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



                                                        S. Hrg. 111-194
 
  FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR FISCAL 
                               YEAR 2010

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


                                HEARINGS

                                before a

                          SUBCOMMITTEE OF THE

            COMMITTEE ON APPROPRIATIONS UNITED STATES SENATE

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                                   on

                           H.R. 3170/S. 1432

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

                               __________

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

                               __________

         Printed for the use of the Committee on Appropriations



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

                               __________
                      COMMITTEE ON APPROPRIATIONS

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

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

       Subcommittee on Financial Services and General Government

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

                           Professional Staff

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

                         Administrative Support

                            Molly Barackman

                                Detailee

                           Richard P. Burkard


                            C O N T E N T S

                              ----------                              

                         Tuesday, June 2, 2009

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

                         Tuesday, June 9, 2009

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

                         Tuesday, June 16, 2009

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

 
  FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR FISCAL 
                               YEAR 2010

                              ----------                              


                         TUESDAY, JUNE 2, 2009

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

                   SECURITIES AND EXCHANGE COMMISSION

STATEMENT OF HON. MARY L. SCHAPIRO, CHAIRMAN


                 statement of senator richard j. durbin


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

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

                   STATEMENT OF SENATOR SUSAN COLLINS

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

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

                        SEC'S RULEMAKING AGENDA

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

                   RESOURCES NEEDED FOR SEC'S MISSION

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

                           PREPARED STATEMENT

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






                    BUDGET AND WORKFORCE OF THE SEC

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

                   INVESTOR PROTECTION AND EDUCATION

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

                     RESTORING INVESTOR CONFIDENCE

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

                    ADDRESSING RESOURCE CONSTRAINTS

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

                          CORPORATE GOVERNANCE

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

                         CREDIT RATING AGENCIES

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

                  REGULATION OF LARGE INVESTMENT BANKS

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

                   ROLE OF A SYSTEMIC RISK REGULATOR

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

                   ENFORCEMENT OF THE SECURITIES LAWS

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

                      REGULATION OF SHORT SELLING

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

               FEE COLLECTIONS BY AND FUNDING OF THE SEC

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

                       REGULATION OF DERIVATIVES

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

                          CONSUMER PROTECTION

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

                     ADDITIONAL COMMITTEE QUESTIONS

    Senator Durbin. We'll be working closely with you and your 
agency as we put together the appropriation bill.
    Ms. Schapiro. Thank you.
    [The following questions were not asked at the hearing, but 
were submitted to the Commission for response subsequent to the 
hearing:]
            Questions Submitted by Senator Richard J. Durbin
