comprise
    more than 80 percent of the Agency's guaranty dollars outstanding are
    accountable for managing their portfolios in a prudent manner, thus
    reducing the SBA's overall credit risk; and (3) continuing to monitor
    its smaller lenders and CDCs through its off-site monitoring process.
        The SBA will expand its oversight efforts to the Microloan program
    by applying its off-site monitoring approach to microloan
    intermediaries.
        The SBA also plans to issue guidance with regard to the use of loan
    agents by lenders to originate SBA guarantied loans. In addition, as
    the Loan and Lender Monitoring System (L/LMS) continues to be leveraged
    for oversight and portfolio management purposes, more involved data
    analysis of performance trends will be conducted. The results of these
    analyses will be used for more effective management of SBA loan
    portfolios, as well as to assist in identifying irregularities that may
    be an indication of inappropriate lending activities.
        Finally, the SBA will also apply its portfolio analysis
    capabilities, first developed through L/LMS, to the Agency's disaster
    loan portfolio. This portfolio analysis capability will be used to
    provide relevant information for senior management to use in decision
    making.
        The SBA plans to issue further guidance to lenders regarding
    grounds for enforcement actions and the types of enforcement actions
    that may be taken by the Agency against lenders. This guidance will
    increase Agency transparency with its lending partners.
        Question. What limitations does SBA face in following up on on-site
    and document reviews of lender activity?
        Answer. As the IG has pointed out, substantial strides have been
    made in lender oversight, and SBA continues to make improvements in its
    oversight processes. SBA utilizes a combination of an offsite portfolio
    monitoring tool as well as periodic onsite examinations of its largest
    lenders in its risk based approach to lender oversight. SBA published
    the Lender Oversight Interim Final Rule in December 2008, which
    provides SBA with increased enforcement capabilities. SBA has a robust
    system for portfolio management and lender performance evaluation. We
    are working to make the benefits of this tracking technology
    infrastructure more accessible and user friendly. Additionally,
    staffing has been increased by seven positions in the Office of Credit
    Risk Management over the last 2 years.
        Going forward, SBA recently re-procured its contract for off-site
    monitoring and is starting to make more information available to
    lenders and SBA staff for portfolio management, redeveloping risk
    rating metrics to enhance their predictiveness, integration of more
    dynamic, ongoing evaluation of lenders and loan portfolio--
    identification and investigation of trends and developments--into
    oversight activities, and development of procedural guidance related to
    the lender oversight regulation.
                  microloan program: fiscal year 2010 request
        Question. SBA's Microloan program was provided $22.5 million in
    fiscal year 2009 funding as well as an additional $30 million under the
    Recovery Act. Yet, the President requests only $13 million for fiscal
    year 2010. While the budget continues to support a robust level of
    lending--$25 million--it reduces funding for grants for borrower
    counseling.
        Has there been a measurable increase in demand for Microloans since
    the Recovery Act became law?
        Answer. The Recovery Act provided an additional $6 million in
    microloan loan subsidy, which supports approximately $50 million in
    additional microlending to intermediaries, and $24 million in microloan
    technical assistance grants. SBA was able to expedite expenditure of
    all 2009 non-Recovery Act microloan funds by mid-July, and now,
    Recovery Act funds are available for SBA microlending intermediaries to
    use through fiscal year 2010.
        Question. How will Microlenders provide adequate technical
    assistance to borrowers in fiscal year 2010 if the grant funding is
    reduced per the budget request?
        Answer. These funds, combined with the 2010 budget-requested funds
    will more than double the size of SBA's microloan program over 2009 and
    2010. The microloan grant fund request is adequate to support the needs
    of current and future intermediaries.
                 microloan program: expanding microloan access
        Question. The Microloan program can accommodate up to 300 lenders.
    However, there are currently only 165 SBA-approved Microlenders.
    Additional partners would provide small businesses better access to the
    Microloan program.
        What steps is SBA taking to expand the number of Microlenders?
        Answer. Since the Recovery Act funding was provided, SBA has
    received 15 new applications from intermediaries, 9 of which have
    already been approved. The Agency has reached out to microlending
    institutions and made presentations at industry conferences and
    workshops to reach out to potential participant organizations.
        SBA is working to make improvements to its microlending program,
    including through a new electronic application. These program changes
    and new marketing efforts will help expand the number of intermediary
    partners that provide microloans to borrowers. SBA has done extensive
    work with intermediaries around best program practices and is reviewing
    applications for new intermediaries.
        Question. How can SBA connect other federal partners to the
    Microloan program--for example, Community Development Financial
    Institutions?
        Answer. SBA has reached out to Community Development Financial
    Institutions and continues to discuss this program opportunity with
    them.
             entrepreneurial development initiative: ``swat'' teams
        Question. The President's budget requests $20 million for a new
    entrepreneurial development initiative. Administrator Mills' testimony
    states that $10 million of this funding would be used to send SBA
    ``SWAT'' teams into distressed communities, including regions that have
    been impacted by the economic crisis.
        What criteria is SBA contemplating to use in selecting communities
    for this assistance?
        Answer. To evaluate where SBA's pilot program would be most
    effective, SBA will consider target criteria that show economic
    distress such as the following: Unemployment; industries in distress
    (loss of tax revenue); natural disaster impact; involvement with other
    federal, state and local agencies; and other economic factors,
    including Employment and Training Administration or Economic
    Development Administration referrals.
        Individual businesses will be targeted to receive an in-depth
    assessment to identify steps for stabilization and growth.
          entrepreneurial development initiative: veterans' businesses
        Question. SBA's proposed Entrepreneurial Development Initiative
    requests $5 million to increase SBA's focus on veterans' business
    issues.
        How would the requested funding help SBA help returning veterans
    start and grow their small businesses?
        Answer. Veterans constitute a special class of business owner.
    Currently SBA supports eight veterans' centers, but this outreach
    effort limits the number of veterans assisted to those located within
    one of these eight immediate geographic locations. To meet the unique
    needs of returning service men and women, SBA intends to leverage its
    Entrepreneurial Development networks to reach out to veterans who will
    need assistance to stabilize veteran-owned businesses and return them
    to prosperity. With this funding, SBA will: train all of SBA's current
    resource partners in the unique needs of veterans regarding business
    start-up or management; and will expand the outreach of existing
    services (business counseling, training and mentorship) to more
    veterans. SBA will leverage the knowledge and skills that reside in
    existing Veteran's Business Outreach Centers to more effectively target
    this training and outreach.
        Question. To what extent is SBA coordinating and collaborating with
    the Department of Veterans Affairs and other organizations to conduct
    outreach and implement other initiatives to best address the needs of
    veterans?
        Answer. SBA's Administrator Karen Mills will meet with the
    Secretary of Veterans Affairs to develop a strategy for greater
    collaboration, avoid duplication and fill gaps for services to veteran-
    owned businesses and veterans wishing to explore business ownership.
           entrepreneurial development initiative: business clusters
        Question. Administrator Mills' testimony states that under SBA's
    proposed Entrepreneurial Development Initiative, $5 million of the
    requested $20 million will be used to support small businesses that are
    part of ``economic clusters''.
        How would this $5 million enhance the strength of regional cluster
    businesses?
        Answer. SBA's clustering program will facilitate networking among
    like-minded businesses that face similar economic problems. The network
    will promote the development of wide-scale discussions on industry
    solutions and best practices. SBA's district offices will promote
    clustering by leveraging existing programs and training opportunities
    to bring businesses together to focus on common economic challenges and
    potential linkages between businesses to foster growth. Examples of
    current or planned industry clusters include: The resurgence of the
    boat-building industry in Maine; and the robotics initiative in
    Michigan and southern Virginia.
        Question. How would SBA leverage these resources with the
    Department of Commerce's manufacturing and export programs, trade
    assistance programs at the Department of Labor, and state and local
    agencies?
        Answer. To expand the Clustering Program's impact, SBA will partner
    with numerous Federal departments and agencies (Commerce, Defense,
    Energy, Labor, Agriculture, Export Import Bank, etc.) to leverage
    extensive industrial knowledge and expertise.
                                 disaster loans
        Question. As of June 2009, carryover balances in the disaster loan
    program were projected to support over $5.5 billion in new disaster
    lending. Due to these large balances, the budget does not request
    additional funds for new disaster loans.
        How does the level of balances compare to the needs of the disaster
    loan program in previous years?
        How does that compare to disaster lending after the largest recent
    disaster, Hurricane Katrina?
        Answer. The following chart shows original loan approvals for
    fiscal year 2005 through fiscal year 2009 to date:

    --------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                  Homes                       Business                      Total
                               Fiscal Year                            --------------------------------------------------------------------------------------
                                                                        Number         Amount        Number         Amount        Number         Amount
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    2004.............................................................    25,024       $627,425,200     3,486       $256,065,200    28,510       $883,490,400
    2005.............................................................    52,677     $1,388,084,700     9,398       $890,604,800    62,075     $2,278,689,500
    2006.............................................................   145,164     $8,399,440,708    24,819     $2,770,815,600   169,983    $11,170,256,308
    2007.............................................................    11,760       $457,311,500     2,254       $362,358,400    14,014       $819,669,900
    2008.............................................................    12,755       $536,303,400     2,373       $289,536,700    15,128       $825,840,100
    June 2009........................................................    16,562       $698,964,200     3,020       $318,105,200    19,582     $1,057,334,500
    --------------------------------------------------------------------------------------------------------------------------------------------------------

                              federal contracting
        Question. Federal agencies reported that a total of $78 billion in
    Federal prime contract dollars went to small businesses in 2006. SBA's
    Inspector General and media reports have highlighted flaws in the
    Federal procurement system related to these contracts. There is
    evidence that large firms are awarded contracts reserved for small
    businesses. Further, federal agencies have inappropriately been
    counting contracts performed by large firms towards their small
    business procurement goals. SBA introduced a ``scorecard'' to rate
    small business procurement practices at federal agencies, including the
    accuracy of reporting data, and issued regulations to require small
    businesses to regularly recertify that they meet certain standards to
    be considered a small business.
        How is SBA working with other federal agencies to ensure
    contracting personnel are properly trained to understand how small
    business contracting preferences should be implemented?
        Answer. The SBA employs professionals, known as Procurement Center
    Representatives or PCRs. PCRs are the SBA's ``eyes and ears'' at the
    buying offices they cover, ensuring that small businesses, including
    8(a), HUBZone, SDVOSB and Women-owned small firms, are afforded the
    maximum, practicable opportunity to receive Federal prime contract
    awards. In addition to the informal training, which often occurs during
    the pre-award consideration stage ``negotiations'' between the PCR and
    contracting officers, our PCRs provide and participate in formal
    training events for buying office staff, including training on how
    small business contracting preferences should be implemented. Thus far
    in fiscal year 2009 (October 1, 2008-June 30, 2009), SBA's PCRs have
    provided training to more than 1,100 staff at Federal buying offices.
    Additionally, PCRs handle many requests for guidance/training from
    contracting officers on how small business preferences should be
    handled on a daily basis.
        Also, SBA has worked with other agencies to develop a series of
    data checks to help ensure data quality. The checks have been used in
    to help improve the quality of the 2007 data and reduce instances of
    businesses being incorrectly coded.
        Question. What recourses or remedies does SBA use when identifying
    an award to an ineligible entity?
        Answer. SBA has a number of programs to identify potentially
    ineligible entities for its programs. SBA's primary program for
    identifying an award to an ineligible entity (i.e., a firm that may be
    other than small (a large business) is our size determination program.
    If a contracting officer, an other interested party, or the SBA itself
    believes that a bidder on a Federal contract may have misrepresented
    its size, the SBA (through our field network of Size Specialists) will
    investigate the allegations and make a formal determination as to the
    firm's size. Our determination is provided to the contracting officer,
    other interested party (i.e., the protestor) and the protested concern,
    which under certain circumstances can appeal the SBA's findings. First,
    size is determined at the time of offer, so firms that are large now
    may still be counted as small for the life of a contract if they were
    small at the time of offer. However, SBA's recertification rule
    requires procuring agencies to accurately reflect a firm's change in
    size status if there is an acquisition, or merger, or, for long-term
    contracts, after 5 years and each option thereafter. Second, SBA
    performs formal size determination in response to protests that may be
    filed by unsuccessful offerors, the contracting officer or SBA, and
    these determinations apply to the procurement in question and are
    binding on the procuring agency. Third, if we determine that a firm
    willfully or recklessly misrepresented its size status, we may refer
    the matter to the SBA's Office of Inspector General or propose the firm
    for suspension or debarment.
        The SBA also maintains a Service Disabled Veteran-Owned Small
    Business (SDVOSB) protest program (at its headquarters) that will
    investigate claims that an entity may have improperly self-certified
    its SDVOSB status. Our findings are set forth in a formal
    determination. If we determine that the firm is not entitled to SDVOSB
    status, we will issue a formal determination which sets forth the
    evidence we considered as well the basis for our findings which is
    provided to the cognizant contracting officer for the appropriate
    action.
        Question. What other steps is SBA taking to oversee the accuracy of
    reporting on small business contracting?
        Answer. SBA has increased its oversight of agency contracting
    officers who enter the award data into the Federal Procurement Data
    System, which is the official database for Federal procurement
    information. As briefly described before, we recently provided Federal
    agencies with ``anomaly reports'' identifying specific individual
    contract action reports which may be miscoded. SBA works closely with
    the headquarters of those agencies to investigate these apparent
    discrepancies and to correct the FPDS database, as necessary.
        Additionally, the SBA is conducting 30 Surveillance Reviews at
    major Federal buying offices across the country. Part of these reviews
    involve an examination of contracts reported to have been made to a
    small business to determine if the awardee is indeed small and the
    level of due-diligence performed by the contracting officer when
    verifying the firm's size.
                           women-owned business rule
        Question. Under the Bush Administration, SBA issued a proposed rule
    that would limit the use of sole-source contracts for women-owned small
    businesses to four industries. SBA is currently developing a revised
    rule related to sole-source contracts for women-owned small businesses.
        When will the revised proposed regulation become public?
        Answer. One of the Agency's highest priorities is implementation of
    the WOSB Program as quickly as possible and in a way that withstands
    legal scrutiny. In furtherance of this goal, the Agency has been
    working on a revised regulation and is preparing to submit a draft
    proposed rule for inter-agency clearance. Although I am unable to give
    you a precise timeline on the WOSB Program implementation because of
    the nature of the regulatory process, the proposed regulation will be
    published in the Federal Register for public notice and comment as soon
    as practical.
        Question. What resources is SBA consulting to develop the new rule?
    How is SBA involving women business owners and other stakeholders?
        Answer. SBA has already received approximately 1,700 comments on
    the previous proposed rule and SBA is considering these comments in
    drafting a proposed rule. Through the standard regulatory process, SBA
    will submit a draft proposed rule to OMB for approval and inter-agency
    clearance. Once cleared, SBA will then publish a proposed rule in the
    Federal Register which will provide the public notice of the proposed
    rule and give the public an opportunity to comment on any aspect of the
    proposed rule. Upon the close of the comment period, SBA will
    incorporate all of the comments into the rulemaking record and proceed
    with an evaluation of each comment. SBA will then draft a final rule
    for publication in the Federal Register which will provide an analysis
    of the comments received.
                                     ______

                Questions Submitted by Senator Mary L. Landrieu
                      federal and state technology program
        Question. The Federal and State Technology Program--or FAST--and
    the Rural Outreach Program provide opportunities for businesses in
    underutilized areas to participate in the SBIR and STTR programs. By
    providing matching funds through competitive grants, the FAST program
    has been successful in increasing total SBIR dollars for small
    businesses in participating states. Through Louisiana's participation
    in the FAST program, the state jumped from 47th in the United States to
    33rd in total SBIR dollars.
        The program hasn't been funded since 2004. Given these programs'
    past successes, do you support funding this program again at the level
    of $5 million?
        Answer. This program has not had enacted funding since 2004 and the
    2010 President's budget does not request funding. However, SBA and the
    SBIR/STTR agencies work diligently to ensure that awards support high
    quality innovations through a competitive process. To ensure high-
    quality innovations, the program elicits applicants from across the
    country and outreach efforts by participating agencies attempt to
    elicit the widest range of applications possible to enhance the SBIR
    and STTR competitive processes.
                            women's business centers
        Question. For 20 years the Women's Business Center (WBC) program
    has successfully provided business counseling and assistance to women
    with an emphasis on those who are socially and economically
    disadvantaged. With the economic turmoil, this program, too, is seeing
    an increase in demand from entrepreneurs hoping to establish a small
    business, as well as requests from small business owners hoping for
    assistance as they attempt to survive through economic uncertainty. To
    demonstrate the negative impact on our local technical assistance
    providers, consider our Women's Business Center in New Orleans, which
    faced a $45,000 shortfall in funding in 2007--despite the increased
    demand for their services post-Katrina.
        Additionally, much of the country is still not served by this
    program; with Arkansas, Idaho, Kentucky, Montana, Wyoming, Washington,
    DC, Guam, Northern Marianas Islands and the U.S. Virgin Islands
    remaining without centers.
        Question. How much would it take to fund all of the present Women's
    Business Centers and fund a center for each of the states currently not
    served by one, at the full amount of $150,000?
        Answer. The President's budget would assist at least 150,000
    clients. Funding 9 additional WBCs within the program at $150,000 would
    cost $1,350,000.
        Question. Why would the President not request the $16.9 million
    that it takes to fund the present centers at the full amount?
        Answer. The current budget provides for a sustained level of
    performance for existing centers.
        In addition, the entrepreneurial development initiative will also
    serve similar economically or otherwise distressed populations.
        Question. Why not request at least what was enacted in 2009?
        Answer. The request provides an amount roughly equal to the 2009
    enacted amount.
                           7(a) loan guaranty program
        Question. The President requested $80 million for the SBA's 7(a)
    loan guaranty program for fiscal year 2010. Taking this program to zero
    subsidy in 2005, as the last Administration did, and shifting the cost
    to borrowers and lenders by raising the fees has been very
    controversial. We want this important source of long-term capital to be
    affordable for borrowers and attractive for lenders, and we want to
    build on the investment we made in this program from the Recovery Act.
    Nevertheless, $80 million is a big share of SBA's budget.
        Please explain why this $80 million is necessary and what are the
    consequences if we don't provide the funding?
        Answer. The 7(a) upfront borrower and ongoing lender fees are
    capped by statute in the Small Business Act. In fiscal year 2010, even
    with the historical (i.e., maximum) fees in place, the 7(a) program
    cannot execute at a zero-subsidy rate, due to higher defaults and
    economic assumptions. The Subsidy rate for fiscal year 2010 is 0.46
    percent. Therefore, in order to maintain the fully authorized program
    level ($17.5 billion), the Administration requests $80 million in
    credit subsidy. If the full request is not provided, the SBA would need
    to reduce its anticipated program level that the lower appropriated
    amount would support.
                                    disaster
        Question. As I have mentioned, last year I worked closely with
    Ranking Member Snowe and former Chairman Kerry to enact significant SBA
    Disaster reforms as part of the 2008 Farm Bill. In particular, these
    reforms increased SBA disaster loan limits, improved disaster planning
    capabilities, and provided the Agency with new tools for future
    disasters.
        It is my understanding that some of these provisions were
    immediately implemented, while others are still in the process of being
    tested. As we approach the 2009 Atlantic Hurricane season, I would like
    an update from the Agency on its implementation of these reforms.
        Please provide us with a status on what has already been
    implemented and what is in the process of being tested or implemented.
        Answer. SBA quickly began implementation of the 2008 Small Business
    Disaster Response and Loan Improvements Act of 2008 (a.k.a. the Farm
    Bill), immediately after enactment. Many of the provisions were in
    place for SBA Disaster Assistance operations during the very active
    2008 Hurricane season.
        As of June 2009 SBA has met 19 of the 26 requirements. SBA has
    existing authority to undertake four of the seven remaining
    requirements, and three are in development stages.
        A spreadsheet with status of each provision is attached. This
    spreadsheet shows which provisions have been implemented or completed
    and which are still in process.

