[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
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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
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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
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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
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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
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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.
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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.
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\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.
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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.
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\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.
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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.
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\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.
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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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