               staying on the cutting edge of technology
    Question. With rapid acceleration of electronic innovations in the 
securities markets, the Securities and Exchange Commission faces the 
challenge of keeping abreast of advancements. In the face of aggressive 
efforts of trading firms to invest in new technology, it is critical 
that SEC investigators understand the nuances of modern trading 
operations.
    Does the SEC have sufficient resources to hire the best and 
brightest financial technologists?
    Have you identified specific gaps in SEC's workforce expertise when 
it comes to electronic trading?
    Answer. As you may know, the SEC has launched a new initiative with 
existing resources to broaden the skill sets within its workforce, 
ranging from financial analysis to complex trading strategies. As part 
of this effort, the SEC is recruiting seasoned industry professionals 
into our enforcement, examination, and risk assessment programs, 
through efforts such as the Industry and Market Fellows and the Senior 
Specialized Examiner programs. The SEC is also implementing 
enhancements to the SEC's existing training programs, in areas such as 
the examination program which is enhancing staff expertise in topics 
such as fraud detection, complex financial products, and trading and 
where more than a third of the staff have signed up for training to 
become Certified Fraud Examiners. If Congress were to approve 
additional resources for the SEC, then the agency would look to expand 
these recruiting and training efforts very significantly.
    A key repository at the SEC for expertise on trading systems is the 
Automated Review Program within the Division of Trading and Markets. 
The program conducts examinations of the trading systems of markets and 
clearing agencies, to assess the data's confidentiality, integrity, and 
availability. The program has been able to stay on top of this rapidly 
evolving field, through efforts such as the CYBER CORPS program, which 
has served as a great resource for identifying talented IT 
professionals, and through the NSA, which has provided non-commercial 
software and technical training. Over the past few years, the program 
has increased its expertise in IT security and launched new initiatives 
in the areas of cyber security, auditing intermediaries in credit 
default swaps, and international markets. The Division now plans to 
implement new source code review of trading systems and more 
sophisticated penetration testing, to the extent resources are 
available.
                  expediting fair funds disbursements
    Question. Under the ``Fair Funds for Investors'' provision (Section 
308(a) of Sarbanes-Oxley), the Securities and Exchange Commission is 
required to return money to investors victimized by securities fraud. 
Previously, disgorgements and penalties were deposited into a U.S. 
Treasury General Fund.
    Answer. The Fair Funds provisions of the Sarbanes-Oxley Act of 2002 
gave the Commission authority to increase the amount of money returned 
to injured investors by allowing civil penalties to be included in Fair 
Fund distributions. Prior to Sarbanes-Oxley, only disgorgement could be 
returned to investors.
    Question. What improvements have been realized so far from the 
creation of a specialized office on ``Fair Funds'' disbursement?
    Answer. The Commission established the Office of Collections and 
Distributions (OCD) to, among other things, expedite the distribution 
of Commission recoveries to injured investors. The Office is 
responsible for overseeing the distribution of funds to investors who 
have been injured by securities law violations, implementing the 
Enforcement Division's collections and distributions programs, and 
conducting litigation to collect disgorgement and penalties imposed in 
certain Enforcement actions. In addition, the Office tracks, records, 
and provides financial management assistance with respect to the funds 
and provides overall case management services for the Division.
    The Office has helped streamline the distributions process and 
enhance its internal controls, and it has overseen the distribution of 
approximately $3.2 billion to injured investors to date. Among the 
Office's recent initiatives has been to issue standardized, step-by-
step guidance to enforcement staff on developing and implementing 
distribution plans in both civil actions and administrative 
proceedings. In addition, the Office has consolidated collections and 
distributions information onto the enforcement program's internal 
website so that is more accessible to staff nationwide. In 
collaboration with other SEC offices, OCD has created templates to 
standardize the reporting of periodic and final accountings for 
distributions of disgorgement funds and Fair Funds, as well as to 