    ------------------------------------------------------------------------
                 Section                               Status
    ------------------------------------------------------------------------
    12061--Economic Injury Disaster    Implemented/Regulations in Process
     Loans to Non-Profits.
    12062--Coordination with FEMA....  Ongoing/Regulations in Process
    12063--Public Awareness of         Completed
     Disaster Declaration and
     Application Periods.
    12064--Consistency btwn. Admin.    Completed
     Regs & SOP's.
    12065--Would allow up to $14,000   Implemented/Regulations in Process
     of a disaster loan to be
     disbursed without any collateral.
    12066--Processing Disaster Loans.  Implemented
    12067--Information tracking and    Implemented
     follow up system.
    12068--Increased deferment period  Available if needed
    12069--Disaster Processing         Completed
     Redundancy.
    12070--Net Earnings Clause.......  Implemented/Regulations in Process
    12071--EIDL loans in Ice Storms    Available w/Existing Authority
     and blizzards.
    12072--Develop and implement a     Completed
     Major Disaster Response Plan.
    12073--Disaster Planning--Full-    Completed
     time Disaster Planning Staff.
    12074--Assignment of Employees to  Ongoing
     the Office of Disaster
     Assistance and Disaster Cadre.
    12075--Comprehensive disaster      Completed
     response plan.
    12076--Office Space..............  Completed
    12077--Applicants that have        Implemented/Regulations in Process
     become an MSE.
    12078--Disaster Loan Amounts/      Implemented/Regulations in Process
     Mitigation.
    12079--Small Business Bonding      Ongoing
     Threshold.
    12081--Eligibility for Additional  Available if needed
     Disaster Asst.
    12082--Additional EIDL Asst......  Available if needed
    12083--Private Disaster Loans....  In development
    12084--Immediate disaster          Developing pilot for 2010
     assistance program.
    12085--Business Expedited          Developing pilot for 2010
     Disaster Assistance Loan.
    12086--Gulf Coast Disaster Loan    Available if needed
     Refinancing Program.
    12091--Reports on Disaster         Monthly reports are being distributed/
     Assistance.                        Annual report pending
    ------------------------------------------------------------------------

        Question. The President's request for SBA calls for $1.7 million to
    fund the two Guaranteed Disaster Loan Program Pilot Programs that we
    enacted as part of disaster reform?
        Answer. The President's budget request for 2010 calls for $1.7
    million to fund two Guaranteed Disaster Loan Pilot Programs. SBA has
    developed an outline for these programs which will be vetted with
    banking industry representative in two planned focus groups. It is
    imperative that we develop a program that the industry accepts to
    ensure participation when disaster activity warrants.
        Question. Will it be available for the 2009 Hurricane season? (Yes/
    No)
        Answer. The guaranteed commercial lending programs will not be
    available for the 2009 Hurricane season.
                 president obama's small business recovery plan
        Question. President Obama's plan to assist small businesses in
    gaining access to the credit markets contains elements of proposals
    that have been pushed by this Committee from the beginning of this
    economic downturn.
        Can you tell us how implementation of that plan is proceeding?
        Answer. Through the programs and funding provided in the Recovery
    Act, SBA has helped small businesses access the capital they need to
    survive the economic conditions. Recovery Act programs have helped
    through increasing lending through the 7(a) and 504 guaranteed loan
    programs, expanding the base of SBA lending partners, providing
    targeted assistance to struggling businesses through the ARC loan
    program, and allowing small businesses with higher dollar contracts to
    obtain SBA-backed surety bonds. All of the $675 million in SBA program
    funds are currently available to support small businesses.
        Question. Are there any lessons from your business background that
    can be applied towards improving SBA lending programs?
        Answer. Over the course of my career I've had the opportunity to
    gain valuable insight into the capital access challenges faced by
    entrepreneurs and small businesses. During the recession of the early
    1990s, I was operating small manufacturing companies that supplied the
    auto industry and that experience gave me a deep understanding of what
    our small businesses need today to survive this current downturn and to
    prosper in the years ahead. I've also had valuable experience with the
    funding needs of high-growth, high-potential companies that I've worked
    with over the years. That understanding of the capital needs small
    businesses have--whether you're a Main Street business or a high-growth
    potential business--is something I bring to this job and something that
    is guiding our current efforts at SBA to assess the efficiency and
    effectiveness of our programs and the systems through which we deliver
    them.
                              office of technology
        Question. The Office of Technology, which promotes and monitors the
    highly successful Small Business Innovation Research (SBIR) and Small
    Technology Transfer (STTR) programs, has seen its operating budget cut
    by more than half during the last 18 years. At the same time, the SBIR
    and STTR budgets have more than doubled, with participating SBIR and
    STTR Federal agencies allocating more than $2 billion to small high-
    technology firms across the country each year.
        I find this trend very alarming, particularly when other agencies
    try to get out of complying with the SBIR and STTR laws, as happened
    with about $229 million in the Recovery Act, and I am interested in
    hearing your perspective on how the Office of Technology is handling
    its oversight responsibilities in light of its diminishing budget.
        In your opinion, does the Office of Technology have the staff and
    funding to meet the program's demands? (Yes/No)
        Answer. The budget provides $250,000 for the Office of Technology.
    Within this amount, the Office provides oversight of the SBIR and STTR
    programs. I also understand the value of rigorous oversight. That is
    why SBA has committed to developing comprehensive performance measures
    for the SBIR and STTR programs. Currently, no continuous or
    comprehensive measures exist for the programs. With performance
    measures in place, we can regularly evaluate the effectiveness of these
    programs. SBA is currently working to implement measures now.
        Question. As I just noted, without adequate funding, the Office of
    Technology cannot function as it was intended and cannot support the
    SBIR and STTR programs. The Committee believes that in order to provide
    the Office with the resources it requires, there should be at least
    $1.5 million allocated for the Office to go toward additional staff,
    oversight, outreach, travel, and maintenance of its databases.
        Would you disagree that at least $1.5 million would be an
    appropriate amount to meet with needs of the Office of Technology, as
    Senator Snowe and I have recommended?
        Answer. The budget provides $250,000 for the Office of Technology.
    Within this amount, the Office will provide oversight for the SBIR and
    STTR programs and will pursue high-priority activities, such as the
    development of comprehensive performance measures to regularly evaluate
    the programs' effectiveness.
                            sba contracting programs
        Question. One of the principle functions of the SBA is to ensure
    that the Federal government meets its 23 percent small business
    contracting goal, specifically by reviewing more than $400 billion in
    federal contracts awarded each year. Several issues have been raised in
    the past with respect to the SBA not playing its proper oversight role
    with respect to contracting.
        First, do you intend to increase the contracting oversight staff at
    the SBA--Procurement Center Representatives (PCRs) and Commercial
    Marketing Representative (CMRs)? (Senator Snowe and I think we need 100
    more PCRs and 50 CRMS, which would require $15 million over time.)
        Answer. The SBA is in the process of reassessing our internal
    procedures regarding the criteria for placement of the PCRs and CMRs.
    As we add and/or replace PCRs and CMRs we want to ensure that they are
    placed in locations which can maximize their individual and group
    ability to assist the Government's small business contractor community.
    Specifically, we are working with the SBA's Office of the Chief
    Information Officer (OCIO) to move forward with the development and
    implementation of the electronic Procurement Center Representative
    (ePCR) program which will allow the Agency to further automate the PCR
    review process, making it possible for them to examine increased
    numbers of purchase requests while expanding the PCR's ability to cover
    Federal buying offices located outside their local commuting area.
    Implementation of the electronic Subcontracting Reporting System (eSRS)
    has enhanced the ability of our CMRs to more closely monitor the
    subcontracting programs in place at the large prime contractors within
    their portfolios by giving them access to ``real time'' data.
    Information entered into eSRS, available to the CMRs, provides for
    greater scrutiny of the prime's use of small businesses as
    subcontractors. As the CMRs have ready-access to the prime's reports
    they can respond more quickly to situations which require their
    attention. As information on Department of Defense large prime
    contractors is being entered into the eSRS, we believe that this
    additional availability of reporting data will only increase the
    effectiveness of the CMRs to effectively monitor the large primes.
        Question. Second, what plans do you have to ensure that minority
    small businesses--whether through the 8(a) program or as Small and
    Disadvantaged Businesses--have full access to the Federal marketplace?
        Answer. It is crucial that minority-owned small businesses are able
    to participate fully in the federal marketplace. One way to measure
    this participation is through the small disadvantaged business (SDB)
    procurement goal which has been established by statute at 5 percent.
    Over the past several years, the Federal government has consistently
    achieved and exceeded this goal.
        Our PCRs continue to work closely with the contracting officers at
    their assigned buying offices to ensure that all small businesses,
    including 8(a) program participants and SDBs have maximum practicable
    access to Federal procurement opportunities. Just recently, our PCRs
    undertook a major initiative with regard to the small business
    ``parity'' issue in light of a recent GAO decision which seemed to give
    priority to HUBZone small business concerns over 8(a) firms in Federal
    contracting. The Office of Management and Budget released interim
    guidance that agencies should follow SBA's parity regulations, while
    the Executive branch undertakes a review of the GAO opinion. Our PCRs
    have undertaken substantial efforts to ensure that the parity rules are
    followed while the opinion is being reviewed. To this end, the PCRs
    have increased training for the contracting officers at the buying
    offices to ensure they understand the need to conduct adequate market
    research and have an awareness of their office's achievements relative
    to their goals when deciding which type of set-aside to use.
        Additionally, our PCRs are conducting 30 Surveillance Reviews at
    major Federal buying offices in fiscal year 2009. As part of these
    reviews, our PCRs are examining the individual buying office's
    compliance with the 8(a) Partnership Agreement, in place between the
    SBA and the higher Headquarters of the buying office reviewed.
        While access to federal contracts is one aspect of the business
    development offered through the 8(a) program, it is not the primary
    purpose of the program. Because the program is a business development
    initiative, the SBA is working diligently to better track assistance
    provided to 8(a) firms through the Business Development Management
    Information System (BDMIS) and the Business Development Assessment Tool
    (BDAT).
                                     ______

                  Questions Submitted by Senator Susan Collins
        Question. What is the status of efforts to establish an economic
    stimulus lending program, a secondary market guarantee authority for
    pools of SBA 504 program first-lien mortgages, and SBA secondary market
    lending authority to make loans to important broker-dealers that
    operate in the SBA 7(a) secondary market?
        What are you seeing in terms lending to small businesses? Has the
    stimulus bill been effective in unfreezing the credit market for small
    businesses?
        Answer. To date, the Recovery Act efforts to eliminate fees and
    raise guarantees has helped restore access to capital for small
    businesses. Through reduced fee and higher guaranteed loans, the Agency
    has supported nearly $8 billion in lending to small businesses using
    $155 million in Recovery Act subsidy. Additionally, over 800 banks that
    had not made an SBA loan since October 2008 have made loans through the
    Recovery Act. At the same time, since March market activity and pricing
    in the 7(a) secondary market has rebounded from its severe contraction
    in 2008. Over the past 3 months, the average monthly loan volume
    settled from lenders to broker-dealers in the secondary market has
    risen to $335 million, moving closer to pre-recession averages.
        On June 15, SBA announced its ARC loan program, aimed at helping
    viable small businesses weather immediate financial hardship through
    interest free, deferred payment loans to help them make payments on
    existing, qualified debts. Since it was launched, the ARC program has
    been steadily ramping up. Through August 4, SBA has approved over 1,000
    loans totaling over $34.5 million.
        Two provisions in the Recovery Act were designed to address market
    disruptions in SBA's secondary markets for guaranteed loans. Both of
    these programs are entirely new and complex, requiring regulations,
    procedures, credit subsidy models and systems to implement. SBA is
    working diligently to develop and implement these programs.
        Section 503 established a new secondary market guarantee authority
    to provide SBA guarantees on pools of 504 first mortgage loans--which
    have not historically been guaranteed or securitized by SBA. The Agency
    has drafted regulations, credit subsidy models, procedural guidance and
    legal forms and agreements for this program. These documents are under
    review by OMB and through the inter-agency process. SBA has also
    started developing contracts and systems to implement this program.
        Section 509 established a new direct loan program to help broker
    dealers in the 7(a) secondary market finance their inventories of
    guaranteed loans. The Agency has drafted regulations, credit subsidy
    models, procedural guidance and legal forms and agreements for this
    program. These documents have been sent to OMB for inter-agency and
    Administrative review. SBA has also started developing contracts and
    systems to implement this program.
        Question. The Recovery Act directed SBA to initiate four new loan
    programs, and mandated revisions to other programs such as increasing
    SBA's guaranty on loans to 90 percent and increasing the size of surety
    bond guarantees. The SBA Office of Inspector General issued a Recovery
    Oversight Framework document identifying various risks to taxpayer
    dollars that could result from these new and revised programs. In
    addition, the OIG recently issued a report on unimplemented
    recommendations from prior audits that could affect the risks and
    performance of these programs. This included outstanding audit
    recommendations regarding the microloan program, which has now received
    additional funding under the Recovery Act.
        What resources is SBA planning to devote to other risk mitigation
    efforts to prevent or limit these risks?
        Answer. Lender oversight regulations were issued in the fall of
    2008 that established clear responsibilities and a supervisory and
    enforcement framework for lender oversight. Additionally, staffing has
    been increased by seven positions in the Office of Credit Risk
    Management over the past 2 years. Going forward, SBA recently re-
    procured its contract for off-site monitoring and is: (1) making more
    information available to lenders and SBA staff for portfolio
    management; (2) redeveloping risk rating metrics to enhance their
    predictiveness; (3) integrating more dynamic, ongoing evaluation of
    lenders and loan portfolios; and (4) ensuring that trends or
    developments are identified and investigated when oversight activities
    surface them.
        In the case of the Recovery Act programs, SBA did a comprehensive
    risk assessment for each of the programs and developed a detailed risk
    mitigation plan for each program. Senior managers from Capital Access,
    Office of Credit Risk Management, Office of Chief Financial Officer,
    and the Office of General Counsel participated in the risk assessment
    and risk mitigation efforts. The Office of Inspector General reviewed
    the plans and provided detailed comments.
        What resources and efforts is SBA devoting to implementing the
    outstanding audit recommendations to improve efficiencies in these
    programs?
        Answer. The Agency has committed significant resources to improving
    lender oversight technology systems and has staffed up to meet the
    increased demands for new Recovery Act programs and for the processing,
    servicing and liquidation of Recovery loans.
        During fiscal year 2009, the Agency closed 66 OIG audit
    recommendations out of a total of approximately 200 at the start of the
    year and addressed in writing the majority of the 50 open GAO
    recommendations. Over the past 2 years, SBA reduced the average number
    of OIG audit findings from around 300 to approximately 150-170. In
    addition, per the 2002 Consolidated Reports Act, SBA's OIG publishes
    annually its Major Management Challenges (8 this year), with a
    scorecard rating system from red to orange to yellow to green. ``Reds''
    have gone from 22 to 1 and the number of recommended actions from the
    high 80s to 26. We continue to work with OIG to incorporate lessons
    learned from previous audits and to develop corrective actions to
    minimize waste, fraud and abuse. Additionally, SBA has put in each
    senior executives job requirements a goal to address and resolve major
    audit findings in his/her respective program area.
        Question. Please describe the current Veterans' Assistance programs
    that SBA operates (1) by the SBA Vets Office, (2) by SBA Capital Access
    program, and (3) by SBA Entrepreneurial Development Office with a
    detailed description of loan programs (average dollar loans and average
    business size, geographic breakdown, total dollar volume) and grant
    programs (average dollar grants, average business size, total dollar
    volume).
        Also please describe SBA's staff efforts at outreach to other
    federal agencies (U.S. Department of Labor, especially its Veterans
    Employment and Training Services Office, and U.S. Veterans
    Administration, the U.S. Department of Defense), state and local
    governments, not-for-profit organizations and other stakeholders, and
    identify existing studies, programs, resources and all existing
    studies, programs, resources and all available federal funding to
    assist veterans in starting and/or growing a small business that
    conduct veterans' benefit programs.
        Answer. The SBA Office of Veterans Business Development (OVBD) is
    the lead SBA office for Veterans' Entrepreneurship. OVBD conducts
    comprehensive outreach to veterans including Reserve component members,
    for the formulation, execution, and promotion of policies and programs
    of the Administration that provide assistance to small business
    concerns owned and controlled by veterans, service-disabled veterans
    and reservists. The AA/VBD also acts as an ombudsman for full
    consideration of veterans in all Administration programs. OVBD, working
    with the Office of Capital Access, was responsible for the Agency
    establishing the Patriot Express Pilot loan program, which has approved
    3,828 loans for $324.2 million for an average loan amount of $84,702 in
    2 years, as of June 30, 2009; we enhanced the surety bond guarantee
    program for veterans, we established a special outreach and web based
    program for veterans and reservists in the SBDC program, we established
    a focused veterans and reservists on line program in SCORE, we market
    the Small Business Training Network to the veterans community, we
    established, and recently improved the Military Reservist Economic
    Injury Disaster Loan program, we provide funding to and manage the
    Veteran Business Outreach Center program, and we have expanded the
    District Office-Veterans Outreach Initiative. In addition, we oversee
    the government wide Service-Disabled Veteran Owned Small Business goal
    program, and OVBD provides training too and e-based ombudsman guidance
    to in excess of 10,000 veterans and reservists each year. OVBD works
    with the independent SBA Office of Advocacy in developing critical
    Advocacy research into veteran's entrepreneurship.
        To accomplish its primary responsibilities of outreach and to act
    as an ombudsman OVBD utilizes:
      --Veteran Business Outreach Centers (VBOC).--8 Veteran specific
            business centers, which operate from a fiscal year
            appropriation of $1.2 million or $150,000 each.
      --District Office-Veterans Outreach Initiatives (DO-VOI).--OVBD
            Funding and support for district office Veteran Business
            Development Officers.
      --E-Guidance and Ombudsman Assistance.--Program guidance provided to
            agency customers via e-mail.
      --Service-Disabled Veteran Procurement.--Providing training SD
            veterans and to contracting officials to improving SD Veteran
            procurement opportunity.
      --Entrepreneurial Tools Development and Distribution.--Development
            and distribution thousands of Veteran and Reservist specific
            Program guides annually.
      --Policy and Program Development and Implementation.--Enhanced OVBD,
            CA, ED, GCBD, ODA programs and policies for veterans and
            reservists.
      --Inter and Intra Agency Coordination.--Coordination and cooperation
            across SBA and representation, liaison and program and policy
            development with DOD, DOL, DVA, State, local and private
            Veteran Serving Organizations, numerous public presentations
            each year, and representation of agency veteran program
            resources with national media.
        Question. Though the Office of Government Contracting and Business
    Development, SBA's 7j program provides training to 8(a) firms (firms
    that are socially or economically disadvantaged). These firms are
    eligible for government contracts set-aside specifically for small
    businesses; however, because of a firm's status as a socially or
    economically disadvantaged firm, its employees need more than just
    financial opportunities to grow. These firms are also in need of
    technical assistance to help them meet the demands of these contracts.
    7j training is a significant part of the 8(a) program effort to promote
    small business opportunities and growth. Please give a status update
    report reviewing the last 5 years of the 7(j) program, including number
    of clients trained, length of training program, cost per client per
    training program, follow-up actions, description and examples of
    curricula provided, and all other relevant information that would
    provide the Committee with insight into the performance of the 7(j)
    program.
        Answer.

    ----------------------------------------------------------------------------------------------------------------
                                                                                        Fiscal year--
                                                                        --------------------------------------------
                                                                           2005     2006     2007     2008     2009
    ----------------------------------------------------------------------------------------------------------------
    Number of 7(j) eligible firms assisted.............................    2,107    2,317    2,486    2,021    2,289
    Per firm cost......................................................   $1,479     $988   $1,344   $2,356   $2,119
    Duration of Training...............................................  ( \1\ )  ( \1\ )  ( \2\ )  ( \2\ )  ( \2\ )
    ----------------------------------------------------------------------------------------------------------------
    \1\ 1 and 2 day workshops.
    \2\ 1 day workshops.

        The U.S. Small Business Administration (SBA), Office of Government
    Contracting and Business Development, 8(a) Business Development Program
    (BD) is expanding its efforts to provide innovative training and
    business solutions to 8(a) Business Development Program Participants.
    Over the past 5 years SBA has funded projects to enhance the business
    savvy of 8(a) Participants by providing them with fundamental business
    development strategies as well as the tools to enhance their ability to
    successfully compete in federal markets.
        SBA monitors contractor/service provider performance and analyzes
    customer feedback from the 8(a) Participant and 8(a) Business
    Development Field Office personnel to assess the effectiveness of each
    7(j) funded project. In addition, periodic surveys of BDS staff in the
    field are conducted to fine tune and develop initiatives that will
    foster business growth and enhance performance and the long term
    viability of 8(a) firms in the federal and commercial sectors.
    Fiscal Year 2009
        In fiscal year 2009, 7(j) funds have been used to support nine new
    initiatives. The first project involves the establishment of an 8(a)
    Association for the Washington Metropolitan Area that supports members
    throughout Washington, Virginia and Maryland. The 8(a) Association will
    be established to assist 8(a) certified businesses with valuable
    educational, promotional, and federal contracting information needed to
    further advance their level of experience and achieve a higher degree
    of success.
        Secondly, the SBA will continue Phase II of its initiative with the
    John H. Chafee Center for International Business at Bryant University
    to provide international business development to 8(a) Participant
    firms. Phase II of the SBA 8(a) 7 (j) Trade Data Matching Program will
    provide 7(j) eligible businesses with counseling and training in the
    areas of international business development that is designed to help
    small business start, grow and foster success in the international
    market place. The training will include one-on-one counseling,
    traditional and online training, feature business forums and
    traditional peer to peer networking opportunities, business modeling,
    conferences and access to a sophisticated trade data retrieval system.
        Additionally, three face-to-face projects utilizing traditional
    classroom as well as Webinars are being funded to provide critical
    business solutions to 8(a) Participants to bolster their ability to
    compete for and manage federal contracts, develop business strategies,
    maximize E-Commerce business opportunities, recruit, manage and retain
    talented staff, and access the capital necessary to grow and sustain
    business functions. Fifteen workshops are planned which include the
    following: Marketing to the Federal Government; How to Qualify for the
    GSA Schedule; Government Contract Negotiations; Proposal Preparation
    Training; Construction Contracting; Federal Contracting and Government
    Contract Management; Strategic Alliances; Leadership Skills; One-On-One
    Business Coaching; Small Business 8(a) Co-Ops; Regional Conferences and
    Seminars E-Commerce and Internet Business Strategies; Human Capital
    Management; Participating on Contracting Teams; Obtaining Debt, Equity
    and Contract Financing; and Planning for and Managing 8(a) Program
    Transition.
        The sixth initiative will permit SBA to develop a Webinars series
    that will provide an online resource to allow 8(a) and 7(j) eligible
    firms to obtain direct business development advice from key business
    development resources. The Technology to host the Webinars will also be
    provided.
        Project seven involves the award of a contract that will be awarded
    to a vendor to provide a publication that will be given to
    approximately 4,000 7(j) eligible and 8(a) firms. This publication will
    increase their knowledge of how to do business with the government to
    optimize their contracting opportunities.
        7(j) funding will also be used to provide enhancements to the
    Business Management Development Information System (BDMIS). The 8(a)
    Business Development Assessment Tool 8(a) BDAT) will provide a uniform
    mechanism to assess the individual management, technical, financial and
    procurement assistance needs of 8(a) participants. The 8(a) BDAT will
    also track individualized assistance provided to 8(a) program
    participants on an annual basis.
        Finally, the SBA serves as a co-host with the Department of
    Commerce Minority Business Development Agency for the 27th Annual
    Minority Enterprise Development Week Conference. The Office of 8(a)
    Business Development will provide networking, matchmaking and training
    opportunities to the 7(j) eligible participants during Minority
    Enterprise Development (MED) Week 2009.
    Fiscal Year 2008
        SBA funded six projects using 7(j) Program funds. The first
    initiative funded Phase I of the international business model developed
    by the John H. Chafee Center for International Business at Bryant
    University to provide international business development assistance to
    100 8(a) firms. Projects two and three provided face-to-face training
    and included the following workshop titles, Business Development for
    Small Businesses Parts 1 and 2, Financial Management for Small
    Business, and Cost and Pricing Parts 1 and 2. These workshops were also
    delivered via the web.
        In addition, SBA awarded a contract to purchase a technical
    resource for 8(a) firms entitled ``Gems of Wisdom for Increasing 8(a)
    BD Competitiveness. This book was provided to increase the knowledge
    base and competitiveness of 8(a) BD firms through the vast network of
    shareholders such as Offices of Small and Disadvantaged Business
    Utilization, Procurement Center Representatives and Commercial Market
    Representatives, Acquisition Team Members including contract offices,
    program offices and mentors.
        The fifth project was awarded in support of the SBA's Emerging 200
    initiative. The purpose of this effort was to increase outreach to
    areas historically challenged by high levels of unemployment and
    poverty. The service provider was tasked with identifying 200-inner-
    city businesses across the country that showed a high potential for
    growth--and to provide them the network, resources and motivation
    required to build a sustainable business of size and scale within a
    designated inner-city geographic location. The sixth and final project
    funded training activities for the fiscal year 2008 MED Week
    Conference.
    Fiscal Year 2007
        During fiscal year 2007, the SBA supported two projects using 7(j)
    Program funds. The initial project financed face-to-face training
    provided management and technical assistance to 8(a) firms and other
    7(j) eligible businesses through one day face-to-face training for the
    following workshop titles, Business Development for Small Businesses
    Parts 1 and 2, Financial Management for Small Business, and Cost and
    Pricing Parts 1 and 2. This initiative also included individualized
    business counseling.
        The second project purchased a business development resource
    entitled ``Gems of Wisdom for Succeeding in the 8(a) BD Program and
    Beyond.'' The purpose of the publication is to share ``gems of wisdom''
    of successful 8(a) BD graduates about their success in the Program.
    This book guided and encouraged others 8(a) firms, and it demonstrated
    that the ``hands on'' provided throughout the program really matters.
    Fiscal Year 2006
        SBA funded a single award to provide workshops to 8(a) and other
    7(j) eligible firms. Workshops titles included Business Development for
    Small Businesses Parts 1 and 2, Financial Management for Small
    Business, and Cost and Pricing Parts 1 and 2. This initiative also
    included individualized business counseling.
    Fiscal Year 2005
        SBA funded two awards to provide workshops to 8(a) and other 7(j)
    eligible firms. Workshop titles included Business Development for Small
    Businesses Parts 1 and 2, Financial Management for Small Business, and
    Cost and Pricing Parts 1 and 2. This initiative also included
    individualized business counseling.
        The second project was designed to maximize the return on time
    invested by each participant. Participants explored different areas of
    their business and discussed the common elements that lead to success
    and what decisions and practices might lead a business to fail.
    Identification of these elements and how they relate to individual
    business environments prepared participants how to analyze specific
    strengths, weaknesses, opportunities and threats so that achievable
    action plans could be developed and implemented. A companion workbook
    and DVD were produced which enabled SBA Field Offices to provide
    additional training to 8(a) Participants who were unable to attend
    previously scheduled workshops.
                        GENERAL SERVICES ADMINISTRATION

    STATEMENT OF HON. PAUL F. PROUTY, ACTING ADMINISTRATOR
    ACCOMPANIED BY THE HONORABLE JOSEPH F. BATAILLON, CHIEF JUDGE, U.S.
                DISTRICT COURT FOR THE DISTRICT OF NEBRASKA; CHAIR, SPACE
                AND FACILITIES COMMITTEE, JUDICIAL CONFERENCE OF THE UNITED
                STATES

        Senator Durbin. Next panel is the General Services
    Administration, and I will give a little introduction here as
    the panelists are going to take the table.
        GSA employs more than 12,000 staff in 11 regions throughout
    our country; oversees a vast and diverse portfolio of Federal
    assets; manages more than 8,600 buildings with a total value of
    $74 billion, including 1,500 Government-owned buildings. This
    may be one of them.
        It is responsible for servicing the workspace requirements
    for 57 Federal agencies with approximately 354 million square
    feet of workspace for over 1 million Federal employees in 2,000
    American communities. It is a big job. They are big landlords.
        First, we will hear the testimony of Paul Prouty, Acting
    Administrator of the General Services Administration. We look
    forward to hearing about the GSA's plans to implement the
    Recovery Act by converting Federal buildings to high-
    performance green buildings, as well as discussing the 2010
    budget.
        Also joining us to discuss the budget request for GSA is
    the Honorable Joseph Bataillon, Chief Judge of the U.S.
    District Court for the District of Nebraska. He is Chair of the
    Space and Facilities Committee of the Judicial Conference,
    which prepares an annual 5-year plan detailing the needs and
    priorities of the judiciary for courthouse space. GSA and the
    administration use this project plan in selecting projects each
    fiscal year and preparing the budget request.
        We thank you both for being here. Your statements will be
    made a part of the official record, and at this point, the
    floor will be available to each of you for 5 minutes.
        Mr. Prouty. Thank you very much.
        Chairman Durbin, Ranking Member Collins, Senator Bennett--
    good to see you, sir--distinguished members of the
    subcommittee, I am honored to appear before you today in
    support of GSA's 2010 budget request. With your permission, I
    would also like to provide an update on our efforts to
    implement the American Recovery and Reinvestment Act of 2009.
        GSA's fiscal year 2010 budget request supports the
    administration's commitments to build a transparent,
    participatory, and collaborative Government through the use of
    new technologies, as well as address significant shortfalls in
    our national infrastructure.
        The fiscal year 2010 budget request, in conjunction with
    the Recovery Act, provides $6.4 billion for capital projects.
    These projects will create new jobs for thousands of Americans
    and will stimulate industries that have been battered by the
    economic downturn. In addition, these projects will deliver
    lasting progress toward modernizing our Nation's
    infrastructure, reducing the Federal Government's consumption
    of energy and water, and increasing our reliance on clean and
    renewable sources of energy.
        GSA's fiscal year 2010 budget requests $645 million in net
    budget authority. This amount is just 2.4 percent of our total
    planned obligations of $27 billion. The majority of our funds
    come in the form of customer reimbursements for goods purchased
    or rent paid for space under GSA's jurisdiction, custody, or
    control.
        For the Public Buildings Service, GSA requests $8.5 billion
    in new obligational authority. Of these funds, $658 million are
    requested for the construction and acquisition of critical
    facility projects for the Food and Drug Administration, the
    Federal Bureau of Investigation, U.S. Customs and Border
    Protection, and the judiciary.
        We also request new obligational authority of $496 million
    to address the backlog of repair and alteration projects.
    Although the Recovery Act funding provides GSA with some relief
    from our substantial backlog of repair and alteration needs,
    our inventory of aging Federal buildings requires continued
    reinvestment.
        We also request $40 million for our energy and water
    retrofit and conservation program and our Federal high-
    performance green buildings program to help address Federal
    requirements for energy conservation and reduced energy
    consumption in Federal buildings.
        The GSA Federal Acquisition Service (FAS) is a leading
    acquisition organization for the Federal Government. Last year,
    revenues increased by 4.6 percent, making fiscal year 2008 the
    first year since fiscal year 2004 that GSA has seen revenue
    growth across the combined programs of FAS. FAS also realized a
    2 percent increase in cash collections from our multiple award
    schedules program. This business resurgence is the result of a
    concerted effort to reduce operating costs, standardize the
    fees we charge our customers, and restructure our service
    offerings.
        Today, GSA and FAS are delivering value to our customers by
    offering products and services that meet or exceed their
    expectations. As a leader in green Government, GSA continues to
    encourage Federal agency customers to consider the
    environmental impact of their acquisition decisions.
        The American Recovery and Reinvestment Act has provided GSA
    with an opportunity to contribute to our Nation's economic
    recovery by investing in green technologies and reinvesting in
    our public buildings. The Recovery Act provided GSA's Public
    Buildings Service with $5.55 billion, including $1.05 billion
    for Federal buildings, U.S. courthouses, and land ports of
    entry, and $4.5 billion to convert Federal buildings into high-
    performance green buildings.
        We are moving forward with speed, tempered by careful
    consideration of our procurement responsibilities and our
    ultimate accountability to the taxpayer. On March 31, GSA
    delivered to Congress a list of 254 projects in all 50 States,
    the District of Columbia, and two U.S. territories to be
    completed with funds provided by the Recovery Act. GSA selected
    the best projects for accomplishing the goals of the Recovery
    Act based on a detailed analysis of a number of factors. Our
    goals in developing this list were to both put people back to
    work quickly and increase the sustainability of our buildings.
        As of June 5, PBS has awarded contracts totaling $244
    million to begin the construction, modernization, or repair of
    25 Federal buildings across the country. Of this, $213 million
    has been obligated to convert GSA facilities to high-
    performance green buildings. We have also obligated $30 million
    for the construction of new energy-efficient land ports of
    entry at Calais, Maine and the Peace Arch at Blaine,
    Washington.
        The Recovery Act provided GSA's Federal Acquisition Service
    with $300 million to replace motor vehicles across the Federal
    fleet with those that are new and more efficient. GSA's
    strategy to improve the energy efficiency of the Federal fleet
    balances energy efficiency goals with the need to expedite
    procurement, in order to maximize economic benefit for the auto
    industry and the economy as a whole.
        To date, GSA has obligated $287 million to order over
    17,000 fuel-efficient vehicles, of which 3,100 are hybrids. In
    the final phase of this procurement, GSA will order $13 million
    of compressed natural gas and hybrid buses and electric
    vehicles by September 30, 2009.
        Today, I have discussed our fiscal year 2010 budget
    request, the Recovery Act, and GSA's eagerness to undertake the
    new challenges that lie ahead. Your approval of GSA's budget
    request is a vital step in helping us achieve our mutual goals
    of economic recovery, energy efficiency, and increased citizen
    engagement in Government.