facilitate the examination of administrative expenses. In order to 
manage receivership expenses, the Office also developed billing 
instructions for receivers. OCD conducts training for the staff on the 
use of both the standardized reports and the billing instructions.
    Question. SEC's financial tracking system (Phoenix) was established 
to improve management of distribution of Fair Funds to victims of 
securities law violations. Is the ``Phoenix'' system fully functional 
at this time? What remains to be done to improve its capabilities?
    Answer. To date, the Phoenix system has only been partially 
deployed. Under the functionalities that are already operational, 
Phoenix assists with tracking and recording the disgorgement and 
penalties ordered in Enforcement actions. However, the Phoenix system 
does not yet track and record distribution information. This function 
is currently performed in a limited way within CATS 2000, the SEC's 
case tracking system, which is itself slated to be replaced.
    To that end, the agency is developing business requirements for a 
new module that would record and monitor distribution-related 
information, including information reported on the newly developed 
standardized accounting reports. Once fully built, this module would 
enable the SEC to track a distribution fund's current status or phase 
in the distribution process, enhance reporting and internal controls 
over the accuracy and integrity of distribution data, and provide 
better information about the investment of Commission funds with the 
Department of the Treasury's Bureau of Public Debt. This effort also 
will support integration with the agency's core financial management 
system.
    The SEC expects to finalize and deploy the distributions module in 
fiscal year 2010, depending on the availability of sufficient funding.
    Question. I note that SEC is currently reviewing its performance 
measure of the percentage of Fair Funds and disgorgement dollars 
designated for distribution to victims within a year. What are the 
challenges? What is hampering SEC's ability to track the timeliness of 
the fund distributions and maintain accurate data?
    Answer. As noted in the Commission's fiscal year 2010 budget 
justification, this measure is currently under review and may be 
adjusted in the future. One of the primary challenges with respect to 
such a measure has been the SEC's inadequate systems to collect, 
analyze, and report on distributions (described above), which have 
hampered the Commission's ability to track the timeliness of the fund 
distributions and maintain accurate data.
    Question. What portion of this year's budget (fiscal year 2009) and 
the proposed needs for fiscal year 2010 will be devoted to the Fair 
Funds distribution project?
    Answer. The first major expense associated with Fair Funds 
distributions is information technology, most notably the Phoenix 
system. In fiscal year 2009, the SEC expects to obligate approximately 
$0.1 million in ongoing maintenance and support related to Phoenix. For 
fiscal year 2010, the agency estimates that distributions-related 
projects will cost approximately $3.2 million. These projects include 
efforts to develop new collections and distributions tracking 
functionalities, enhance the current Phoenix system, integrate Phoenix 
with the enforcement program's new HUB tracking system and the core 
financial system, and conduct ongoing system maintenance.
    A second component of the SEC's distributions-related costs is the 
expense associated with the Office of Collections and Distributions. 
OCD's costs amount to approximately $6.0 million in fiscal year 2009 
and $6.2 million in fiscal year 2010. However, it is important to note 
that the Office performs a variety of functions in addition to 
distributions, including assisting with collection of delinquent debts 
and maintenance of internal controls.
    The final element is the substantial staff time spent on 
distributions functions within other parts of the SEC. For example, 
within the enforcement program (outside of OCD), attorneys spend 
considerable time on the development, oversight, and implementation of 
distribution plan actions, while support staff perform data input for 
all cases. In addition, the SEC's Office of Financial Management aids 
with funds investment and disbursement, as well as internal controls; 
the Office of the General Counsel reviews and comments on distribution-
related documents; and the Office of Economic Analysis evaluates the 
methodologies for measuring investor loss. Although the staff time 
involved is significant, the SEC does not currently track costs at this 
level.
                                 ______
                                 