                               PREPARED STATEMENT

        GSA is committed to delivering on these goals, contributing
    to the long-term objectives of the administration, and
    providing the best use of taxpayer funds. I look forward to
    continuing this discussion of our 2010 budget request with you
    and the members of the subcommittee.
        Thank you.
        Senator Durbin. Thank you.
        [The statement follows:]
                      Prepared Statement of Paul F. Prouty
        Chairman Durbin, Ranking Member Collins, and Distinguished Members
    of the Subcommittee: My name is Paul Prouty and I am the Acting
    Administrator of the General Services Administration (GSA). Thank you
    for inviting me to appear before you today to discuss GSA's fiscal year
    2010 budget request. With your permission, I would also like to provide
    you with an update on our efforts to implement the American Recovery
    and Reinvestment Act of 2009 (``Recovery Act'').
        GSA's fiscal year 2010 budget request supports the Administration's
    commitments to build a transparent, participatory, and collaborative
    government through the use of new technologies as well as address
    significant shortfalls in our national infrastructure. The fiscal year
    2010 budget request, in conjunction with the Recovery Act, provides
    $6.4 billion for capital projects involving the new construction, major
    modernization, and repair of Federal buildings. These projects will
    create new jobs for thousands of Americans and will stimulate
    industries that have been battered by the economic downturn. Our
    projects will provide jobs for constructions workers, carpenters,
    plumbers, electricians, architects, and engineers nationwide. Our
    demand for building materials will create or sustain jobs in those
    industries. And these projects will deliver lasting progress towards
    modernizing our Nation's infrastructure, reducing the Federal
    Government's consumption of energy and water, and increasing our
    reliance on clean and renewable sources of energy.
        The budget establishes an aggressive agenda for opening Government
    to the American people by rapidly expanding the use of technology
    across the Executive Branch. The President knows that new technology is
    crucial to delivering greater transparency, accountability, and public
    participation in government. The Recovery Act has been the staging
    ground for the Administration's new approach to open Government through
    the innovative use of new technology
        The fiscal year 2010 President's Budget creates a vision of Federal
    IT that goes beyond increasing the public availability of Government
    data. Data transparency is a key goal of this Administration, but we
    are limited in our ability to deliver the broader goal of participatory
    government without substantial changes in the Federal technology
    infrastructure. Sound and measured investments are needed to increase
    collaboration across Federal agencies, to open government processes and
    operations--not just data--to the public, and to consolidate,
    standardize, and reduce common Federal IT services, and solutions.
        Our fiscal year 2010 budget request is a foundational piece for
    moving forward with the President's vision of transforming Government
    by transforming Federal information technology. We have proposed nearly
    $40 million in technology investments, which will improve transparency,
    accountability, and public participation. The investments included in
    our request look to 21st Century technologies to accelerate rapidly
    efforts, which are often characterized as ``electronic government''.
        Our request seeks funding to begin building the capacity in the
    Federal Government for a culture of openness and transparency. That
    culture is based on innovative tools by developing new means of
    delivering Government data, citizen services, and Federal IT
    infrastructure. GSA's fiscal year 2010 budget requests the resources
    necessary for GSA to support the President's vision of ``leveraging the
    power of technology to transform the Federal Government''. The
    requested investments will allow GSA to take a dramatic step forward
    towards expanding public participation in and access to Government
    data, which will help to deliver greater transparency, accountability,
    and public participation in Government. Adopting new technologies and
    new ways to harness existing technology will make the Federal
    Government more efficient, more effective, and more responsive to its
    citizens.
                        fiscal year 2010 budget request
        GSA's fiscal year 2010 budget requests $645 million in net budget
    authority for the Federal Buildings Fund and our operating
    appropriations. This amount is just 2.4 percent of our total planned
    obligations of $27 billion. The majority of our funding is provided
    through reimbursements from Federal customer agencies, for purchases of
    goods and services or as rent paid for space in Federally-owned and -
    leased buildings under GSA jurisdiction, custody or control. GSA
    requests appropriations to support capital investments in the Federal
    Buildings Fund, to provide for our Government-wide responsibilities,
    and for other activities that are not feasible or appropriate for a
    user fee arrangement.
                            public buildings service
        Our fiscal year 2010 budget requests $8.5 billion in New
    Obligational Authority (NOA) and an appropriation of $525 million for
    the Federal Buildings Fund. Our request proposes a capital investment
    program of $1.15 billion, for projects for the Food and Drug
    Administration (FDA), the Federal Bureau of Investigation (FBI), U.S.
    Customs and Border Protection (CBP), and the Judiciary.
        We have requested $658 million in NOA for New Construction and
    Acquisition, including $453.5 million for two Agency consolidations and
    three infrastructure and development projects, $151 million for three
    land port of entry facilities, and $53 million for two U.S. Courthouse
    projects. Our request includes the following projects:
      --FBI Field Office Consolidation in Miami, FL ($191 million);
      --FDA Consolidation in Montgomery County, MD ($138 million);
      --Acquisition of Columbia Plaza in Washington, DC ($100 million);
      --Southeast Federal Center Remediation in Washington, DC ($15
            million);
      --Denver Federal Center Remediation in Lakewood, CO ($10 million);
      --Land ports of entry in El Paso, TX; Calexico, CA; and Madawaska,
            ME; and
      --U.S. Courthouses in Lancaster, PA and Yuma, AZ.
        GSA also requests NOA of $496 million for Repairs and Alterations
    (R&A) to Federal buildings. Although the funding provided in the
    Recovery Act gives GSA some relief from our substantial backlog of R&A
    needs, our inventory of aging Federal buildings requires continued
    reinvestment. The R&A program will continue to be a strategic priority
    for GSA, and our fiscal year 2010 request focuses on the highest
    priority projects in our real property portfolio.
        The request includes $176 million in NOA for four major building
    modernizations, $260 million for non-prospectus level projects, and $60
    million for Special Emphasis programs. Our proposed major modernization
    projects are:
      --East Wing (White House) Infrastructure Systems Replacement in
            Washington, DC ($121 million);
      --New Executive Office Building in Washington, DC ($30 million);
      --EEOB (Courtyard Replacement) in Washington, DC ($10 million); and
      --EEOB (Roof Replacement) in Washington, DC ($15 million).
        Our Special Emphasis programs would provide:
      --$20 million for Fire and Life Safety Program;
      --$20 million for Energy and Water Retrofit and Conservation
            Measures; and
      --$20 million for improvements necessary to transform existing
            Federal buildings into Federal High Performance Green
            Buildings.
        GSA is dedicating $40 million to our Energy and Water Retrofit and
    Conservation program and our Federal High Performance Green Buildings
    program, to help address Federal requirements for energy conservation
    and reduced energy consumption in Federal buildings. These Special
    Emphasis programs will upgrade Heating, Ventilation and Air
    Conditioning (HVAC) and lighting systems, install advanced metering,
    increase water conservation, support new renewable energy projects, and
    many other items that will conserve energy in Federal buildings. These
    programs are in addition to the energy conservation measures that are
    already incorporated into our prospectus-level New Construction and
    Repairs and Alterations project requests.
        In fact, the Public Buildings Service (PBS) already incorporates
    sustainable design principles and conservation measures into the design
    and construction of, and repair and alteration to, many GSA Federal
    buildings. For example, 100 percent of the new construction projects
    initiated in fiscal year 2008 were registered for the U.S. Green
    Buildings Council's Leadership in Energy and Environmental Design
    (LEED). These projects will be measured against objective standards for
    sustainable design and construction and will receive LEED certification
    upon substantial completion. PBS has established a commissioning
    program, to ensure all building systems are working efficiently, and in
    a coordinated manner, upon completion of a construction project. PBS
    performs energy audits and environmental risk assessments on a regular
    basis to determine where resources should be focused.
        These initiatives are just a few of the environmental measures that
    GSA incorporates into New Construction and R&A projects, in addition to
    our Special Emphasis programs. Our many environmental initiatives
    compliment each other to build a comprehensive program to promote
    efficient use of energy and water, increased reliance on sustainable
    energy sources, and environmental stewardship in the Federal inventory.
    These programs not only benefit the environment but increase the value
    of our assets and reduce operating costs over the life of our
    buildings.
        In addition to our capital program, GSA requests New Obligational
    Authority for our operating program, in the amount of:
      --$4.9 billion for the Rental of Space program, which will provide
            for 194 million rentable square feet of leased space;
      --$2.4 billion for the Building Operations program; and
      --$141 million for the Installment Acquisition Payments program.
                        operating appropriation request
        While only $270 million of GSA's proposed budget is funded through
    GSA's operating appropriations, the activities they fund are critical.
    Our operating appropriations provide for GSA's Office of Governmentwide
    Policy and the Chief Acquisition Officer, the many Government-wide
    programs of the Operating Expenses account, the Electronic Government
    Fund, the pensions and office staffs of former Presidents, and the
    Federal Citizen Services Fund.
        The largest increase in our request is for major new Government-
    wide E-Government initiatives, supported by the CIO Council and under
    the auspices of the new Federal CIO. The proposed increase of $33
    million in this account would be used to address initiatives in the
    area of Open Government and Transparency, to move agencies to realize
    large potential savings through alternative approaches to IT
    infrastructure, to increase agency use of collaborative technologies,
    and to advance the adoption of new tools to support innovations in how
    the Federal Government relates to citizens, the private sector, and
    State and local governments.
        Additional funds requested for GSA operating appropriations include
    increases for the Federal pay raise and inflation, along with proposed
    program increases to:
      --develop high performance green building standards for all types of
            Federal facilities;
      --develop and enhance multiple Government-wide databases to improve
            Federal reporting and transparency;
      --provide additional training support for the Federal Acquisition
            Institute, supporting acquisition workforce of all civilian
            Executive agencies; and
      --reflect the full-year cost of the pension and related benefits for
            former President George W. Bush.
                          federal acquisition service
        The Federal Acquisition Service (FAS) had a very successful year in
    fiscal year 2008. Revenues increased by 4.6 percent last year, making
    fiscal year 2008 the first year since fiscal year 2004 that GSA has
    seen revenue growth across the combined programs of FAS. FAS also
    realized a solid two percent increase in cash collections from our
    multiple award schedules program. Business with the Department of
    Defense, FAS' largest customer, increased by three percent in fiscal
    year 2008. This ``business resurgence'' is the result of a concerted
    effort to reduce operating costs, standardize the fees we charge our
    customers, and restructure our service offerings. Today, GSA and FAS
    are delivering value to our customers by offering products and services
    that meet or exceed their expectations.
        After 3 years of cost cutting, a protracted hiring freeze, and a
    major realignment of staff out of the Assisted Acquisition Services
    portfolio, to other parts of FAS and GSA, we are beginning to realize
    benefits. FAS now has a workforce that is better aligned with its
    workload, strong cash balances in the Acquisition Services Fund (ASF),
    and a stable organizational structure to support a strong mix of
    programs, which deliver value to customers. However, many years of cost
    cutting and reorganization have created new challenges for FAS, as
    major IT investments have been deferred, and staffing levels were
    reduced across all organizations. GSA must now begin to strategically
    invest in the FAS infrastructure and workforce to ensure a successful
    future.
        Our future depends on investments in technology and continued
    process improvements in FAS. Short term investments in information
    technology tools, such as business intelligence, will improve our
    ability to understand the buying patterns of FAS customers. Business
    intelligence will improve our ability to help customers make better
    procurement decisions, which will result in more efficient use of
    Federal funds and more effective Government. Additional technology
    investments must be made to FAS legacy systems, that are as much as 35
    years old. FAS has also implemented a Lean Six Sigma program. Lean Six
    Sigma is a process improvement methodology focused on improving
    efficiency and quality while reducing costs. Private sector experience
    suggests that Lean Six Sigma initiatives can produce significant
    improvements. FAS has already launched several Lean Six Sigma
    initiatives, which we expect to begin generating efficiency gains in
    fiscal year 2010 and beyond.
        FAS also supports the entire Federal community in promoting good-
    for-Government initiatives, such as strategic sourcing. Strategic
    sourcing uses business intelligence to analyze customer spending data
    and makes recommendations to increase the efficiency and effectiveness
    of acquisitions. GSA participates in the Government-wide Federal
    Strategic Sourcing Initiative (FSSI), and has established an FSSI
    Program Management Office in FAS. FAS manages three major FSSI
    commodity categories: Domestic Delivery Services, Wireless
    Telecommunications Expense Management Services, and Office Supplies.
        In fiscal year 2008, the Domestic Delivery Services contract had 57
    participating agencies, boards, and commissions, with a total estimated
    spend of $94.7 million and $33.8 million in estimated savings. Wireless
    Telecommunications Expense Management Services expects to save agencies
    25 to 40 percent off their wireless cost of operations. And FSSI Office
    Supplies has grown to over 50 participating Federal agencies, boards,
    and commissions, with $10 million in spend. Eighty-nine percent of this
    work is conducted with small business.
        GSA and FAS also actively encourage our Federal agency customers to
    consider the environmental impact of their acquisition decisions. FAS
    offers a specially designed page, within GSA Advantage, which allows
    customers to shop by ``Environmental Specialty Category.'' This
    application enables customers to search for products and services that
    are environmentally friendly, contain recycled content, or are bio-
    based. Customers are able to save time and make informed procurement
    decisions, as GSA has brought a wide range of products into a common
    procurement tool. In addition to offering environmentally friendly
    products, GSA has also a Multiple Award Schedule (Environmental
    Services, GSA Schedule 899) that is dedicated to environmental
    services. This schedule provides access to services from environmental
    clean up and remediation and waste management and recycling services,
    to consulting services.
        The GSA Vehicle Leasing program (GSA Fleet) is another example of
    our leadership in ``Green Government''. GSA Fleet enables agencies to
    fulfill their missions and meet their environmental responsibilities,
    offering over 80,000 alternative fuel vehicles (AFVs) that are leased
    to customers to meet their transportation needs. The use of AFVs across
    the Federal Government helps to reduce petroleum consumption,
    introduces more efficient vehicles into the Federal fleet and reduces
    greenhouse gas emissions. This GSA program also helps agencies better
    meet the requirements of multiple environmental statutes and
    regulations, including the Energy Policy Act and the Energy
    Independence and Security Act of 2007.
        FAS is well positioned to continue as a leading acquisition
    organization for the Federal Government and assist agencies in
    achieving their missions in support of the American taxpayer.
                     american recovery and reinvestment act
        The American Recovery and Reinvestment Act (``Recovery Act'') has
    provided GSA with an unprecedented and exciting opportunity to
    contribute to our Nation's economic recovery, by investing in green
    technologies and reinvesting in our public buildings.
        The Recovery Act provided GSA's Public Buildings Service with $5.55
    billion, including $1.05 billion for Federal buildings, U.S.
    courthouses, and land ports of entry, and $4.5 billion to convert
    Federal buildings into High Performance Green Buildings. In addition,
    the Recovery Act provided the GSA with $300 million to replace motor
    vehicles across the Federal fleet with those that are new and more
    efficient.
        Today, I would like to provide you with an update on GSA's efforts
    to implement the Recovery Act.
                      federal buildings fund--recovery act
        As of June 5, PBS had awarded contracts totaling $244 million, to
    begin the construction, modernization, or repair of 25 Federal
    buildings across the country. We have obligated $213 million towards
    measures to convert GSA facilities to High-Performance Green Buildings,
    including modernizations of the Thurgood Marshall U.S. Courthouse in
    New York, the Birch Bayh U.S. Courthouse and the Minton-Capehart
    Federal Building in Indianapolis, IN, and the Denver Federal Center in
    Lakewood, CO. We have also obligated $30 million for the construction
    of new, energy-efficient Land Ports of Entry at Calais, ME, and the
    Peace Arch at Blaine, WA.
        The Recovery Act funds that were provided for investments in
    Federal buildings will provide many direct and meaningful benefits.
    First, the money will help the Federal Government reduce energy and
    water consumption and improve the environmental performance of the
    Federal inventory of real property assets. Second, much of the funding
    provided will be invested in the existing infrastructure, which will
    help reduce our backlog of repair and alteration needs. This will
    increase the value of our assets and extend their useful life. Third,
    the funds provided for New Construction will reduce our reliance on
    costly operating leases, by providing more Government-owned solutions
    to meet the space requirements of our customers. Finally, we will
    stimulate job growth in the construction and real estate sectors and
    drive long-term improvements in energy efficient technologies,
    alternative energy solutions, and green building technologies.
        We know this is not business as usual and we are moving forward
    with speed, tempered by careful consideration of our procurement
    responsibilities and our ultimate accountability to the taxpayer. In
    order to streamline business processes and provide tools and resources
    to assist GSA's regional Recovery project delivery, the Public
    Buildings Service (PBS) has established a nationally managed,
    regionally executed Project Management Office (PMO). The PMO works
    closely with counterparts in the core PBS organization to leverage PBS
    resources and expertise. This national operation will be accountable
    for the following:
      --Develop and maintain consistent processes, policies and guidelines;
      --Manage customer requirements and expectations at the national
            level;
      --Drive successful project oversight and management;
      --Ensure accurate tracking and reporting of Recovery Act funds;
      --Manage cross-agency resources; and
      --Enable PBS to adopt leading practices in the PBS organization
            generally.
        PBS and the PMO have moved forward quickly. On March 31st, GSA
    delivered to Congress a list of 254 projects in all 50 States, the
    District of Columbia, and two U.S. territories to be completed with
    funds provided by the Recovery Act. These projects fall into the
    following categories: new Federal construction; full and partial
    building modernizations; and limited-scope, high-performance green
    building projects. In the new Federal construction category, we will
    invest $1 billion in 17 projects; in the building modernization
    category, we will invest $3.2 billion in 43 projects; and in the
    limited-scope green buildings category, we will invest $807 million in
    194 projects. This totals over $5 billion. GSA selected the best
    projects for accomplishing the goals of the Recovery Act based on a
    detailed analysis of a number of factors. Our goals in developing this
    list were to both put people back to work quickly and increase the
    sustainability of our buildings.
        Many of the projects in the new Federal construction and building
    modernization categories have previously received partial funding. We
    can start construction quickly on these projects, while also
    identifying ways that existing designs can be improved. These
    categories include projects such as the Bishop Henry Whipple Federal
    Building in Fort Snelling, Minnesota, a multi-tenant office building
    project where Heating, Ventilation and Air Conditioning (HVAC),
    plumbing, electrical and life safety improvements are expected to
    deliver 23.6 percent energy savings, once the project is completed.
    This is over and above the 20 percent in energy savings already
    achieved in this building in recent years.
        An example of the innovative improvements we will be making in some
    of the construction and modernization projects is the Edith Green-
    Wendell Wyatt Federal Building in Portland, Oregon. As part of this
    project, GSA will install a new high-performance double glass enclosure
    over the entire building, which will dramatically enhance energy
    performance and blast resistance. On the west facade, vegetative
    ``fins'' will provide shade, reducing the load on the new high-
    efficiency HVAC system that will be installed. These are just some of
    the ``green'' improvements GSA will make as part of this project. We
    expect the building to attain a LEED Gold rating.
        By using well-established contracting techniques we can start work
    quickly, and make simultaneous improvements to the existing designs.
        In the limited scope category, we have identified a number of
    projects that can rapidly be deployed in many buildings at once--
    buildings as varied as the Oklahoma City Federal Building, the
    Burlington Federal Building U.S. Post Office and Courthouse, and the J.
    Caleb Boggs Courthouse and Federal Building in Wilmington, Delaware.
    Through these projects, we can make significant improvement to the
    energy performance of a building and also improve the working
    conditions for the people in them.
        Greening our buildings will be an ongoing process. As the
    Subcommittee knows, the Energy Independence and Security Act of 2007
    (EISA) and other laws require GSA, among other things, to reduce its
    energy consumption by 30 percent by 2015; reduce fossil fuel-generated
    energy consumption in our new buildings by increasing amounts--from 55
    percent in 2010 to 100 percent in 2030; and ``green'' an even greater
    portion of our inventory. Although the Recovery Act will accelerate our
    progress in these areas, that alone will not enable us to meet these
    goals. Our fiscal year 2010 budget request provides the next steps in a
    long-term program to meet the aggressive goals of EISA and related
    legislation.
            energy-efficient federal motor vehicle fleet procurement
        GSA's strategy to improve the energy-efficiency of the Federal
    fleet balances energy-efficiency goals with the need to expedite
    procurement, in order to maximize economic benefit for the auto
    industry and the economy as a whole. GSA is focusing this procurement
    on vehicles that will provide long-term environmental benefits, and
    cost savings, by increasing the fuel efficiency of the Federal fleet.
    GSA will use newer and more fuel-efficient vehicles and advanced
    technologies, while at the same time spending funds quickly to provide
    immediate stimulus to the economy and the automotive industry.
        GSA is procuring new motor vehicles only to replace, on a one-for-
    one basis, operational motor vehicles in the Federal inventory that
    currently meet replacement standards, so as to not increase the overall
    size of the Federal fleet. Each vehicle purchased will have a higher
    miles-per-gallon rating than the vehicle it replaces and the overall
    procurement will provide a minimum of a 10 percent increase in fuel
    efficiency over the replaced vehicles.
        GSA will only acquire motor vehicles that comply with all Federal
    environmental mandates. These vehicles will be included in the
    alternative fuel vehicle-acquisition compliance calculations of the
    Energy Policy Act of 2005, as well as the petroleum reduction and
    alternative fuel use increase requirements of Executive Order 13423,
    ``Strengthening Federal Environmental, Energy, and Transportation
    Management''. Vehicles acquired under this procurement will meet, or
    exceed, standards for greenhouse gas emissions which were established
    in the Energy Independence and Security Act of 2007.
        On April 14, 2009, GSA obligated $77 million to order 3,100 hybrid
    vehicles for Federal agencies using Recovery Act funds. The vehicles in
    this initial order are a mix of Chevrolet Malibus, Saturn Vues, Ford
    Fusions and Ford Escapes. This purchase represents the largest one-time
    procurement of hybrid vehicles for the Federal fleet.
        On June 1, 2009, GSA obligated an additional $210 million. To date,
    we have obligated $287 million, and ordered 17,200 motor vehicles with
    funds provided by the Recovery Act.
        In the final phase of this procurement, GSA will order $13 million
    worth of Compressed Natural Gas (CNG) and hybrid buses and low-speed
    electric vehicles, by September 30, 2009. While this is the smallest
    segment of the plan, we are excited by the fact that the vehicles
    purchased will replace some of the highest-emission vehicles in the
    Federal fleet with much lower-emission vehicles, which will reduce fuel
    consumption and further the Federal Government's exploration of the use
    of alternative fuels.
                               summary statement
        Today, I have discussed our fiscal year 2010 budget request, the
    Recovery Act, and GSA's eagerness to undertake the new challenges that
    lie ahead. We at GSA are strongly committed to ensuring that the
    responsibilities entrusted to us are exercised in a manner that is
    effective, efficient, and transparent. My task, and the task of
    everyone at GSA, is to keep building on our recent successes and to
    fulfill GSA's mission to acquire the best value for taxpayers and our
    Federal customers, while exercising responsible asset management.
        We look forward to carrying out our role in the Recovery Act, to
    responsibly deliver modernized and energy-efficient Federal buildings
    and motor vehicles, and to stimulate the economy by creating jobs and
    outlaying Federal funds to industries in crisis. Your approval of GSA'
    budget request for fiscal year 2010 is a vital step in helping us
    achieve our mutual goals of economic recovery, energy efficiency, and
    increased citizen engagement in Government. GSA is committed to
    delivering on these goals, contributing to the long-term objectives of
    the Administration, and providing the best use of taxpayer funds.
                               closing statement
        Mr. Chairman, this concludes my formal statement. I look forward to
    continuing this discussion of our fiscal year 2010 budget request with
    you and the Members of the Subcommittee.

        Senator Durbin. Judge Bataillon.

                     STATEMENT OF HON. JOSEPH F. BATAILLON

        Judge Bataillon. Good afternoon, Mr. Chairman, Senator
    Collins, Senator Bennett, members----
        Senator Durbin. Would you check and make sure that your
    microphone switch is on?
        Judge Bataillon. Now it is on. Thank you very much.
        That is what I say to the lawyers all the time. You have to
    speak into the microphone, gentlemen.
        But at any rate, thank you for inviting us here today. I
    appreciate the opportunity to appear before the subcommittee
    today to discuss the judiciary's courthouse construction needs,
    the process for identifying and prioritizing these needs for
    Federal construction projects, as well as lease construct
    projects, which are an alternate approach for acquiring smaller
    courthouse facilities.
        Before addressing those issues, however, I want to convey
    the judiciary's gratitude to this subcommittee for supporting
    and furthering the administration of justice through
    appropriating monies from GSA Federal Buildings Fund for the
    construction of new courthouses and for the renovation of
    existing courthouses.
        We understand that there are many Federal needs competing
    for scarce capital resources in Government, and we deeply
    appreciate the subcommittee's willingness to champion the needs
    of the judiciary in terms of the real estate infrastructure
    necessary to conduct the work of the courts and administer
    justice. We are particularly grateful for the subcommittee's
    appropriation of additional funds for the San Diego courthouse
    in 2009 and for its support of courthouse construction with the
    American Recovery and Reinvestment Act funds.
        On April 1 of this year, James Duff, Director of the
    Administrative Office of the United States Courts, on behalf of
    the Judicial Conference, transmitted to this subcommittee,
    other cognizant congressional committees, the White House, the
    Office of Management and Budget, and the General Services
    Administration, the 5-year plan for courthouse construction
    projects as approved by the Judicial Conference of the United
    States in March 2009.
        An advance copy of the plan was provided to GSA earlier
    this year for use in developing the 2010 Federal Buildings Fund
    budget request. We are disappointed that none of these projects
    listed on the 2000 plan--on the 2010 plan appear on the
    President's 2010 budget.
        The projects that were included, however, were Yuma,
    Arizona, and Lancaster, Pennsylvania, which were initially
    determined by GSA and by the courts as lease construction
    projects as opposed to Federal building projects. They now
    appear on the budget as Federal building projects.
        The distinction between these two execution strategies for
    acquisition of new construction has never been in place before,
    and it has never been part of the 5-year plan for the courts.
    Federally constructed projects have to be ranked and
    prioritized because Federal construction dollars are scarce,
    and at any given year, only so much money is available to be
    appropriated for these projects.
        Lease construct projects, on the other hand, do not compete
    with each other for funding from a limited pool of Government
    construction capital but are privately financed. Consequently,
    there has been no need for the judiciary to rank or prioritize
    lease construction projects as long as they fit within our
    budget requirements.
        Moreover, Federal construction has been and remains the
    primary means by which GSA provides new space for the courts.
    Lease construction has only played a small role in one or two
    courthouse construction projects in low-density population
    areas where a large court presence is not necessarily needed.
        In addition, lease construction courthouse projects are
    delivered in a fraction of the time that it takes the
    Government to construct a Federal courthouse. This expedited
    delivery feature is a key benefit to the lease construction
    alternative.
        While the use of the lease construction method has been
    very modest with the judiciary, it has been critical to the
    judiciary and GSA to deliver small projects on an expedited
    basis. We now understand that the Office of Management and
    Budget (OMB) has raised objections to the lease construction
    courthouse process, even for modest projects like the ones in
    Yuma and Lancaster.
        If the lease construct execution strategy will no longer be
    accorded to GSA as an alternative to Federal construction
    methods for delivery of new courthouses, and the administration
    seeks funding for these projects from the Federal Buildings
    Fund, the projects on the judiciary's 5-year plan will suffer,
    and the President's budget this year is an example of that.
    None of the 5-year construction projects are included in the
    President's budget request, only what would otherwise be
    considered as lease constructions.
        If that continues to be the case, lease construction
    projects would have to compete for scarce Federal building
    dollars, along with long-term judicial space requirements, and
    Yuma is a prime example. Yuma was on the verge of a lease
    construct contract award and scheduled for completion in June
    2011. A Federal construction execution will likely delay the
    project by at least another year or 2 years.
        Yuma, to date, has handled over 2,000 defendants, and it is
    anticipated that they will handle at least 5,000 defendants
    this calendar year. The security requirements are so limited in
    this leased facility that ICE has required the court only to
    process 40 defendants a day because we don't have the capacity
    to do any more than that, and it becomes a bottleneck for the
    prosecution of these individuals.
        The judiciary was not consulted prior to this change in
    execution strategy. We are disappointed that the Yuma and
    Lancaster projects, which we believe are appropriate for the
    lease construct path, have now been redirected to the Federal
    construction path, apparently at the expense of the 5-year
    plan.
        With regard to the fiscal year 2010 projects, if they are
    not funded in this budget year, then they will be pushed back
    yet again another year, and it has been our experience that
    every time we push back a project, the costs for the project
    increase substantially. The judiciary urges the subcommittee to
    support remaining lease construction as necessary and
    appropriate and as an alternative to Federal construction,
    especially in locales where the court space is modest, acute,
    and of possible intermediate duration.