                Question Submitted by Senator Ben Nelson
                   rule 151a, issued january 16, 2009
    Question. On January 16th of this year, the Commission issued a new 
rule regarding indexed annuities and certain other insurance contracts. 
This rule takes effect on January 12, 2011.
    What level of resources will the SEC devote in fiscal year 2010 to 
preparing to implement this rule? Can you calculate the cost to the 
Commission of the work necessary to fully implement this rule so that 
it can be operational on January 12, 2011?
    Looking ahead to the next fiscal year (fiscal year 2011), in taking 
on this additional regulatory responsibility, will additional staff be 
required? What will additional staff needs and additional regulatory 
responsibility mean for the Commission's budget?
    Answer. The release adopting this rule (Rule 151A) articulated the 
Commission's determination that investors in certain indexed annuity 
contracts are entitled to the protections of the federal securities 
laws. The rule includes a new definition of ``annuity contract'' that, 
on a prospective basis, will define a class of indexed annuities that 
are outside the scope of Section 3(a)(8) of the Securities Act, which 
provides an exemption under the Securities Act for certain insurance 
contracts. These indexed annuities will, on a prospective basis, be 
required to register under the Securities Act. With few exceptions, 
indexed annuities historically have not been registered as securities. 
The new definition will apply to indexed annuities that are issued on 
or after the January 12, 2011, the effective date of the rule.
    The staff is currently considering how to tailor disclosure 
requirements for indexed annuities. As with any other rulemaking, if 
the staff determines to recommend that the Commission propose new 
disclosure requirements, resources will be applied to develop a 
proposal, analyze public comments on the proposal, determine whether to 
recommend adoption of the proposal and consider whether and how it 
should be modified to reflect commenters' concerns.
    In addition, the Commission encouraged insurance companies, sellers 
of indexed annuities, and other affected parties to submit specific 
requests for guidance regarding the implementation of the rule. We 
anticipate that any responses to such requests will require staff 
resources.
    The Division of Investment Management also anticipates reviewing 
filings for approximately 400 new indexed annuity contracts in the 
first year.
    In all, the Division of Investment Management believes the 
implementation of Rule 151A will require an allocation of seven staff 
positions during the first year, with that number likely to decrease in 
the years following the initial implementation. The estimated cost of 
these seven positions is $1.6 million for fiscal year 2011. As 
discussed above, these staff will perform further rulemaking as 
appropriate, provide interpretive advice, and review disclosure 
filings.
                                 ______
                                 