                               PREPARED STATEMENT

        The judiciary believes that GSA has the authority to use
    this procurement method, which is a widely accepted method of
    delivering buildings in the private sector. Again, the
    judiciary is grateful for the past and continuing support shown
    by this subcommittee for its facilities and space needs.
        Thank you very much.
        [The statement follows:]
                   Prepared Statement of Joseph F. Bataillon
                                  introduction
        Good afternoon, Mr. Chairman, Senator Collins, and members of the
    Subcommittee. I am Joseph F. Bataillon, Chief Judge of the United
    States District Court in Nebraska and Chair of the Judicial Conference
    Committee on Space and Facilities. I appreciate the opportunity to
    appear before this subcommittee today to discuss the Judiciary's
    courthouse construction needs, the process for identifying and
    prioritizing these needs for Federal construction projects, as well as
    lease-construction projects which are an alternative approach for
    acquiring smaller courthouse facilities.
        Before addressing those issues, however, I want to convey the
    judiciary's gratitude to this subcommittee for supporting and
    furthering the administration of justice through appropriating monies
    from GSA's Federal Buildings Fund for the construction of new
    courthouses and for the renovation of existing courthouses. We
    understand that there are many Federal needs competing for scarce
    capital resources in Government, and we deeply appreciate the
    subcommittee's willingness to champion the needs of the judiciary in
    terms of the real estate infrastructure necessary to conduct the work
    of the courts and administer justice. We are particularly grateful for
    the subcommittee's appropriation of additional funds for the San Diego
    Courthouse in the 2009 appropriations bill, and for its support of
    courthouse construction with American Recovery and Reinvestment Act
    (ARRA) funds.
                   five-year courthouse project plan process
        I would like to begin by describing the process and criteria used
    to develop the Judiciary's Five-Year Courthouse Project Plan. On April
    1, 2009, James Duff, Director of the Administrative Office of the U.S.
    Courts, on behalf of the Judicial Conference, transmitted to this
    subcommittee, other cognizant congressional committees, the White
    House, the Office of Management and Budget, and the General Services
    Administration, the Five-Year Plan for Courthouse Projects as approved
    by the Judicial Conference of the United States on March 17, 2009. An
    advance copy of the Plan was provided to GSA earlier in the year for
    its use in developing the 2010 Federal Buildings Fund Budget request.
    The Five-Year Plan is a key output of the Judiciary's Long-Range
    Facilities Planning process. The Plan consists of an ordinally-ranked
    list of new courthouse construction projects for which the Judiciary is
    requesting authorization, funding and execution from the Executive and
    Legislative Branches. With one minor exception, all of the Federal-
    construct courthouse projects on the Judiciary's current Five-Year
    Courthouse Project Plan are projects that were not affected by the
    moratorium on new construction described below, because they all had
    received either authorization or funding from the Congress. These
    projects were evaluated by the Judicial Conference and its Space and
    Facilities Committee, and placed on the Plan on the basis of the
    following four weighted criteria: (1) year out of space (weighted 30
    percent); (2) security concerns (30 percent); (3) operational concerns
    (25 percent); and (4) judges without courtrooms (15 percent).
        In terms of the courthouse projects that populate the Five-Year
    Plan, it is important to note that a project is removed from the Plan
    once it receives the requested construction funding. Should a
    previously funded construction project require additional funds due to
    a budget shortfall (e.g., cost overrun), it is not placed back on the
    list. Thus, the Plan no longer lists the Los Angeles courthouse
    project, even though this remains the Judiciary's top priority among
    new courthouse projects. In 2005, Congress appropriated the full
    construction amount requested by GSA for the Los Angeles courthouse;
    but when the time came to put the project out for bid, GSA determined
    that it could not be delivered for the appropriated amount. Several
    years later, even with a substantial reduction in scope, GSA awaits
    sufficient funding for this much needed court project.
        As part of its cost-containment effort which I will discuss later
    in my statement, the Judicial Conference has recently adopted changes
    to its long-range facilities planning process. I will briefly describe
    these changes, because they include revisions to the way new projects
    not previously authorized or funded will be scored for placement on
    future Five-Year Plans. Again, none of the projects on the current Plan
    were placed there under the new, revised scoring methodology. Under the
    new methodology, however, courthouse locations will be ranked in order
    of urgency of need, based on four criteria: (1) judges without chambers
    (30 percent); (2) judges without courtrooms (20 percent); (3) facility
    assessment (40 percent); and (4) caseload growth (10 percent). Building
    security issues are included in the facility assessment criteria. We
    are in the process of completing plans for approximately 30 districts,
    representing nearly a third of our courthouse inventory. The Long-Range
    Facilities Plan includes short- and long-term statistical projections
    of caseload and personnel in order to estimate future facilities needs,
    a comprehensive assessment of each courthouse building to see how it
    meets the needs of the court, and a set of strategies, some involving
    real estate and some operational solutions, to address current and
    projected space deficiencies. Security remains an important factor in
    the determination of urgency of need, but it is now part of the
    facility assessment criterion, rather than a stand-alone criterion.
                                cost containment
        In 2004, the Federal Judiciary looked into the future and saw that
    its ``must pay'' requirements, such as GSA rent, would increase at a
    pace that would exceed projected appropriations within a few years.
    Budget projections indicated that rental costs for existing and new
    facilities would increase 6 to 8 percent annually, outpacing budget
    growth. The Judicial Conference recognized that controlling rent costs
    was absolutely critical to avoiding personnel reductions. As part of
    that effort, a national moratorium on courthouse construction was
    imposed from 2004 to 2006. The moratorium lasted 24 months and gave the
    Judiciary time to re-evaluate its space planning policies and practices
    and to enhance budgetary controls.
        The long-range facilities planning methodology for the Judiciary
    was re-evaluated resulting in a greater emphasis on the ability of a
    facility to accommodate additional space requirements rather than the
    physical attributes of a facility in determining whether or not to
    recommend a new courthouse construction project. If a building has
    sufficient space, functional issues such as security concerns would
    then be addressed through repair and alterations and technology
    strategies. An emphasis on cost, which was the key driver in the
    development of the new rating methodology, has resulted in a
    realignment of the criteria for ranking projects, giving greater weight
    to when a building is out of space and less weight to security and
    operational concerns.
        While the Judicial Conference undertook many other initiatives to
    reduce rent costs, which I will not enumerate at this time, the
    moratorium and changes to space planning policies and practices affect
    the Five-Year Plan process most directly.
                          lease-construction projects
        While GSA has utilized two execution strategies for the acquisition
    of new courthouses--Federal construction and lease-construction--the
    Judiciary has never placed lease-construct projects on the Five-Year
    Plan. Federally constructed courthouse projects have to be ranked and
    prioritized because Federal construction dollars are scarce, and in any
    given year, only so much money is available to be appropriated for
    these projects. Lease-construct projects, on the other hand, do not
    compete with each other for funding from a limited pool of Government
    construction capital, because they are privately financed. Hence, there
    has been no need for the Judiciary to rank or prioritize lease-
    construct projects. Moreover, Federal construction has been and
    remains, the principal means by which the GSA provides new space for
    the courts; lease-construction has only ever played a minor role, for
    small (one or two courtroom) courthouse projects in low population
    density areas where a large court presence is not needed. Use of the
    lease-construct method has been very modest.
        I do want to note, however, that lease-construction is clearly a
    secondary means of new courthouse execution, running far behind Federal
    construction in terms of overall capital value. Nonetheless, the
    Judiciary is mindful that these projects add to the overall rent burden
    of the courts. Accordingly, it is Judicial Conference policy that each
    lease-construct project be subject to approval by both the Space and
    Facilities Committee and the Judicial Conference, and if the project is
    approved, it is with a specific dollar rent cap.
        We now understand that the Office of Management and Budget has
    raised objections to lease-construct courthouses, even for modest
    project scopes. If the lease-construct execution strategy will no
    longer be accorded to GSA as an alternative to the Federal construct
    method for the delivery of new courthouses, then the Judiciary will
    need to revisit its courthouse prioritization method. However, the
    Judiciary urges the subcommittee to support retaining lease-
    construction as a legitimate, valuable and appropriate alternative
    strategy to Federal construction, especially in locales where the court
    space need is modest, acute and of possible indeterminate duration. GSA
    has the authority to use this procurement method, which is a widely
    accepted practice in the private sector. Furthermore, lease construct
    courthouse projects are delivered in a fraction of the time that it
    takes the Government to construct a Federal courthouse. This expedited
    delivery feature is a key benefit of the lease-construct alternative.
    From Judiciary project approval to completed construction, the lease-
    construct alternative takes approximately 3 years; the Federal
    construction alternative takes over 10 years, which includes time
    waiting to place the project on the Plan, and then time expended
    waiting for funding once it is on the Plan.
                 gsa federal buildings fund 2010 budget request
        The President's fiscal year 2010 Budget Request for the Federal
    Buildings Fund does not include any projects from the Judicial
    Conference-approved Five-Year Courthouse Project Plan. Instead, funding
    is included for Federal construction of projects in Yuma, AZ, and
    Lancaster, PA, which GSA and the Judiciary had previously determined
    should proceed as lease-construction projects. In the case of Yuma, AZ,
    a critically needed facility in a very busy southwest border location,
    GSA had already begun the procurement process of preparing
    solicitations for offers.
        The Judiciary was not consulted prior to this change in execution
    strategy. We are disappointed that these projects, which we believe
    were appropriate for the lease-construct path, have now been re-
    directed to the Federal construct path, apparently at the expense of
    projects on our Five-Year Plan, since no Plan projects were included in
    the President's fiscal year 2010 budget request. With regard to the
    projects on the Five-Year Plan for 2010, if they are not funded in
    2010, these projects and all projects in subsequent years would be
    delayed at least a year.
                                   conclusion
        Again, the Judiciary is grateful for the past and continuing
    support shown by this Committee for the facilities needs of the Federal
    courts. It is clear that while many projects have been successfully
    executed, much additional work remains to be done. I will be glad to
    take any questions you have at this time.

        Senator Durbin. Well, thank you both very much.
        And first, let me get it straight ``Prow-ty'' or ``Pru-
    ty''?
        Mr. Prouty. ``Prow-ty.''
        Senator Durbin. Prouty. Thank you. I'm sorry I
    mispronounced your name to start with.

                       DIFFERING CONSTRUCTION PRIORITIES

        This really is a classic constitutional confrontation here,
    the building of courthouses, where we literally have three
    branches of Government involved in it and obviously going in
    different directions.
        It reminds me when I was in the House, and then
    Appropriations chairman Jamie Whitten allowed me to come in as
    a new member, and I said I would like to also serve on the
    Budget Committee, which was permissible. You could be on
    Appropriations and Budget. And he said, ``You can do it if you
    want to do it. But just remember, the Budget Committee deals in
    hallucinations, and the Appropriations Committee deals in
    facts.''
        So I went on and took on the Budget assignment. Turned out
    he was right.
        So here, let me show you some charts here just to give you
    an idea of some things that we have noticed about construction.
        This one is interesting, and I think that Senator Bennett
    will like it a lot. And it shows on the left-hand side what the
    judiciary lists as priorities in fiscal year 2010, and Salt
    Lake City is on there.
        Senator Bennett. Why do you think I am here?
        Senator Durbin. I know.
        Your timely arrival. And you will notice the President's
    budget zeroed it out, and then you will notice what the history
    has been in the past. We have, I guess, appropriated some $40
    million for a $211 million project.
        I won't go into detail here other than just to show you
    that the three branches of Government all have different
    priorities when it comes to this construction. I am going to
    mention in a moment much of the last chart, the bar chart
    there, that shows the increased cost, which was a point that
    was made by Judge Bataillon.
        Salt Lake City, off on the right, has been delayed for 9
    years, and the estimated cost of construction has gone up from
    somewhere in the range of $50 million to over $200 million. And
    we have all been very cognizant of that.
        So it appears that the judicial branch picks its
    priorities. The President then picks his priorities, and then
    Congress decides what to fund, which may be a different
    priority. And that has been the way this has worked back and
    forth or has failed to work back and forth. And I don't know if
    we will be able to resolve that at this moment, Judge. But we
    will try to at least discuss it here.

                              SAN DIEGO COURTHOUSE

        If I can ask about two specific courthouses, and I believe
    one or both have been mentioned. The San Diego courthouse, in
    the fiscal year 2009 appropriation, we provided an additional
    $100 million to cover cost overruns necessary to complete the
    project. The law was enacted in March, but a contract has yet
    to be awarded. It appears it is stalled once again.
        The GSA didn't inform us of a delay. Would you like to tell
    us, Mr. Prouty, what is going on in San Diego?
        Mr. Prouty. We are currently, at the request of the House
    staff, reviewing the San Diego housing plan. It appears that
    there may be some space that is in the building which we, like
    you, would like to award that is not currently designated for
    the courts.
        So we are putting a plan together. We think that there is
    some space that we can give to another Federal agency until
    such time as the courts need that space. So it is just a space
    requirements issue.
        Senator Durbin. So what is going to happen to the $110
    million?
        Mr. Prouty. It is going to be spent and, hopefully, soon.
        Senator Durbin. Okay, and the contracts will be awarded
    soon?
        Mr. Prouty. I certainly believe that to be true.

                             LOS ANGELES COURTHOUSE

        Senator Durbin. Let us take a look at a downtown photograph
    of the home of the National Basketball Association (NBA)
    champion Los Angeles Lakers.
        We appropriated $300 million for the construction of a
    Federal courthouse in fiscal year 2005, and you will notice
    that empty lot in the corner there. There is no indication that
    construction will begin anytime in the foreseeable future.
    Costs have obviously escalated dramatically in 4 or 5 years,
    making the initial project prohibitively expensive. As a
    result, GSA and judiciary have been exploring less costly
    alternatives.
        Can you tell us, when we are so short on money and we do
    appropriate the money and nothing happens for 4 or 5 years, you
    can understand why that gives us a fair degree of angst. Would
    you like to comment on that?
        Mr. Prouty. I think it is safe to say that we are at a
    total impasse. For the amount of money that we have, we can't
    build what the courts want. So we currently have a project
    that--the original project, as you indicated, is with the
    scope, even the reduced scope, is beyond the money that we have
    got. We proposed a project, which included a smaller building
    and a renovation of an existing Federal building, and the
    discussions continue.
        Judge Bataillon. It has been very problematic for us, and
    that is a tremendous understatement. I have been on the Space
    and Facilities Committee for 9 years. The Los Angeles
    courthouse showed up on the 5-year plan in 1999, and it was
    scheduled for site and design, number one on our list in 1999
    and number one on our list for construction in 2000.
        And frankly, the extraordinary increases in construction
    costs in the Los Angeles area have presented tremendous
    problems for both the courts and GSA. And we have tried to work
    together to solve these problems.
        The latest scenario would be to split the courts even more
    than they are already, and Los Angeles is one of the largest
    courts, if not the largest court in the country that has not
    had a comprehensive housing plan. And it is important for the
    courts in order to maintain the way we operate to get this
    problem solved. And unfortunately, we haven't been able to
    overcome that.
        And part of the problem, I believe, is that any further
    authorization from the House side for this project has pretty
    much been blocked.
        Senator Durbin. One last quick question, Mr. Prouty. This
    morning on National Public Radio (NPR) local broadcast, there
    was an indication that D.C. charter schools are having a tough
    time finding space to open new schools. I assume there is some
    excess GSA property in the District of Columbia. Is it possible
    that we could open up a dialogue between you and the District
    of Columbia government and see if there are any opportunities
    there that could be utilized?
        Mr. Prouty. The answer is absolutely yes, although I don't
    know the authorities and I don't know the vacant inventory.
        Senator Durbin. Okay. Well, let me try to work with you on
    that.
        Mr. Prouty. Great. Thank you.
        Senator Durbin. Senator Collins.
        Senator Collins. Thank you. Thank you, Mr. Chairman.

                       JUDICIARY'S 5-YEAR COURTHOUSE PLAN

        Judge, as Senator Durbin has pointed out, the
    administration did not follow the priorities set forth in the
    judiciary's 5-year courthouse project plan. Had the budget
    reflected your plan, Salt Lake City would have been first on
    the list. Could you give us more insight into the process? Is
    there a back-and-forth discussion of the priorities with GSA,
    with OMB, or did the budget proposal come as a surprise to you?
        Judge Bataillon. Well, the budget proposal came as a
    surprise to us. We submit the 5-year plan every year to GSA,
    and then it is up to the President to decide how the President
    wants to fund our building requirements. The stimulus bill
    included two courthouses, one in Bakersfield and one in
    Billings, Montana. And those were both originally slated as
    lease construct buildings.
        When that occurred last year, we received some signals that
    OMB was changing the way it was interpreting the A-11 circular.
    And when that happened, then when the President's budget came
    out this year, I suppose it was somewhat of a surprise, but not
    too much of a surprise. Because apparently, we have changed the
    way we have decided to score these courthouses, and it does
    create problems as far as the 5-year construction plan is
    concerned.
        We have always done a 5-year construction plan. That plan
    is based on the priorities set by the judiciary. We score these
    courthouses, and we have rescored these courthouses, and now we
    even have a new method of scoring courthouses to make sure that
    the needs of the judiciary, in order to administer justice
    appropriately, are met. And that is why they give the 5-year
    plan.
        By taking these two projects off of the lease construction
    line, if you will, or execution plan, it creates a problem
    about how we prioritize our courthouses. And it really puts
    these two projects in jeopardy because we have already set the
    5-year plan, and the conference won't meet again until
    September to determine whether we can incorporate these. So it
    is very problematic for us.
        Senator Collins. Mr. Prouty, this doesn't make much sense
    to me. I would understand if the GSA or OMB said we have x
    amount to spend, and we are going to go down the list until
    that is spent. But it doesn't make sense to me that the
    priorities are different than those established by the Judicial
    Conference.

                                MIAMI FBI OFFICE

        Let me ask you about another line item in the construction
    budget, which is almost as much as it would cost to build the
    courthouse that is so high on the Judicial Conference list. The
    budget request includes almost $191 million for Federal
    construction of a new Federal Bureau of Investigation (FBI)
    field office in Miami. Prior to this request, the project was
    originally planned as a lease construct project, which is
    obviously far lower cost.
        What criteria, what objective criteria led GSA to decide to
    request this funding for the Miami FBI field office at a time--
    at this time as opposed to other projects that are urgently
    needed?
        Mr. Prouty. The only--first of all, I want to mention that
    in the recovery funding, we did fund the top priority, which
    was Austin. But there are competing challenges here. Both OMB
    and the Government Accountability Office (GAO) are concerned
    about the lease construction program. It has been our goal for
    a very long time to have few, if any, courts in leased
    properties because it is problematic.
        So the challenges have been to find a way to deal with
    those issues. If you look at the payback on the FBI project in
    Miami, over the 15 years of that initial lease period that it
    is beneficial to do a Government construction to the tune of
    $130 million.
        Senator Collins. But initially, the upfront cost is more to
    do construction. Correct?
        Mr. Prouty. The payback, it is $190 million up front. You
    are right.
        Senator Collins. And could the FBI's needs be met, should
    the building proceed as was originally planned as a lease
    construct project?
        Mr. Prouty. It certainly could have been.
        Senator Collins. Thank you, Mr. Chairman.
        Senator Durbin. Senator Nelson.
        Senator Nelson. Thank you, Mr. Chairman.
        Welcome, Judge Bataillon. Mr. Prouty.
        Judge Bataillon. Senator, it is always good to see you.
        Senator Nelson. Good to see you.
        My colleagues may not know that when I was Governor, I was
    pleased and proud to recommend you for the judgeship, and I
    have been proud ever since.
        Judge Bataillon. Thank you very much, Senator.

                            CONSTRUCTION PRIORITIES

        Senator Nelson. One of the challenges that is obvious
    before us is that the three branches of Government have not
    come together with any common understanding or common agreement
    as to where to proceed or how to proceed. Is it possible or is
    it naive to assume that it is even possible to work with OMB to
    sit down and go through the priorities? Do we know what their
    priority list, what criteria they use to establish their
    priority list that is different than what you do?
        I guess first, Judge, I will ask you and then Mr. Prouty.
        Judge Bataillon. Well, OMB communicates directly with GSA
    on these issues, and GSA, of course, has to, I assume, follow
    what OMB tells them to do as far as their scoring method under
    the A-11 circular.
        Previously, they have on small projects that the courts
    have been presenting, that scoring criteria was such that they
    believed that courthouse buildings were not special use. In
    other words, that there was no other private market for it. It
    wasn't uniquely governmental.
        A courthouse has courtrooms. You could use that for a
    banquet hall. You could use that for a gathering hall. And it
    has office space, just like any other office might have, a bank
    or any kind of business.
        And so, these smaller projects generally were scored so
    that they could be a lease construct. The part that was scored
    as uniquely governmental was the marshals' money for the
    holding cells. And so, we would always bring the money--or the
    marshals would bring the money up front for the holding cells.
        Now OMB, as we understand it, has changed their
    interpretation of the scoring and has decided that this is a
    special purpose building, and it ought not to be built as a
    lease construct. So I am sure the administrator can elaborate
    on that.
        Mr. Prouty. There certainly is a discussion about the
    benefit to the Government and about the nature of these
    properties, and I am certainly not in the position to speak on
    behalf of OMB. But we, at GSA, would very much like to have a
    discussion which would preclude these types of discussions in
    the future.
        Judge Bataillon. So would we.
        Senator Nelson. Well, it does seem that that would be part
    of the answer, to come to some sort of an agreement on whether
    it is a special use or not a special use to resolve the
    question about lease construct. And just because they have
    taken that position that it is special use doesn't make it so.
        And hopefully--I don't know how to facilitate that, but I
    wish you would think about what we could do to help facilitate
    that because I think we are as frustrated as you are when you
    see the lack of construction on a project that has been
    appropriated, and then you see the cost of construction go up.
    It is as frustrating in some ways as seeing cost overruns. It
    just takes more Treasury dollars to be able to complete at some
    point.
        If you are putting together another 5-year courthouse
    project plan, do you have any idea how long it might take for
    the Judicial Conference to come up with another 5-year plan?
    And if you do come up with it, can you come up with it assuming
    the lease construct under one assumption and then no lease
    construct under another assumption?
        Judge Bataillon. We can come up with another 5-year
    construction plan, and the 5-year plan is a priority on how to
    spend the Federal Buildings Fund money. If it is a lease
    construct, then it doesn't come out of that pot of money and is
    just like leasing any other office space, except that GSA makes
    a contract with a developer. And so, we haven't put those
    buildings on the 5-year plan for a number of reasons.
        One is because we have acute court needs, administration
    needs like in Yuma, and we want to get the building built as
    quickly as we can, and it is a small project and so we can
    deliver it.
        But as far as the 5-year plan, we have a particularly
    difficult problem. In 2004, through 2004 and 2006, we had a
    moratorium on any construction because of the budget problems
    that we encountered in 2004 and had to lay off people, as a
    matter of fact, in order to meet our budget constraints. So we
    did a moratorium.
        And when we did the moratorium, there were 15 courts that
    had some appropriation from Congress, and so we left those on
    the 5-year plan. And the 35 that didn't have some appropriation
    we pushed off of the 5-year plan, and now we are reevaluating
    all of those courts in what we call an asset management
    process.
        So we have frozen the 13 to 15 courts that were on the
    original 5-year plan, and now we are trying to bring on other
    courts on the 5-year plan, and meshing those two groups of
    folks is getting to be very problematic.
        And then if we throw Yuma into the mix or Lancaster into
    the mix or some other lease construct projects that we are
    talking into the mix, we have just created a quagmire for the
    judiciary. But to answer your question, we are smart folks, and
    if you tell us that we have to do 5-year--put these programs on
    the 5-year plan, we will do the best we can to do it.
        Senator Nelson. Well, I am not telling to you to. I am just
    asking if you can. It is perhaps over my head to try to require
    that. But it seemed to me that it might be one of the ways to
    proceed.
        Judge Bataillon. Well, it is not that you would require it.
    I think it is basically OMB saying that they won't accept the
    lease construct process, and GSA communicating that to us, and
    so then we will have to take a different approach.
        But it is a Gordian knot. And I go off the committee in
    October, and I will be happy to do it then.
        Senator Nelson. Well, on the way out, will you rule them in
    contempt?
        Judge Bataillon. I will try.
        Senator Nelson. Thank you. Thanks to both of you.
        Senator Durbin. Senator Bennett.
        Senator Bennett. Thank you very much, Mr. Chairman. I
    appreciate the opportunity to be here with the subcommittee.
        Judge Bataillon, I couldn't have written your testimony
    better than you wrote it.
        Judge Bataillon. Thank you very much.