              Questions Submitted by Senator Susan Collins
    Question. Chairman Schapiro, recently many news outlets have issued 
stories about the administration's proposal to move some consumer-
protection powers outside of the SEC. Reports state that that you are 
opposed to such a proposal. A May 20th Wall Street Journal article 
quotes you as saying that such a plan would ``. . . be hugely expensive 
and highly inefficient . . .'' Would you discuss your objections?
    Answer. I did not believe that investors would be better protected 
by separating some securities products from others, potentially 
creating gaps in the regulatory and enforcement regime. Securities 
products are different from consumer credit products: generally they 
are not guaranteed and include a number of inherent risks, including 
the loss of principal. The administration's white paper outlining its 
consumer protection plan appears to recognize this, and I do not object 
to that approach.
    Question. Secretary Geithner recently laid out a framework for 
overseeing the derivatives market including rigorous reporting 
requirements. Such a proposal would give the SEC and CFTC new 
authorities to regulate derivatives. What are your thoughts on the plan 
and the role of the SEC in the regulation of derivatives?
    Answer. I agree with the Secretary's approach. Both the SEC and 
CFTC have a role in regulating derivatives products. We continue to 
work together and make progress on how such a regime might work to best 
fill gaps in the regulatory framework and prevent regulatory arbitrage. 
I look forward to working with Congress to make the necessary 
legislative changes.
    Question. Two veteran enforcement lawyers at the SEC are currently 
under investigation for insider trading. A May 16 a Wall Street Journal 
article quotes a report by the SEC Inspector General saying that ``the 
SEC has `essentially no compliance system' to detect potential insider 
trading.'' As a result of the investigation into the trading activities 
of the two attorneys', the SEC has proposed the imposition of new rules 
on employee trades. How does this investigation affect your confidence 
in the ability of the SEC staff? In your estimation, do the recent 
troubles at the SEC signify fundamental problems within the 
organization, and if so how do you propose to rectify the issues?
    Answer. I have the utmost confidence in the ability of the SEC's 
staff and their unflagging dedication to the protection of investors. 
Time and time again, I have been impressed by the staff's talent, 
integrity, and enthusiasm for the agency's mission. However, it became 
clear to me soon after joining the agency that the SEC's system for 
ensuring compliance with employee trading rules was not sufficient. The 
report by the agency's Inspector General concerning trading activity by 
certain employees reinforced my belief that the SEC should have a 
trading compliance system that is second to none.
    I know the agency's staff shares my belief that, in light of the 
SEC's mission, it is vital that we conduct ourselves according to the 
highest standards of ethical conduct when it comes to our own financial 
holdings and transactions. To that end, we have taken several 
significant steps to strengthen the SEC's compliance system and reduce 
the potential for even the appearance of inappropriate securities 
trading:
  --We have proposed new rules concerning employee trading. These rules 
        will, among other things:
    --Require the pre-clearance of all trades.
    --Prohibit all trading in the securities of a company under SEC 
            investigation, regardless of whether the employee is aware 
            of the investigation.
    --Require all employees to authorize their brokers to provide 
            duplicate trade confirmation statements to the agency.
    --Prohibit the ownership of securities in publicly-traded exchanges 
            and transfer agents, in addition to existing prohibitions 
            against owning securities in other firms directly regulated 
            by the Commission.
    --Require employees to certify that they do not have any non-public 
            information about the company whose securities they are 
            trading.
      These rules were submitted to the Office of Government Ethics 
        (``OGE'') on May 22, 2009, and we await OGE's comments.
  --We recently retained an outside firm specializing in automated 
        compliance systems to develop a new computer compliance system 
        for the agency, which will automate and simplify the 
        transaction reporting process and make it easier to verify and 
        monitor employee trading.
  --We are creating a new Chief Compliance Officer position, and have 
        already received applications from a number of excellent 
        candidates for the new position.
  --I have consolidated responsibility for the oversight of employee 
        securities transactions within the SEC's Ethics Office and 
        devoted additional staff resources to monitor, review, and 
        spot-check these transactions.
    These measures will bolster and modernize the agency's compliance 
program, and help the talented and committed staff do its critical work 
of protecting investors without distraction.
    Question. The fiscal year 2010 budget request does not include an 
increase for the SEC Inspector General. Considering the likelihood of 
an increased workload at the IG's office, as the SEC increases 
surveillance and monitoring of employee trading, do you think that the 
IG will need additional funds?
    Answer. The Inspector General submitted a request for three 