                           SALT LAKE CITY COURTHOUSE

        Senator Bennett. And the chairman, of course, has
    highlighted the fact Salt Lake City first went on the list in
    1998. Is that correct?
        Judge Bataillon. Right.
        Senator Bennett. So it is even older than----
        Judge Bataillon. It has been on the list for 9 years.
        Senator Bennett. Yes. And I would like to--I can't
    appropriately give you the full letter because the last
    paragraph of the letter says, ``The specific weaknesses in
    building security highlighted by this inspection should be
    treated as sensitive information and should not be released to
    the public.''
        But this is a letter from the senior inspector of the U.S.
    Marshals Service just this month, having gone through the Salt
    Lake City courthouse and looked at the various security
    problems that are there.
        Judge Bataillon. Right.
        Senator Bennett. Is it your understanding that this project
    is, to take a term that has been vastly overused here in the
    Congress in the last 6 months, shovel ready?
        Judge Bataillon. It is absolutely shovel ready. We have a
    site, and I am sure you have been to the site and seen the
    chain-link fence that is around it. We moved the Masonic Temple
    and a local pub in order to get this place, and now we have
    vacant property in Salt Lake, and it is ready to go.
        We have designs. In fact, I have talked to Members of the
    House and the Senate, and it is a model of appropriateness and
    efficiency for the judiciary, and it needs to be built.
        Senator Bennett. As I say, I couldn't do this any better
    than you have done for me.
        Judge Bataillon. Thank you very much.
        Senator Bennett. Mr. Prouty, I would be ungrateful if I
    didn't acknowledge how helpful you have been over the years, as
    we have wrestled with this problem. And your office has always
    been available to mine, and you have always been very helpful.
        Now we have been in touch with Alan Camp, who is the
    project manager in your Denver office, and he has informed my
    staff that the building prices are at their lowest point in 3
    years. And if funding is not received in the 2010 budget, there
    is the possibility that costs will escalate, and the Salt Lake
    courthouse currently is projected to come in right under
    budget. Is that your understanding as well?
        Mr. Prouty. We are seeing--we are testing the market. We
    are obviously--we do a lot of research in the market. And now
    with all of the recovery funds, we think we are seeing and we
    anticipate the projects will come in less than they were. So I
    think the markets are decreasing. The extent of that we are not
    sure.
        But you are right. The Salt Lake City project, if it were
    bid today, would certainly come in within budget.
        Senator Bennett. Thank you very much.
        Mr. Chairman, I have laid out my case, and I have had a lot
    of help from your two witnesses, and I am now completely at
    your mercy.
        Senator Durbin. I have been waiting for this for so long.
        Senator Bennett. Thank you very much for allowing me to
    participate.
        Senator Durbin. Well, I am glad that you came by, Senator
    Bennett. You are always welcome here.
        Senator Collins, do you have any additional questions?
        Senator Collins. Mr. Chairman, I would just like to submit
    for the record, with your consent, a follow-up letter from the
    chief judge.
        Actually, I take it back. It is from the Judicial
    Conference of the United States. It is a letter from James Duff
    that expresses disappointment that the budget does not fund any
    of the projects on the 5-year plan and talks about the impact
    on the judicial process where courthouses are out of space, as
    well as the critical security deficiencies.
        I think it strengthens the case that our witness has made
    today on behalf of the judiciary and strengthens the case that
    Senator Bennett has made as well.
        Thank you, Mr. Chairman.
        Senator Durbin. Without objection, it will be made part of
    the record if you would like it to be. Would you?
        Senator Collins. Yes, please.
        Senator Durbin. Okay.
        [The information follows:]

                      Judicial Conference of the United States,
                                          Washington, DC, June 9, 2009.
    Honorable Richard J. Durbin,
    Chairman, Subcommittee on Financial Services and General Government,
            Committee on Appropriations, United States Senate, Washington,
            DC 20510.
    Honorable Susan Collins,
    Ranking Member, Subcommittee on Financial Services and General
            Government, Committee on Appropriations, United States Senate,
            Washington, DC 20510.
        Dear Chairman Durbin and Senator Collins: On April 1, 2009, I sent
    a letter on behalf of the Judicial Conference of the United States,
    transmitting the Judicial Conference-approved Five-Year Courthouse
    Construction Plan for Fiscal Years 2010-2014 to this Subcommittee, the
    Office of Management and Budget, and the General Services
    Administration (GSA). An advance copy of the Plan was also provided to
    GSA earlier in the year for its use in developing the fiscal year 2010
    Federal Buildings Fund budget request.
        At the time of my letter, we did not know which, if any, projects
    would be included in the President's 2010 Budget Request. We were
    disappointed to learn that funding was not requested for any of the
    projects on the Five-Year Plan. If these projects are not funded in
    fiscal year 2010, we are concerned that all projects in 2010 and
    subsequent years will be delayed at least another year--seriously
    impacting the judicial process where courthouses are already out of
    space, and critical security deficiencies currently exist. These
    projects are ranked in priority order, and several are ``shovel-ready''
    with contractors in place and construction ready to begin.
        I have enclosed another copy of our Five-Year Courthouse
    Construction Plan for Fiscal Year 2010-2014 and appreciate any
    consideration you can give to our courthouse construction needs. If you
    have any questions, please do not hesitate to contact me.
                Sincerely,
                                                 James C. Duff,
                                                             Secretary.
    Enclosure

     FIVE-YEAR COURTHOUSE PROJECT PLAN FOR FISCAL YEARS 2010-2014 APPROVED BY THE JUDICIAL CONFERENCE OF THE UNITED
                                                 STATES--MARCH 17, 2009
                                             [Estimated dollars in millions]
    ----------------------------------------------------------------------------------------------------------------
                                                                                                            Est. Net
                                                                                          Cost      Score    Annual
                                                                                                              Rent
    ----------------------------------------------------------------------------------------------------------------
                   FISCAL YEAR 2010

    Austin, TX....................................  Add'l. S&D/C......................    $116.1      82.0      $6.5
    Salt Lake City, UT............................  Add'l D/C.........................    $211.0      67.9     $11.4
    Savannah, GA..................................  Add'l. D..........................      $7.9      61.3      $3.5
    San Antonio, TX...............................  Add'l. D..........................      $4.0      61.3      $9.2
    Mobile, AL....................................  Add'l. S&D/C......................    $190.3      59.8      $4.7
                                                                                       -----------------------------
          Total...................................  ..................................    $529.3  ........     $35.4
                                                                                       =============================
                   FISCAL YEAR 2011

    Nashville, TN.................................  Add'l. S&D/C......................    $183.9      67.3      $7.0
    Savannah, GA..................................  C.................................     $95.5      61.3      $3.5
    San Jose, CA..................................  Add'l. S..........................     $38.6      54.5      $9.4
    Greenbelt, MD.................................  S&D...............................     $14.0      53.8      $1.6
                                                                                       -----------------------------
          Total...................................  ..................................    $332.0  ........     $21.5
                                                                                       =============================
                   FISCAL YEAR 2012

    San Antonio, TX...............................  C.................................    $142.2      61.3      $9.2
    Charlotte, NC.................................  C.................................    $126.4      58.5      $7.1
    Greenville, SC................................  C.................................     $79.1      58.1      $4.1
    Harrisburg, PA................................  C.................................     $57.3      56.8      $5.4
    San Jose, CA..................................  D.................................     $17.2      54.5      $9.4
                                                                                       -----------------------------
          Total...................................  ..................................    $422.2  ........     $35.2
                                                                                       =============================
                   FISCAL YEAR 2013

    Norfolk, VA...................................  C.................................    $104.7      57.4      $5.1
    Anniston, AL..................................  C.................................     $20.4      57.1      $1.1
    Toledo, OH....................................  C.................................    $109.3      54.4      $5.9
    Greenbelt, MD.................................  C.................................    $170.0      53.8      $1.6
                                                                                       -----------------------------
          Total...................................  ..................................    $404.4  ........     $13.8
                                                                                       =============================
                   FISCAL YEAR 2014

    San Jose, CA..................................  C.................................    $223.9      54.5      $9.4
    ----------------------------------------------------------------------------------------------------------------
    S=Site; D=Design; C=Construction; Addl.=Additional.

    All cost estimates subject to final verification with GSA.

                         ENERGY EFFICIENCY IN BUILDINGS

        Senator Durbin. Can I switch off courthouses for a very
    quick observation and question, Administrator Prouty?
        I recently was invited to tour what was formerly known as
    Sears Tower in Chicago. It is now known as Willis Tower. And it
    was built 35 years ago and I think still is the tallest
    building in the United States. And maybe it has been eclipsed
    overseas by some other building, but it is certainly a dominant
    feature on the Chicago skyline.
        And the management company brought me in to show me what
    their plans were. And their plans involve about a $300 million
    investment in making this 35-year-old building energy
    efficient. It turns out when it was built 35 years ago, no one
    paid any attention to the basics. They have 16,000 single-pane
    windows in the Sears Tower, for example.
        And if you can imagine a heating and air-conditioning
    system that is ancient by today's modern standards, and it
    costs a fortune, 125 elevators and all of these things. They
    have decided that it is economical for them to invest $300
    million in energy savings and that it will be paid back rather
    promptly.
        And that, of course, means replacing the windows, maybe
    even repainting the building, putting wind turbines on every
    roof, adding solar panels, creating new heating and air-
    conditioning unit, actually creating a co-generation
    opportunity with 125 elevators, which with the friction they
    create can be generating electricity.
        They think that this building can become an energy producer
    to the point where they can build a hotel next door and use the
    energy off the old Sears Tower to sustain a building next to
    it.
        I think of that in terms of your responsibility with a lot
    of buildings even older, and pollution coming off of them every
    day. Someone estimates 60 percent of our pollution comes off of
    our structures as opposed to what we drive. And I am wondering,
    as you get into this decisionmaking about the future of GSA
    buildings, what calculations are you making that may parallel
    what I found at the Sears Tower?
        Mr. Prouty. I think we are in the same category. I was just
    going to say that we wished we had buildings so young as 35
    years old. Our buildings are a lot older, a lot more
    inefficient.
        There are a lot of really good things that are happening
    right now. The technology is improving to the point that you
    are getting a payback that causes these all to pay out in
    reasonable amounts of time.
        Also what we are seeing is green buildings in the market
    perform better. We also know with the $4.5 billion that we have
    been given, that we are going to drive that industry. So we
    absolutely agree. We are looking for every innovative approach
    we possibly can. We are using solar. We are using wind. We are
    doing windows. We are doing insulation. We are doing improved
    technology in all the systems. So we agree we are learning more
    every day.
        I am not an expert. We happen to have an expert with us.
        Senator Durbin. How do you stay in front of it on the
    technology? For example, it appeared at first blush the window
    replacement would be some at least double-paned insulated
    windows, and then it turns out there are other windows coming
    on the scene with film that allows in the sunlight at certain
    times of the year--the winter, when you want it--and shields
    the building, inside the building parts of the year when you
    don't want it.
        And this really just seems to be coming so quickly. How do
    you evaluate these technologies when you are about to make
    massive investments?
        Mr. Prouty. Yes, we are tied to the industry. We have a
    green building program. Kevin Kampschroer leads that program.
    He is--he meets with them all the time. In many cases, we are
    leading that industry. So, as you say, it is a very dynamic
    world. It is changing every day. But the good news is we have
    $4.5 billion, which causes us to be able to test out some of
    these new technologies.
        Senator Durbin. At the risk of a commercial announcement, I
    have discovered a company that just bought a facility in
    Chicago called Serious Materials. It is out of California. And
    they have production facilities in several different places,
    and they are doing the window replacement on the Empire State
    Building with these new filmed windows. And so, I am going to
    promote them in the hopes it means more jobs in Chicago, a
    place that I am proud to represent.
        Thank you very much.
        Do you have anything further?
        Well, thanks a lot for your testimony, Mr. Prouty.
        Mr. Prouty. Thank you very much.
        Senator Durbin. And Judge Bataillon, thank you for coming
    and giving us an insight into this constitutional clash that we
    have over the construction of courthouses. Thanks a lot.
        Judge Bataillon. Thank you very much. Thank you.

                         ADDITIONAL COMMITTEE QUESTIONS

        Senator Durbin. At this point, we are going to recess the
    subcommittee and tell you that there will be some written
    questions coming your way. Hope that you can respond to them on
    a timely basis and maybe by--we will leave the record open
    until Wednesday, June 24 at noon.
        [The following questions were not asked at the hearing, but
    were submitted to the Administration for response subsequent to
    the hearing:]
                     Questions Submitted to Paul F. Prouty
                Questions Submitted by Senator Richard J. Durbin
                          recovery act implementation
        Question. As part of the Recovery Act, GSA received $5.5 billion,
    of which $4.5 billion was designated for converting GSA facilities to
    High-Performance Green Buildings. The Act states that not less than $5
    billion of Recovery Act funds must be obligated by the end of fiscal
    year 2010. GSA has identified 43 buildings for ``full and partial
    building modernizations'' at an estimated total cost of approximately
    $3.1 billion. GSA has also identified 194 buildings for ``Limited Scope
    projects'' at a cost of approximately $800,000,000. In addition, the
    Recovery Act funds an additional $1 billion in construction projects.
    This is a significant increase in workload as compared with previous
    years, and recent press reports suggest that there may be as many as
    150 vacancies for contracting officers at GSA and shortages in other
    critical personnel areas.
        Given the volume of projects to be undertaken by GSA and the amount
    of funds to be obligated in fiscal year 2010, how can you assure the
    subcommittee that GSA will be able to responsibly obligate $5 billion
    or more by the end of fiscal year 2010?
        Answer. To ensure that we responsibly obligate $5 billion or more
    by fiscal year 2010, GSA has established a centralized program
    management office (PMO) within the Public Buildings Service (PBS) to
    oversee and manage recovery activities. The PMO is a small, cohesive,
    National Office staffed with high performing project managers and
    subject matter experts who are supported by contract/consultant
    resources.
        The PMO will: manage Recovery Act tracking and reporting efforts;
    support regional offices by providing contracts, subject matter
    experts, legal expertise, audit functions, workload/staff modeling,
    tools, and troubleshooting of program and project challenges; interface
    with stakeholders, including Congress and tenant Federal agencies;
    ensure that cost, schedule, and scope are completed as promised;
    identify resource needs and shift resources to accommodate changing
    program requirements; and establish a quality review plan to define and
    assess the key GSA information systems that may contain information
    required for full Recovery reporting and continually monitor and review
    the information required for compliance with Recovery Act reporting
    requirements.
        GSA's PBS has enhanced the reporting capabilities of its project
    tracking database to incorporate additional project milestones into the
    Variance Tracking Report, a management tool for monitoring and tracking
    project progress. This report also serves as an early warning tool so
    management can identify projects that are starting to deviate from the
    plan and promptly implement corrective activities.
        The PMO is undertaking regular and ongoing activities with the
    Office of Inspector General to ensure effective and efficient program
    execution, including pre-award audits and ongoing dialogue.
        GSA has implemented additional management controls and oversight
    mechanisms to ensure effective and efficient execution of recovery
    activities. For guidance, we are drawing on Agency-wide existing
    management controls, which are based on OMB Circular A-123,
    Management's Responsibility for Internal Control; the Federal Managers'
    Financial Integrity Act (FMFIA); OMB Circular A-127 Financial
    Management Systems; and the Federal Financial Management Improvement
    Act (FFMIA). GSA's internal control reviews are conducted for Agency
    program components to ensure that all significant risks are identified,
    tested, evaluated, and mitigated in a timely and effective manner.
        Question. Does GSA currently have sufficient staff to handle these
    projects?
        Answer. GSA is currently using several approaches to ensure there
    are sufficient resources to manage Recovery Act projects. Our
    approaches include deploying our experienced personnel to Recovery Act
    projects and backfilling with temporary hires as well as ``industry
    hires'' whose limited terms sunset with the expiration of the Recovery
    initiative. This solution fulfills our short-term need for a larger
    workforce without encumbering our long-term personnel goals. These
    industry hires are recruited from the ailing design, construction, and
    construction management industries.
        GSA is also hiring contractors to support GSA in such areas as data
    tracking and reporting, reviews of scopes, schedules and budgets,
    energy performance reviews, design services, construction contracting,
    technical expertise, and project management.
        GSA will continue to evaluate our resource needs on an ongoing
    basis, to determine where we have gaps and the best means to fill those
    gaps, including recruitment, contract staff, and redeployment of
    current staff. We are addressing resource requirements for
    accomplishing Recovery Act projects as well as our existing workload.
    We have sought approval from OPM to utilize various hiring authorities
    and are establishing national contract vehicles to supplement the
    workforce.
        Question. What is the optimal number of FTEs (GSA contracting
    officers, project managers, and support staff) needed to ensure that
    GSA will be able to award contracts for the 237 green building
    ``modernization or limited scope'' projects and the $1 billion worth of
    new Recovery Act construction projects in a timely manner?
        Answer. GSA has conducted a series of workforce analyses to
    determine the resources needed to deliver Recovery projects. It was
    estimated that approximately 232 Government FTE and contractor
    positions are required in procurement, realty, architecture,
    engineering, project management, and program analysis to expeditiously
    and fully support the projects and programs tied to the Recovery Act.
    GSA will be re-directing existing resources, as well as hiring
    temporary resources, to meet this workload demand.
        Question. How does the optimal number compare to the actual
    staffing level?
        Answer. The optimal number of combined Government FTE and
    contractor positions is approximately 232 positions. To achieve this
    staffing level, PBS has redeployed current staff, recruited new hires,
    and procured contractor support to address resource requirements for
    accomplishing Recovery Act projects as well as our existing ongoing
    workload. We are on track to achieve this goal.
        Question. With respect to contract oversight, what is the optimal
    number of FTEs needed to ensure that these projects are appropriately
    monitored and contractors are delivering the products and services on
    time and at the proper cost?
        Answer. The optimal number of positions estimated above includes
    contract oversight resource needs. The 232 positions include managers
    and analysts who are dedicated to monitoring contractor performance and
    ensuring that projects are delivered in compliance with Recovery Act
    funding and GSA requirements, on-time and at the proper cost.
        Question. How does GSA plan to measure the environmental benefits
    of the Green Building projects in a quantifiable way?
        Answer. We are improving energy performance on a large scale with
    our full and partial building modernization projects and in specific
    ways with our limited scope projects. In both types of projects, we
    expect energy savings from new building controls and adjustments;
    lighting replacements; new roofs and windows: and building mechanical
    system upgrades. We are performing detailed surveys of each building to
    quantify the potential for energy savings. Once the surveys have been
    completed and the baselines identified, we will be able to estimate the
    energy consumption reductions for the building specific projects.
        Question. How does GSA plan to measure the number of jobs created
    by the projects?
        Answer. GSA will not prepare independent estimates of jobs created
    by our Recovery Act projects. Instead, we will support the
    Administration's efforts to collect job data directly from recipients
    of Federal contract awards and their sub-recipients.
        GSA has included provisions in our Recovery Act contracts
    consistent with interim Federal Acquisition Regulation (FAR) clause
    52.204-11. This FAR clause requires recipients of Federal contract
    awards to submit information required by Section 1512 of the Recovery
    Act through the www.FederalReporting.gov website.
        Question. What the basic distinction between a ``partial building
    modernization'' and a ``limited scope project?
        Answer. Generally, full and partial building modernizations adopt a
    ``whole building approach'' and include repairs and renovations to
    multiple building systems in order to improve energy- and water-
    efficiency of the entire facility. Building systems, in this case,
    include Heating, Ventilation, and Air Conditioning (HVAC), building
    envelope, or lighting. Limited scope projects focus on installing a
    specific green technology (such as intelligent lighting, or ENERGY STAR
    roofs) or addressing a single building system.
        Examples of repairs and renovations included in full and partial
    modernization projects include:
      --Adding thicker insulation than required by the newest energy codes
            in climates where it makes sense;
      --Installing variable frequency drives to reduce energy and extend
            the life of mechanical equipment;
      --Converting parking structure lighting to LED (light-emitting
            diode), which dramatically lowers energy consumption, improves
            safety and visibility and reduces maintenance as LEDs can last
            two to three times as long as typical parking lot lights;
      --Retrofitting or replacing less efficient windows; and
      --Specifying dual flush toilets and waterless or low water urinals to
            save water and reduce demand on aging city sewer systems.
        Examples of limited scope improvements include:
      --Installing intelligent lighting systems that provide daylight and
            provide controls for occupants to adjust for ambient light
            versus task light;
      --Replacing flat roofs with ENERGY STAR membranes; integrated
            photovoltaic panels bonded to the membrane; or planted roofs.
            These options offer benefits ranging from increasing the life
            of the roof, to producing energy and to reducing the ``heat
            island'' effect of a black roof; and
      --Accelerating the installation of advanced meters--required under
            the Energy Policy Act to be completed by 2012. Advanced meters
            enable us to better manage buildings by instantaneously
            providing information on a building's energy use and
            encouraging immediate operational changes.
        Question. What will be GSA's approach to prioritizing among the 43
    ``full and Partial Modernization Projects'' for implementation? Among
    the 194 ``limited scope'' projects?
        Answer. GSA's priorities for ``Full and Partial Modernization'' and
    green ``limited scope'' projects are based on the purpose of the
    Recovery Act: (1) Stimulate the American economy by spending money
    quickly; and (2) Improve the environmental performance of Federal
    assets, particularly reducing our dependence on carbon-based fuels.
        Within these broad objectives, each class of project is prioritized
    based on the following criteria:
        Full and Partial Building Modernization projects:
      --High-performance features concentrating on energy conservation and
            renewable energy generation.
      --Speed of construction start (job creation).
      --Execution Risk (ensuring that the projects will not fail due to
            unforeseen conditions).
      --Facility Condition. The Facility Condition Index is a standard real
            estate industry index that reflects the cost of the repair and
            alteration backlog of a particular building relative to the
            building's replacement value.
      --Improving Asset Utilization.
      --Return on Investment.
      --Avoiding Lease Costs.
      --Historic Significance.
        Limited Scope projects are prioritized based on energy performance
    (beginning with the worst performing buildings) and informed by
    existing physical condition surveys:
      --Projects are initially prioritized based on Energy Use Intensity:
            Btus/Gross Square Foot.
      --This list is refined, based on input from Regions on specific
            building conditions and operations.
      --Preference is given to projects in descending order of: energy
            conservation, return, or high-performance improvement.
        No project is on our list if it does not deliver a positive return
    on investment.
                    underutilized or excess federal property
        Question. Underutilized or excess federal property is a significant
    problem that puts the government at significant risk for lost dollars
    and missed opportunities. GAO reported in May 2007 that GSA reported
    258 buildings, with 13.8 million rentable square feet, as excess
    property. In order to help other agencies better serve the public by
    meeting--at best value--their needs for real property such as federal
    buildings and to meet its goal of exemplary management of buildings,
    GSA should reduce its excess and underutilized property.
        What strategy will GSA employ to help the federal government reduce
    its excess and underutilized property?
        Answer. GSA is responsible for managing the utilization and
    disposal of Federal excess and surplus real property government-wide,
    and we have a comprehensive strategy for promoting the effective use of
    Federal real property assets.
        GSA Properties.--GSA has over 1,000 properties in our portfolio,
    making the disposal of underutilized real property a considerable task.
    GSA works together with partner Federal agencies, State and local
    governments, nonprofit organizations, business groups, and citizens, to
    ensure that we create a lasting, positive impact on communities by
    making valuable government real estate available for numerous public
    purposes. Properties that are not conveyed to eligible recipients for a
    public purpose are sold by competitive bid to private individuals.
        In fiscal year 2008, GSA disposed of 13 of our own properties,
    valued at approximately $58.5 million. These disposals provided
    revenues of $56 million for the Federal Buildings Fund (FBF).
        Other Federal Agencies.--GSA supports the Administration's goals of
    disposing of unneeded real property and reducing Federal spending by
    providing a variety of asset management and disposal services to other
    landholding Federal agencies. GSA assists those agencies in developing
    asset management plans and strategies, in accordance with Executive
    Order 13327, ``Federal Real Property Asset Management'', and provides a
    variety of asset utilization and disposal services, including:
    Understanding the role of each asset in supporting agency mission
    objectives; examining current and future utilization alternatives;
    collecting and organizing title, environmental, historical and cultural
    information; and identifying real estate and community issues affecting
    the property.
        In fiscal year 2008, GSA disposed of 235 properties valued at
    approximately $192.2 million for other Federal agencies. GSA also
    conducted 26 targeted asset reviews to help agencies identify
    underutilized real property assets and improve their compliance with
    E.O. 13327.
                    projects requested for fiscal year 2010
        Question. The 2009 Omnibus Appropriations Act required the fiscal
    year 2010 budget submission to include 5-year plans for Federal
    Building and Land port-of-entry projects. However, these plans have not
    been furnished to the Subcommittee.
        Why were these plans not included in the Budget submission? When
    will they be provided?
        Answer The 5-year capital plans required by the fiscal year 2009
    Omnibus cannot be completed without input from many different customer
    Federal agencies. Our customers' long-term requirements and GSA's needs
    have changed as a result of the substantial new funds provided in the
    Recovery Act. The complexities created by the Recovery funding--as well
    as the increased workload that it placed on Federal capital planning
    staff--made it difficult to prepare a 5-year forecast of capital
    investment needs in time to include it in the fiscal year 2010 budget
    submission.
        The required plans will be submitted as soon as they are
    coordinated. GSA will include the plans in future budget requests.
                                repair backlogs
        Question. Restoration, repair, and maintenance backlogs in federal
    facilities are significant and reflect the federal government's
    ineffective stewardship over its valuable and historic portfolio of
    real property assets. As part of its 2008 financial statement, GSA
    reported about $7.3 billion in capital repair and alteration work items
    that had not been addressed by ongoing projects.
        To what extent, if any, will the funding provided by the American
    Recovery and Reinvestment Act address these needs?
        Answer. GSA expects Recovery Act funds to reduce the backlog of
    traditional Repairs and Alterations (R&A) needs by $1 to $1.5 billion.
    Of the $4.5 billion of ARRA funds directed towards High-Performance
    Green Buildings, almost two-thirds has been dedicated to energy
    improvements and greening initiatives, and the remainder will directly
    address the R&A backlog. The $1.05 billion provided for Federal
    buildings and LPOE projects will be used for New Construction, and will
    not have a direct impact on our repair and alterations liabilities.
        Question. What action is GSA taking to ensure that recently
    constructed and recently renovated properties are maintained so the
    situation of allowing facilities to deteriorate does not continue?
        Answer. GSA strives to maintain a portfolio of assets that are in
    ``Good'' condition, meaning needed repairs are less than 10 percent of
    the asset's functional replacement cost. GSA maintains the condition of
    these core assets through strategic reinvestment throughout the life of
    the asset. Asset condition is evaluated and monitored annually, through
    a series of asset management diagnostic tests. When repair and
    alteration needs are identified, such repairs are addressed through the
    minor repairs and alterations program. Recently constructed and
    recently renovated properties have few, if any, repair and alteration
    needs.
        GSA has made progress in improving the condition of its portfolio
    of assets through strategic management of existing assets, and Recovery
    Act funding provided for repair, modernization, and green initiatives.
    For example, 50 U.N. Plaza in San Francisco, CA, had been mostly
    vacant, and Recovery Act funding will allow this historic asset to be
    fully utilized again. However, despite the investments of the Recovery
    Act, GSA continues to face challenges from maintaining an aging
    building portfolio. The Recovery Act is expected to reduce GSA's R&A
    backlog by approximately $1 to $1.5 billion.
                                     ______