additional positions only a few days before the publication of the 
SEC's Congressional Justification for fiscal year 2010, and therefore 
these additional positions were not reflected in the document. However, 
I have since approved the addition of these personnel, which would 
bring the OIG to a total of 19 positions. When these new staff are 
combined with the two positions approved for OIG in January 2009, the 
Office will have grown by a total of 73 percent within this calendar 
year, which is the highest growth rates of any SEC office during this 
timeframe.
    Question. Please provide a breakdown of the tips and complaints the 
SEC received in fiscal year 2007 and fiscal year 2008, to help explain 
the large decline in that year.
    Answer. As you mentioned, the number of tips and complaints 
received by the SEC's Office of Internet Enforcement declined 
significantly between 2007 and 2008, from about 1,586,000 to about 
615,000 in 2008. Unfortunately, the SEC has not had a tracking system 
that can break down those figures into their component parts or support 
rigorous analysis of underlying trends.
    The SEC's initiative to bolster its systems for tracking tips and 
complaints, working with the Center for Enterprise Modernization, will 
help the agency perform much better analyses in the future. Such 
analyses will help the SEC understand the overall statistics on tips 
and complaints and identify trends among specific firms or practices 
that can provide valuable information for potential enforcement action 
and compliance exams. The SEC also is working to streamline and 
standardize the agency's handling of tips and complaints, so they can 
be addressed more consistently and effectively. Nevertheless, for the 
2007-2008 period, the SEC is reliant on anecdotal evidence to explain 
the decline in tips and complaints during that timeframe.
    In general, the number of complaints the agency sees is related to 
the volume of spam and commercial email traffic received by investors. 
A number of factors likely affected this volume during the 2007-2008 
timeframe. First, the SEC's initiative starting in 2007 to combat spam-
driven stock manipulations was reported to have been a major 
contributor to reducing the amount of spam.\1\ Under this initiative, 
the SEC suspended trading in the securities of dozens of companies that 
had been the subject of spam stock promotions and initiated several 
spam-related enforcement actions. According to a private-sector 
Internet security report, a 30 percent decrease in stock market spam 
``was triggered by actions taken by the U.S. Securities and Exchange 
Commission, which limited the profitability of this type of spam . . 
.'' \2\
---------------------------------------------------------------------------
    \1\ ``SEC makes inroads against financial spam; Crackdown pays off 
as e-mail campaigns slow,'' by Matt Krantz, USA Today, Oct. 5, 2007 at 
p. 7A.
    \2\ http://eval.symantec.com/mktginfo/enterprise/white_papers/ent-
whitepaper_internet_security_threat_report_xii_09_2007.en-us.pdf. 
Copyright 2007 Symantec Corporation. All rights reserved. Symantec, the 
Symantec Logo, BugTraq, Symantec Brightmail AntiSpam, and Symantec 
DeepSight are trademarks or registered trademarks of Symantec 
Corporation or its affiliates in the United States and other countries. 
Apple, Mac OS, and QuickTime are trademarks of Apple Inc., registered 
in the United States and other countries. Safari is a trademark of 
Apple Inc. Microsoft, ActiveX, Windows, and Windows Media are either 
registered trademarks or trademarks of Microsoft Corporation in the 
United States and/or other countries. Sun, Java, and Solaris are 
trademarks or registered trademarks of Sun Microsystems, Inc. in the 
United States and other countries.
---------------------------------------------------------------------------
    Another major factor is the growing use and sophistication of 
commercial-grade spam email filters, blacklists, and experimental 
``data mines,'' which radically diminish the number of mass investment 
solicitations received by the average investor. Additionally, tough 
state and federal anti-spam laws, and high-profile prosecutions under 
those laws, likely helped to deter spammers.\3\
---------------------------------------------------------------------------
    \3\ See http://www.msnbc.msn.com/id/18955115/(arrest of Robert Alan 
Soloway); http://www.sophos.com/pressoffice/news/articles/2008/02/
japan-spam.html (Yuki Shiina); http://spamkings.oreilly.com/archives/
2006/03/stock_spammers_stung_by_secret.html (``g00dfellas'' spam gang).
---------------------------------------------------------------------------
    General market conditions also likely played a role in the decline 
in tips and complaints. Email stock promoters' activities lend 
themselves best to the promotion of obscure, thinly-traded stocks, such 
as the tech stocks that flourished during the late 1990s market 
``bubble.'' Since the collapse of that bubble, it seems fewer investors 
have been interested in these microcap stock promotions.
    It is important to note that, while the number of tips and 
complaints went down significantly in 2008, the figure is still 146 
percent higher than it was 5 years previously. By comparison, the 
number of full-time equivalents in the SEC's enforcement program 
increased by only 23 percent during that period. Also, while the 
quantity of complaints the SEC received decreased between 2007 and 
2008, the SEC believes that the quality of complaints has increased 
dramatically. Thus, the agency's workload from these complaints has 
actually become greater over the past year, despite the reduced number 
of complaints relating to spam.