                 Question Submitted by Senator Mary L. Landrieu
                                 customs house
        Question. The New Orleans Customs House is a magnificent historic
    structure located on the edge of the French Quarter that dates back to
    1848. During Katrina, its roof failed, and the building suffered
    significant water damage. Since that time, GSA and Customs have
    dedicated funding to repair the building, and it is scheduled for re-
    occupancy in the spring of 2010. The Customs House is the only National
    Historic Landmark building in GSA's Southwest Region, which is based in
    Fort Worth, Texas. This subcommittee included language in the previous
    year's appropriations report that mentioned the building by name and
    underscored its significance to the local community. Section 307 of the
    Stafford Act and GSA Policy Number 2851.5 both require that preference
    for reconstruction work following a major disaster be given to locally-
    based firms. However, there are no Louisiana firms under contract to
    perform work on the Customs House.
        Will you and the Chief Architect of GSA work with my office to
    ensure that the agency complies with the Stafford Act and follows its
    own policy on Gulf Coast reconstruction projects, by allowing locally-
    based Louisiana firms to participate in the restoration of the Customs
    House?
        Answer. Yes, GSA will work with Senator Landrieu's office to
    address any questions on the restoration of the New Orleans Customs
    House.
        Phase I of the New Orleans Customs House repair and alteration is
    for Hurricane Katrina reconstruction, and as such is governed by the
    Stafford Act. The design-build contract has been awarded to a local
    business: Carl E. Woodward, LLC, a New Orleans-based firm. The Phase I
    design firm is Waggonner & Ball Architects, also of New Orleans. As of
    July 2009, $36 million has been awarded. 95 percent of that amount, or
    approximately $34 million, has been awarded to Louisiana-based
    subcontractors.
        Phase II of the Customs House restoration does not involve any work
    covered by the Stafford Act, such as debris clearance, supply
    distribution, or reconstruction work. Nevertheless, GSA has awarded 35
    percent of the design contract to Waggonner & Ball Architects of New
    Orleans. The remainder of the Phase II design contract was awarded to a
    design firm that, while not locally-based, had extensive prior
    experience working on the Customs House, and was able to present a fair
    and reasonable price for the remaining design work. The construction
    contract for Phase II repair and alteration is anticipated to be
    awarded during or near January 2010. GSA is encouraging organizations,
    firms, and individuals residing or doing business primarily in New
    Orleans to submit proposals for the final portion of the Customs House
    restoration work, and is considering holding a local business workshop
    on the subject during autumn 2009.
        Re-occupancy of the Customs House is scheduled for Summer 2011.
                                     ______

                  Questions Submitted by Senator Susan Collins
        Question. It seems like the $4.5 billion provided for converting
    GSA facilities to High-Performance Green Buildings will create a great
    deal of demand for ``green'' building products and technologies, such
    as LED lighting and solar roofing materials.
        Is the domestic market for these materials strong enough to meet
    these needs?
        Answer. GSA is investigating the capacity of American manufactures
    to provide products, particularly in the energy efficiency sector, to
    be installed and used in GSA's Recovery projects. GSA is using the
    services of a major construction management firm with close ties to the
    construction industry to analyze product requirements and project
    schedules. We are also using information already collected by the
    Department of Energy in this analysis. As part of this effort, GSA
    plans to manage project schedules and by extension, product orders, to
    level demand for specific manufactured products and materials.
        Question. Will all of these materials come from American
    manufacturers?
        Answer. The Recovery Act generally requires Federal agencies to
    utilize iron, steel, and manufactured goods produced in the United
    States for Recovery projects. GSA is asking the American manufacturing
    community to help meet its goal of ``on time, on budget, on green.''
    Although specific requirements vary by product type and project, GSA
    strives to use American-made goods to the greatest extent possible on
    all Recovery Act projects.
        Question. Will GSA take any additional or extra steps to ensure
    that local, small businesses can compete to provide ``green'' products
    or services?
        Answer. GSA's Recovery Act projects provide many opportunities for
    small businesses:
      --GSA has planned over 200 high-performance green building limited
            scope projects, which range in size from $114,000 to
            $107,000,000, and together total just over $800 million.
      --Other opportunities include an additional $296 million for small
            projects across the country.
      --Opportunities also exist in support service contracts, such as
            acquisition and project management support.
        GSA will support small businesses through the use of new small
    business set-asides where adequate competition and competitive pricing
    can be achieved.
        GSA is also preparing a list of Indefinite Delivery, Indefinite
    Quantity (IDIQ) contract holders: This list will be made publicly
    available to assist small businesses in obtaining sub-contracts with
    existing GSA contractors. All bid opportunities will be advertising on
    www.FedBizOpps.gov.
        GSA is hosting partnering events that provide opportunities for
    small vendors to present qualifications and form relationships with
    prime contractors. We have also developed a communication network
    through small business associations, to provide information to vendors
    across the nation.
        GSA remains committed to negotiating aggressive small business
    subcontracting plans with our prime contractors for large design and
    construction contracts. As appropriate, GSA will publish prime
    contractor contact information online
        Question. GSA's lack of responsiveness to this Committee and to the
    Committee on Homeland Security and Governmental Affairs is very
    problematic. As you know, both Committees have oversight over GSA's
    policies and activities, and are responsible for ensuring that GSA is
    using Federal funds effectively. Inquiries to GSA--particularly
    questions relating to the Public Buildings Service and construction
    projects--take a very long time to generate responses, and sometimes
    are never answered.
        GSA frequently takes months to prepare responses to formal letters.
    Are you aware that this is a problem for GSA? Can you identify steps
    that you will take to improve this situation and ensure that GSA
    responds to Congressional inquiries--formal and informal--in a timely
    manner? If not, will you agree that this is a problem and will you
    commit to taking immediate steps to improve this situation?
        Answer. GSA is aware of the problem and we are currently analyzing
    our organizational structure and internal processes to correct this
    issue. The Public Buildings Service (PBS) has merged its legislative
    and correspondence offices into one office that reports directly to the
    PBS Chief of Staff. We have analyzed the correspondence process within
    PBS and are testing a new process starting July 30, 2009. We believe
    the new procedures will streamline the correspondence process within
    PBS and reduce the overall time it takes to return letters. In fact,
    PBS is aiming to reduce response time within PBS from months to 7
    business days. This would include receiving the letter, vetting the
    request, researching the answer, drafting a response, and obtaining
    proper internal clearance for the draft response, to ensure we have
    properly answered the letter.
        Question. The Fiscal Year 2009 Omnibus Appropriations Act includes
    separate provisions directing GSA to provide both a 5-year plan for
    Federal buildings and a 5-year plan for land ports of entry in fiscal
    year 2010 Congressional Budget Justification materials. GSA did not
    provide these plans in their budget justification materials and has yet
    to provide them to the Committee.
        If these plans are not available, what is the basis for GSA's
    fiscal year 2010 request for Federal building construction and land
    ports of entry? How can this Committee be certain that the projects
    included in your request are the best or most pressing needs for
    Federal construction?
        Answer. GSA's fiscal year 2010 request for New Construction
    projects concentrates on space consolidation efforts, for the Food and
    Drug Administration and the Federal Bureau of Investigation, and for
    mission-critical requirements that cannot be easily met in leased
    space.
        Our customers' long-term requirements and GSA's needs have changed
    as a result of the substantial new funds provided in the Recovery Act.
    However, the Recovery Act plan was based on shovel-ready projects, and
    a large number of high-priority needs remain that were not ``shovel-
    ready'' at the time the Recovery Act plan was prepared.
        The required plans will be submitted as soon as they are
    coordinated. GSA will include the plans, as required, in future budget
    submissions.
        Question. Although GSA has not provided 5-year plans for Federal
    buildings or Land Ports of Entry, this Committee does have the 5-year
    courthouse plan of the Judiciary. But neither of the courthouses in
    GSA's request are on that list. The projects on the Judiciary's list
    are scored and ranked by fiscal year.
        In developing the fiscal year 2010 budget request, why did GSA not
    follow the priorities set out in the Judiciary's Five-Year Courthouse
    Plan?
        Answer. The funding provided by the Recovery Act allowed GSA to
    fund a large program of Courthouse requirements in fiscal year 2009 and
    fiscal year 2010; this freed up funds to meet the needs in Lancaster
    and Yuma with Federal construction.
        Our Recovery Act project plan includes 6 Courthouse New
    Construction projects, including the Austin Courthouse ($116 million),
    which is the highest priority Courthouse to be identified by Judiciary
    in their Five-Year Plan. The Recovery Act project plan also includes
    funds for repair and alteration work on more than 110 Courthouses.
        Question. What objective criteria led GSA to select Lancaster,
    Pennsylvania, and Yuma, Arizona, over the projects on the Judiciary's
    list?
        Answer. These projects were originally identified as potential
    lease construction projects. Both OMB and GAO have been closely
    reviewing lease construction scenarios and have determined that it is
    often not in the best interest of the Federal Government and the
    taxpayer. In this case, GSA performed a 30-year present value life
    cycle cost comparison between Federal construction and leasing. The
    analysis considered both the government's equity and its capital and
    operating costs in each alternative to determine the lowest net costs
    expressed in present value terms for a given amount of space. The
    inherently governmental nature and long term requirement of these
    courthouses make Federal construction a financially responsible
    solution. A lease construction project would involve annual above-
    market rent outlays from the government over the life of the lease
    without any benefit of residual value at the end of the lease. The
    life-cycle cost analysis supports Federal construction as the best
    value to the taxpayer.
        The Courthouse project in Yuma, AZ was originally proposed as a
    lease construction project because funding was not expected to be
    available to meet the Judiciary's requirements with Federal
    construction. GSA was also working with the Courts to develop a
    potential lease construction project in Lancaster, Pennsylvania. If
    funding were provided through the 2010 Appropriations, both projects
    would be converted to Federal construction, which would allow for a
    government-owned solution and save taxpayer money.
        Question. GSA seems to have an inability or unwillingness to
    appropriately address the needs of local communities when planning and
    executing Federal construction projects. For example, this is apparent
    in GSA's dealings with the Madawaska, Maine community.
        Does GSA have a formal process for collecting public input on
    construction projects?
        Answer. At GSA, we take pride in our work with communities when
    planning and executing Federal construction projects. Large or complex
    development projects often engender competing views on community
    impacts. GSA conducts formal and informal communications with local
    communities throughout all stages of the design and construction
    process for new construction projects.
        During the planning stage of a project, GSA utilizes the process
    set forth by the National Environmental Policy Act (NEPA) to solicit
    public involvement and input from residents, business owners, local and
    state officials, and affected agencies. GSA typically hosts a public
    meeting to hear local concerns and provide contact information for
    those who want to comment directly to the agency. GSA takes into
    consideration issues raised by the public at these meetings or in
    writing to determine and update the scope of the prospectus development
    study. NEPA documentation is made available to local communities as it
    is developed. GSA then evaluates and responds to those comments as a
    part of our NEPA process.
        Additionally, GSA holds community open house meetings and hosts
    stakeholder meetings at key stages during project design. For example,
    GSA held a stakeholders' meeting for the Madawaska Land Port of Entry
    on March 31 of this year. Nearby businesses (Fraser Paper and Montreal,
    Maine, and Atlantic Railway, Inc.), Town of Madawaska officials,
    Congressional delegation representatives, and the facility's future
    tenant, the Department of Homeland Security's U.S. Customs and Border
    Protection, were invited to attend. The GSA design team presented an
    electronic building information model (BIM) showing the new port and
    incorporating a 4 dimensional (time visualization) demonstration of how
    traffic will flow through the new port.
        Question. Does GSA perform an objective review of citizen concerns,
    and notify the community of GSA's decision in a timely manner?
        Answer. GSA performs an objective review of citizen concerns for
    Federal construction projects. GSA immediately responds to oral
    questions received during open houses and stakeholder meetings, and
    addresses written comments submitted through the Agency's NEPA review.
    In the case of Madewaska, GSA thoroughly reviewed and responded to
    community concerns, questions and comments. Once substantive comments
    were addressed, GSA notified the community of how it evaluated and
    responded to comments in its final EIS.
        The timeliness of the GSA's responses can be best demonstrated by
    example. For the Madawaska Land Port of Entry, the Draft EIS was made
    available to the public on August 8, 2006. The public comment period
    started on August 3, 2006 and ended on September 22, 2006. GSA also
    hosted an open house on August 17, 2006, where 14 attendees offered
    oral comments and GSA received ten written comments. GSA received a
    total of 75 pages of public concerns and comments regarding its Draft
    EIS, including verbal and written comments. GSA objectively reviewed
    these comments and then responded accordingly in the final EIS, which
    was published in December 2006.
        Question. Approximately how many data centers does the Federal
    Government own? Approximately how many square feet of data center space
    does the federal government occupy in government owned facilities and
    contractor owned facilities?
        Answer. The Office of Management and Budget is currently gathering
    Government-wide information on data centers. Once we receive the
    updated information, we will be in a better position to answer these
    questions. We expect to provide the Committee with the answers by
    October 15, 2009.
        Question. What risk does the continued proliferation of federal
    data centers present to the federal budget and our nation's energy
    consumption?
        Answer. The proliferation of Federal data centers will increase
    energy consumption in order to support the facilities' environment
    control systems and information technology systems. Additional data
    centers, as historically constructed, would increase overall costs to
    the Federal government for construction and operation and maintenance,
    and not take advantage of modern concepts such as cloud computing and
    virtualization that can reduce IT cost, energy consumption and lower
    the cost of government operations. Future data centers should be built
    with a well-coordinated strategy that increases capacity and utilizes
    modern concepts such as green building, and other efficiencies that
    would otherwise not be realized.
        Question. Is GSA actively exploring how it can be a singular
    provider of data processing and storage capability to a large portion
    of the rest of the Federal Government?
        Answer. Yes, GSA is currently preparing a business case analysis to
    determine the viability of providing multi-tenant government-owned data
    centers that offer a fully acceptable risk mitigated data survivability
    solution to all Federal entities.
        To date, this analysis has focused on ensuring that Federal data
    centers provide adequate protection for our nation's most critical
    information and network infrastructures.
        Question. What role can intra-data center and inter-data center
    virtualization play in facilitating federal data center consolidation?
        Answer. These activities will reduce the footprint of information
    technology tremendously, through the provisioning of technology
    resources, and will assist in the reduction of Federal energy
    consumption. Data center virtualization will be one vehicle to
    realizing the cost savings and efficiencies proposed in this area by
    this Administration.
        Question. What challenges exist to GSA and other agencies on the
    statutory and regulatory levels to achieving a more consolidated
    federal IT infrastructure?
        Answer. We are currently gathering Government-wide information on
    data centers. Once we receive the updated information, we will be in a
    better position to answer these questions. We expect to provide the
    Committee with the answers by October 15, 2009.
        Question. What are some examples of excellence within the federal
    government with regard to pushing the consolidation agenda forward?
        Answer. We are currently gathering Government-wide information on
    data centers. Once we receive the updated information, we will be in a
    better position to answer these questions. We expect to provide the
    Committee with the answers by October 15, 2009.
                                     ______

                   Question Submitted to Joseph F. Bataillon
                  Question Submitted by Senator Susan Collins
        Question. GSA will be spending $1.5 billion of American Recovery
    and Reinvestment Act (Stimulus) funds on facilities in which the
    Judiciary is a tenant. Do you believe the projects that have been
    identified reflect the Judiciary's highest priority needs?
        Answer. The Judiciary's top space priority is the additional money
    needed to build the Los Angeles project. We were hopeful that stimulus
    funding was going to be provided to fund the estimated shortfall for
    the Los Angeles project that was authorized by the House and Senate.
    Thereafter, the Judiciary's space priorities are set forth in the
    attached Five-Year Courthouse Project Plan for Fiscal Years 2010-2014
    (Five-Year Plan). Only one courthouse that was on the Five-Year Plan,
    Austin, Texas, was included in the stimulus legislation ($116 million).
    The Judiciary recognizes and is appreciative of the fact that of the
    $4.5 billion appropriated for green buildings, we will receive almost
    $1.3 billion of that money for repair and alteration projects in 132
    buildings where the Judiciary is a tenant. In addition, two projects
    (Billings, Montana and Bakersfield, California) which the Judiciary and
    GSA had initially determined could best be provided through lease-
    construct are now funded as federal construction projects through the
    stimulus legislation. The Judiciary's highest priority space needs,
    however, are reflected in the Five-Year Plan.

     FIVE-YEAR COURTHOUSE PROJECT PLAN FOR FISCAL YEARS 2010-2014 APPROVED BY THE JUDICIAL CONFERENCE OF THE UNITED
                                                 STATES--MARCH 17, 2009
                                             [Estimated dollars in millions]
    ----------------------------------------------------------------------------------------------------------------
                                                                                                            Est. Net
                                                                                          Cost      Score    Annual
                                                                                                              Rent
    ----------------------------------------------------------------------------------------------------------------
                   FISCAL YEAR 2010

    Austin, TX....................................  Add'l. S&D/C......................    $116.1      82.0      $6.5
    Salt Lake City, UT............................  Add'l D/C.........................    $211.0      67.9     $11.4
    Savannah, GA..................................  Add'l. D..........................      $7.9      61.3      $3.5
    San Antonio, TX...............................  Add'l. D..........................      $4.0      61.3      $9.2
    Mobile, AL....................................  Add'l. S&D/C......................    $190.3      59.8      $4.7
                                                                                       -----------------------------
          Total...................................  ..................................    $529.3  ........     $35.4
                                                                                       =============================
                   FISCAL YEAR 2011

    Nashville, TN.................................  Add'l. S&D/C......................    $183.9      67.3      $7.0
    Savannah, GA..................................  C.................................     $95.5      61.3      $3.5
    San Jose, CA..................................  Add'l. S..........................     $38.6      54.5      $9.4
    Greenbelt, MD.................................  S&D...............................     $14.0      53.8      $1.6
                                                                                       -----------------------------
          Total...................................  ..................................    $332.0  ........     $21.5
                                                                                       =============================
                   FISCAL YEAR 2012

    San Antonio, TX...............................  C.................................    $142.2      61.3      $9.2
    Charlotte, NC.................................  C.................................    $126.4      58.5      $7.1
    Greenville, SC................................  C.................................     $79.1      58.1      $4.1
    Harrisburg, PA................................  C.................................     $57.3      56.8      $5.4
    San Jose, CA..................................  D.................................     $17.2      54.5      $9.4
                                                                                       -----------------------------
          Total...................................  ..................................    $422.2  ........     $35.2
                                                                                       =============================
                   FISCAL YEAR 2013

    Norfolk, VA...................................  C.................................    $104.7      57.4      $5.1
    Anniston, AL..................................  C.................................     $20.4      57.1      $1.1
    Toledo, OH....................................  C.................................    $109.3      54.4      $5.9
    Greenbelt, MD.................................  C.................................    $170.0      53.8      $1.6
                                                                                       -----------------------------
          Total...................................  ..................................    $404.4  ........     $13.8
                                                                                       =============================
                   FISCAL YEAR 2014

    San Jose, CA..................................  C.................................    $223.9      54.5      $9.4
    ----------------------------------------------------------------------------------------------------------------
    S=Site; D=Design; C=Construction; Addl.=Additional.

    All cost estimates subject to final verification with GSA.

                             CONCLUSION OF HEARINGS

        Senator Durbin. So that is about it for today, and the
    subcommittee is going to stand recessed.
        Thank you very much.
        [Whereupon, at 4:53 p.m., Tuesday, June 16, the hearings
    were concluded, and the subcommittee was recessed, to reconvene
    subject to the call of the Chair.]

                 MATERIAL SUBMITTED SUBSEQUENT TO THE HEARINGS

        [Clerk's Note.--The following testimony was received by the
    Subcommittee on Financial Services and General Government for
    inclusion in the record.]
            Prepared Statement of the National Coalition for History
        The National Coalition for History (NCH) is a consortium of over 60
    organizations that advocates and educates on federal legislative and
    regulatory issues affecting historians, archivists, political
    scientists, teachers, and other stakeholders. As researchers and
    conservators of American history and culture we care deeply about the
    programs and activities of the National Archives and Records
    Administration (NARA) and the National Historical Publications and
    Records Commission (NHPRC). Thank you for the opportunity to submit our
    views on the agency's proposed fiscal year 2010 budget.
        We want to thank you Mr. Chairman, and all of the members of the
    subcommittee, for their strong support of NARA's budget in fiscal year
    2009. Despite tight budget constraints, you were able to provide NARA
    with increased funding. We especially want to express our appreciation
    for the additional funding that was included for the second consecutive
    fiscal year to hire additional archival staff.
        Congress continues to face enormous fiscal challenges in crafting
    the federal budget for fiscal year 2010. However, we are encouraged
    that NARA would see a $7.6 million increase in funding under
    President's Obama's proposed fiscal year 2010 budget. The overall
    funding level of $466 million reflects the Administration's strong
    commitment to NARA's mission as steward of our Nation's documentary
    heritage. However, there are specific priorities that we feel must be
    addressed at NARA.
    National Historical Publications and Records Commission (NHPRC)
        We appreciate the Subcommittee's strong support for the NHPRC in
    the fiscal year 2009 budget. Your actions not only saved the NHPRC from
    elimination, but also provided $9.25 million for grants, a $1.75
    million increase from fiscal year 2008. This is the closest the NHPRC
    has come since fiscal year 2004 to receiving its fully authorized
    amount of $10 million.
        While we are grateful that the Obama Administration has recommended
    funding the NHPRC grants programs at the $10 million level, this macro
    number does not tell the whole story.
        NARA's ``2010 Performance Budget--Congressional Justification''
    recommends apportioning the $10 million in funding amongst three
    program areas. The Founding Fathers Online initiative would receive
    $4.5 million. The traditional core programs of the NHPRC of publishing
    historical records of key individuals and movements in documentary
    editions would receive $2 million. In addition, the archives
    preservation, access, and digitization grants that go mainly to assist
    states in their archival programs would receive $3.5 million.
        In 2008, Congress enacted the ``Presidential Historical Records
    Preservation Act of 2008'' (Public Law 110-404). In addition to
    authorizing the Archivist to enter into contractual agreements to put
    the Founding Fathers Papers projects online, the law creates two new
    grant programs that could potentially compete for already scarce NHPRC
    funds.
        The law authorized ``Grants for Presidential Centers of Historical
    Excellence'' to facilitate the preservation of historical records
    related to any former president who does not have an archival
    depository administered by NARA under the Presidential Libraries Act.
    The law also authorizes the creation of a national database for records
    of servitude, emancipation, and post-Civil War Reconstruction and
    allows the NHPRC to make grants to preserve these records.
        Given all of these additional responsibilities placed on the NHPRC,
    we feel that the priorities put forth by the Administration amount to
    nothing more than performing triage on a grossly overburdened agency.
    It is certainly within the prerogative of the Administration to suggest
    how the $10 million be spent. However, the final decision rests with
    the Congress which appropriates the funds and makes its priorities
    known through bill language and committee reports.
        The NHPRC is a 15-member body chaired by the Archivist of the
    United States that is comprised of representatives of the three
    branches of the Federal Government. In addition, the NHPRC includes six
    members representing professional associations of archivists,
    historians, documentary editors, and records administrators who are
    chosen based on their extensive expertise in their respective fields.
        Congress created the NHPRC, and its predecessor the National
    Historical Publications Commission, in 1934 to make precisely the kind
    of resource allocation decisions the Administration proposes in its
    fiscal year 2010 budget request. Congress should leave these funding
    decisions to those with the professional expertise to determine
    priorities, not to bureaucrats at the Office of Management and Budget
    who sought throughout the Bush administration to eliminate the program
    altogether.
        The NHPRC's $10 million annual authorization is expiring this
    fiscal year, and this amount has not been increased since fiscal year
    1997. Even with an authorization, the NHPRC has constantly been
    threatened and inflation has seriously eroded its funding level in
    constant dollars. We urge the Administration and the Congress to
    support the passage of legislation to reauthorize the NHPRC at an
    annual level of $20 million for fiscal years 2010-2014.
    Operating Expenses (OE)
        The President's fiscal year 2010 request includes $339.8 million
    for NARA's operating expenses budget. This reflects a $12.5 million
    increase over fiscal year 2009.
        The fiscal year 2010 budget operating expenses program budget
    includes $1 million to hire an additional 12 Full-Time Equivalent (FTE)
    archival staff. We are happy to see that the President's request
    continues the initiative your subcommittee began 2 fiscal years ago to
    provide NARA with additional funding to hire new staff and to ensure
    that research hours at NARA facilities are maintained.
        For fiscal year 2010, the budget requests $4.2 million and 27 FTE
    to implement two new mandates assigned to NARA's portfolio.
        The budget requests $1.4 million and 6 FTE to staff and operate
    NARA's Office of Government Information Services (OGIS). The OGIS will
    serve as the Freedom of Information Act (FOIA) ombudsman for the
    federal government as authorized by the OPEN Government Act of 2007
    (Public Law 110-175). We are happy to see that the battles that were
    fought with the Bush administration over funding the office and
    locating it within NARA are finally over.
        The OE budget also includes $1.9 million and 9 FTE to staff and
    operate the Controlled Unclassified Information (CUI) Office. We hope
    that the Archivist will play a key role within the administration in
    the development of the forthcoming government-wide CUI policy. The
    addition of the Office of Government Information Services (OGIS) and
    the CUI offices at NARA, as provided for in the President's fiscal year
    2010 budget, will strengthen the Archivist's authority in ensuring
    appropriate open access to public information.
    Electronic Records Archives (ERA)
        The long-delayed Electronic Records Archives (ERA) is an essential
    tool for the NARA of today and tomorrow. Mandatory use of the ERA by
    all federal agencies is currently scheduled to begin in January 2011.
    Without this system NARA will be unable to manage the exponentially
    expanding volume of electronic records. Effective management of federal
    records will improve the performance of our government, save tax
    dollars, and ensure current and future generations will have access to
    our nation's history.
        We believe that the Electronic Records Archive program merits the
    $18.5 million in increased funding proposed by the President in his
    fiscal year 2010 budget. However, we continue to share the concerns
    that members of this Subcommittee and the Government Accountability
    Office have expressed about the ERA program remaining on schedule and
    budget. This program is vital not just to NARA but also to the entire
    federal government and the historical and archival communities. We are
    confident that this Subcommittee will continue its vigorous oversight
    of the ERA program. One of the major challenges facing a new Archivist
    of the United States will be to ensure that the ERA comes fully online
    as currently scheduled in January 2011, when use of the system will be
    mandatory for all agencies.
        We are concerned that, despite NARA's past assurances to the
    contrary, the Bush administration's electronic records will not be
    fully ingested until this autumn. Along with many in Congress, NCH
    expressed concerns throughout 2008 that the hastily-constructed
    Executive Office of the President (EOP) system that NARA had built
    parallel to the ERA might not be capable of rapidly ingesting all of
    the Bush electronic records beginning on January 20, 2009. We hope that
    Congress will continue to monitor this situation and hold NARA
    accountable for completing this project expeditiously.
    Repairs and Restoration
        The bill provides $27.5 million for repairs and restoration. This
    amount includes $17.5 million for necessary expenses related to the
    repair and renovation of the Franklin D. Roosevelt Presidential Library
    in Hyde Park, NY, which NARA has listed as its top capital improvement
    priority. The remaining $10 million will be used to fund repairs and
    restorations to 16 NARA-owned facilities. NCH is pleased that the
    President's budget request continues to fund the much needed repairs at
    the FDR Library, the oldest in the presidential library system.
        Congress last year made a strong statement that the costs
    associated with the construction and maintenance of presidential
    libraries have been spiraling out of control. Congress enacted a law
    (Public Law 110-404) increasing the endowment percentage requirement
    for presidential library foundations for the cost of land,
    construction, and installing equipment at these facilities from 40
    percent to 60 percent. Unfortunately, we have seen earmarks for the
    maintenance of specific presidential libraries tacked on to NARA's
    annual appropriation at the expense of NARA's core mission. NARA must
    now provide Congress annually with a 10-year capital improvement plan
    for the Presidential Library System. NARA should ensure this plan is
    based on demonstrated needs, not outside political pressure.
        Thank you again for the opportunity to present our views on these
    issues of vital concern to the historical and archival communities.

           LIST OF WITNESSES, COMMUNICATIONS, AND PREPARED STATEMENTS

                                  ----------
                                                                       Page
    Bataillon, The Honorable Joseph F., Chief Judge, U.S. District
      Court for the District of Nebraska; Chair, Space and Facilities
      Committee, Judicial Conference of the United States............   191
        Prepared Statement of........................................   201
        Question Submitted to........................................   222
        Statement of.................................................   199
    Bond, Senator Christopher S., U.S. Senator From Missouri:
        Prepared Statement of........................................    73
        Questions Submitted by.....................................116, 158
        Statement of.................................................    72

    Collins, Senator Susan, U.S. Senator From Maine:
        Prepared Statements of.......................................5, 170
        Questions Submitted by..............37, 67, 112, 154, 185, 219, 222
        Statements of................................................ 4, 69

    Durbin, Senator Richard J., U.S. Senator From Illinois:
        Opening Statements of.......................................69, 161
        Prepared Statement of........................................     2
        Questions Submitted by...................35, 57, 103, 150, 175, 214
        Statement of.................................................     1

    Geithner, Hon. Timothy F., Secretary, Office of the Secretary,
      Department of the Treasury.....................................    69
        Summary Statement of.........................................    74
        Prepared Statement of........................................    75
    Gensler, Hon. Gary, Chairman, Commodity Futures Trading
      Commission.....................................................    43
        Prepared Statement of........................................    45

    IRS Oversight Board, Prepared Statement of the...................   140
    Investment Company Institute, Prepared Statement of the..........    40

    Kelley, Colleen M., National President, National Treasury
      Employees Union, Prepared Statement of.........................   146

    Landrieu, Senator Mary L., U.S. Senator From Louisiana, Questions
      Submitted by.................................................181, 218
    Lautenberg, Senator Frank R., U.S. Senator From New Jersey:
        Question Submitted by........................................   153
        Statement of.................................................    71

    Mills, Hon. Karen G., Administrator, Small Business
      Administration.................................................   161
        Prepared Statement of........................................   165
        Summary Statement of.........................................   162

    National Coalition for History, Prepared Statement of the........   225
    Nelson, Senator Ben, U.S. Senator From Nebraska:
        Questions Submitted by.................................37, 111, 154
        Statement of.................................................    71

    Prouty, Hon. Paul F. Acting Administrator, General Services
      Administra-
      tion...........................................................   191
        Prepared Statement of........................................   193
        Questions Submitted to.......................................   214

    Schapiro, Hon. Mary L., Chairman, Securities and Exchange
      Commission.....................................................     1
        Prepared Statement of........................................     8

    Shulman, Douglas H., Commissioner, Internal Revenue Service,
      Department of the Treasury.....................................   123
        Opening Statement of.........................................   123
        Prepared Statement of........................................   125

    Tester, Senator Jon, U.S. Senator From Montana, Statement of.....    72

                                 SUBJECT INDEX

                                  ----------

                      COMMODITY FUTURES TRADING COMMISSION

                                                                       Page

    Additional Committee Questions...................................    57
    Adequacy of Funding to Permit Pay Parity.........................    58
    Derivatives:
        Market Regulatory Reform.....................................    59
        Regulation...................................................53, 55
    Enforcement:
        Actions to Preserve Market Integrity and Protect Market Users    60
        Penalties: Amount, Recovery and Deterrence...................    54
    Index Traders....................................................    51
    International....................................................    56
    Memorandum of Understanding Between CFTC and SEC.................    60
    Merger...........................................................    52
    Most Serious Management Challenges Identified by Inspector
      General........................................................    57
    Performance Goals/Measuring Outcomes.............................    63
    Speculation......................................................    50
    Staffing.........................................................    48
    Student Loan Repayment...........................................    49
    Underfunding.....................................................    50

                           DEPARTMENT OF THE TREASURY

                            Internal Revenue Service

    A Firm Foundation Upon Which to Build............................   125
    Additional Committee Questions...................................   149
    Business Systems Modernization.................................137, 158
    Customer Account Data Engine.....................................   138
    Deterrent Effect of Enforcement Initiatives......................   151
    Electronic Filing--Staffing Shifts...............................   151
    Enforcement....................................................147, 158
    Explanation of Budget Activities.................................   128
    Fiscal Year 2010:
        Budget Adjustments...........................................   130
        IRS Budget Recommendations...................................   140
    Human Capital Crisis.............................................   146
    IRS Fiscal Year 2010 Budget Request..............................   146
    Implementation of Tax Gap Strategy...............................   160
    Improve Tax Administration and Other Miscellaneous Proposals.....   133
    Increasing Complexity of Tax Administration......................   147
    Information Technology Security..................................   139
    International Activity and the Tax Gap...........................   137
    Major Challenges.................................................   146
    Measuring Return on Investment: New Initiatives..................   150
    Mistakes on Returns..............................................   133
    Performance on Toll-Free Phone Lines.............................   134
    Phishing and Data Protection.....................................   135
    Private Debt Collection..........................................   159
    Refund Anticipation Loans........................................   134
    Regulation of Preparers........................................133, 137
    Section 1203.....................................................   149
    Tax Gap...................................................136, 147, 159
    Taxpayer Service.................................................   148
    The Administration's Fiscal Year 2010 Budget Request Funds Key
      Priorities.....................................................   127

                            Office of the Secretary

    Additional Committee Questions...................................   102
    Alcohol and Tobacco Tax and Trade Bureau (TTB)...................   108
    Auto Rescue......................................................   120
    Automobile:
        Dealership Terminations......................................    94
        Industry.....................................................    88
    Capital Magnet Fund..............................................   105
    Committee on Foreign Investment (CFIUS)..........................   103
    Community Development Financial Institutions (CDFI) Fund.........   104
    Credit Card Interchange Fees.....................................    92
    Departmental Offices.............................................   103
    Executive Compensation...........................................    84
    Extension of Troubled Asset Relief Program.......................    90
    Failed Banking Institutions......................................    86
    Federal Deficits.................................................    96
    Financial:
        Crimes Enforcement Network (FinCEN)..........................   106
        Product Safety Commission Proposal...........................    98
        Regulatory Reform........................................89, 95, 97
    Mortgage Foreclosure.............................................    80
    Office of Foreign Assets Control (OFAC)..........................   104
    Protectionism....................................................   119
    Redesigning the Tax System for Fairness and Efficiency...........    78
    Reengaging with the World on Economic Issues.....................    80
    Reforming Government Sponsored Enterprises.......................   102
    Regulatory Reform..............................................100, 117
    Repairing and Reforming the Financial System.....................    77
    Repayment of TARP Funds..........................................   119
    Repayments Under the Troubled Asset Relief Program...............    92
    Social and Economic Missions.....................................   118
    Staffing of the Troubled Asset Relief Program....................    93
    Stress Tests.....................................................   118
        And Economic Recovery........................................   101
    Termination of Automobile Dealerships............................    96
    Toxic Assets....................................................87, 116
    Transparency of the Troubled Asset Relief Program................    91
    Treasury Inspector General.......................................   108
    Treasury's Key Priorities........................................    76
    Troubled Asset Relief Program (TARP)............................82, 109
        Reserve Fund.................................................    90
    Usury Cap........................................................    99

                        GENERAL SERVICES ADMINISTRATION

    Additional Committee Questions...................................   214
    American Recovery and Reinvestment Act...........................   197
    Construction Priorities..........................................   208
    Cost Containment.................................................   202
    Customs House....................................................   218
    Differing Construction Priorities................................   204
    Energy Efficiency in Buildings...................................   212
    Energy-Efficient Federal Motor Vehicle Fleet Procurement.........   198
    Federal:
        Acquisition Service..........................................   196
        Buildings Fund--Recovery Act.................................   197
    Fiscal Year 2010 Budget Request..................................   194
    Five-Year Courthouse Project Plan Process........................   202
    GSA Federal Buildings Fund 2010 Budget Request...................   203
    Judiciary's 5-Year Courthouse Plan...............................   206
    Lease-Construction Projects......................................   203
    Los Angeles Courthouse...........................................   205
    Miami FBI Office.................................................   207
    Operating Appropriation Request..................................   195
    Projects Requested for Fiscal Year 2010..........................   217
    Public Buildings Service.........................................   194
    Recovery Act Implementation......................................   214
    Repair Backlogs..................................................   218
    Salt Lake City Courthouse........................................   210
    San Diego Courthouse.............................................   205
    Summary Statement................................................   199
    Underutilized or Excess Federal Property.........................   217

                       SECURITIES AND EXCHANGE COMMISSION

    Additional Committee Questions...................................    34
    Addressing Resource Constraints..................................    23
    Budget and Workforce of the SEC..................................    17
    Combating Abusive Short-Selling..................................    11
    Consumer Protection..............................................    33
    Corporate Governance.............................................    24
    Credit Rating Agencies...........................................    24
    Enforcement of the Securities Laws...............................    28
    Expediting Fair Funds Disbursements..............................    35
    Fee Collections by and Funding of the SEC........................    30
    Filling Regulatory Gaps..........................................    11
    Improving:
        Money Market and Mutual Fund Regulation......................    12
        Transparency and Investor Protection.........................    10
    Investor Protection and Education................................    20
    Regulation of:
        Derivatives..................................................    31
        Large Investment Banks.......................................    26
        Short Selling................................................    29
    Reinvigorating SEC Enforcement...................................     9
    Resources Needed for SEC's Mission...............................     7
    Restoring Investor Confidence....................................    22
    Role of a Systemic Risk Regulator................................    27
    Rule 151A, Issued January 16, 2009...............................    37
    SEC:
        Resources....................................................    13
        Rulemaking Agenda............................................     7
    Staying on the Cutting Edge of Technology........................    35
    Strengthening:
        Examination and Oversight....................................    10
        Shareholder Rights...........................................    12

                         SMALL BUSINESS ADMINISTRATION

    Additional Committee Questions...................................   175
    American Reinvestment and Recovery Act...........................   171
    Dealer Floor Plan Financing Program..............................   172
    Disaster.........................................................   182
        Loans........................................................   180
    Employee Training................................................   169
    Entrepreneurial Development Initiative:
        Business Clusters............................................   179
        Veterans' Businesses.........................................   179
        ``SWAT'' Teams...............................................   179
    Federal:
        And State Technology Program.................................   181
        Contracting..................................................   180
    Lender Oversight...............................................174, 177
    Liquidity of SBA Loans...........................................   176
    Microloan Program:
        Expanding Microloan Access...................................   178
        Fiscal Year 2010 Request.....................................   178
    Office of Technology.............................................   184
    President Obama's Small Business Recovery Plan...................   183
    Recovery Act:
        American Recovery Capital Loans..............................   176
        Impact on Small Business Lending.............................   175
    SBA Contracting Programs.........................................   184
    7(a) Loan Guaranty Program.......................................   182
    Small Business:
        Access to Credit.............................................   171
        Clusters.....................................................   175
        Contracting..................................................   173
        Development Centers........................................168, 171
    Subsidizing 7(a) Loans in Fiscal Year 2010.......................   177
    Women's Business Centers.........................................   182
    Women-Owned Business Rule........................................   181

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