                     ADDITIONAL SUBMITTED STATEMENT

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

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

                           PREPARED STATEMENT

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

                                STAFFING

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

                         STUDENT LOAN REPAYMENT

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

                              UNDERFUNDING

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

                              SPECULATION

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

                             INDEX TRADERS

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

                                 MERGER

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

                         DERIVATIVES REGULATION

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

         ENFORCEMENT PENALTIES: AMOUNT, RECOVERY AND DETERRENCE

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

                         DERIVATIVES REGULATION

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

                             INTERNATIONAL

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

                     ADDITIONAL COMMITTEE QUESTIONS

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

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

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

                          SUBCOMMITTEE RECESS

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

 
  FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR FISCAL 
                               YEAR 2010

                              ----------                              


                         TUESDAY, JUNE 9, 2009

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

                       DEPARTMENT OF THE TREASURY

                        Office of the Secretary

STATEMENT OF HON. TIMOTHY F. GEITHNER, SECRETARY

             OPENING STATEMENT OF SENATOR RICHARD J. DURBIN

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

                   STATEMENT OF SENATOR SUSAN COLLINS

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

                STATEMENT OF SENATOR FRANK R. LAUTENBERG

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

                    STATEMENT OF SENATOR BEN NELSON

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

                    STATEMENT OF SENATOR JON TESTER

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

                STATEMENT OF SENATOR CHRISTOPHER S. BOND

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

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

             SUMMARY STATEMENT OF HON. TIMOTHY F. GEITHNER

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

                           PREPARED STATEMENT

    Thank you, Mr. Chairman, I'd be happy to answer any 
questions.
    [The statement follows:]
               Prepared Statement of Timothy F. Geithner
    Chairman Durbin, Ranking Member Collins, members of the 
Subcommittee, I appreciate the opportunity to testify before you for 
the first time as Treasury Secretary on the President's fiscal year 
2010 budget request for the Department of the Treasury.
    While we see some initial signs of economic improvement and the 
financial system is beginning to heal, our country faces very 
substantial economic and financial challenges.
    President Obama and his administration are working to meet these 
challenges by getting Americans back to work and getting our economy to 
grow again; by restoring fiscal discipline to ensure a sustained 
recovery, and by making the long-neglected investments in health care, 
energy and education needed to enhance America's global competitiveness 
and produce more balanced, sustainable growth over the long-term.
                       treasury's key priorities
    To achieve these goals, we are repairing and reforming our 
financial system so that it works for, not against, a recovery that 
serves all Americans.
    To restore growth and meet our fiscal goals, we are redesigning and 
bolstering enforcement of our tax code so that it is both fairer and 
more efficient.
    To advance our interests globally, we are working with other 
nations to promote economic recovery and financial repair, and to 
ensure more open markets for U.S. business.
    And to protect the country, we are deploying all of the tools at 
our disposal to exclude terrorists, proliferators, and other illicit 
actors from the international financial stage, and thereby secure our 
financial system and combat threats to our security.
    The fiscal year 2010 budget that you have before you will allow 
Treasury to pursue these core missions assigned to the Department by 
the President and the Congress. The $13.4 billion request includes a 
$676 million, or 5.3 percent, increase over enacted 2009 levels.
    Of this increase, $14 million would go to bolstering the staffs of 
our Domestic Finance and Tax Policy offices, which are at the epicenter 
of administration efforts to support rigorous analysis and 
implementation of revenue policy and to redesign and improve our tax 
policies and tax code.
    Some $137 million would be devoted to more than doubling our 
Community Development Financial Institutions (CDFI) Fund to ensure that 
the benefits of our financial repairs reach beyond our major banks and 
businesses to help economically distressed communities. These 
communities were underserved by our financial system even before the 
current crisis, and have been deeply hurt by the job losses and 
business failures that the crisis has spawned.
    A total of $332 million would be devoted to new Internal Revenue 
Service (IRS) enforcement efforts, including $128.1 million to add 
nearly 800 new IRS employees to combat offshore tax evasion and improve 
compliance with U.S. international tax laws by businesses and high-
income individuals. Another $130 million would go to bolster the 
security of the IRS information technology, improve the efficiency of 
its business systems and upgrade its fraud detection capabilities.
    Although not directly under the jurisdiction of this Subcommittee, 
our budget also includes funds to meet our international obligations to 
help us in mounting a global response to the crisis and in creating 
mutually reinforcing growth around the world.
    As we seek these additional funds to respond to our Nation's 
troubles, we have cut back on some programs that are either ineffective 
or that we believe can be safely delayed.
    For example, while the Earned Income Tax Credit (EITC) continues to 
be one of the most effective anti-poverty programs that the Federal 
Government administers, the Advanced EITC, a related program which 
provides benefits in advance of filing a tax return, has been prone to 
exceptionally high levels of error and low use by those eligible for 
it. Accordingly, our budget proposes to end this latter program for 
savings next fiscal year of $125 million.
    Similarly, even as we seek to increase capital investment for the 
IRS, our budget would reduce the Department-wide capital investment 
account by 65 percent for a savings of $17 million.
    The Treasury budget would reduce the number of international 
economic attaches from 20 to 16, saving $2 million next fiscal year. It 
would absorb a portion of our non-pay inflation through more efficient 
use of contracting and other cutbacks, saving $18 million. It would 
take advantage of the growth of efficient electronic filing of tax 
returns to reduce the IRS processing budget by $8 million next fiscal 
year.
    Given we have had control over the budget for fewer than 5 months, 
the reductions that I have just described represent a first attempt to 
do more with less. As we begin work on the Budget for fiscal year 2011, 
Treasury has prepared itself for a more rigorous assessment of its 
spending.
    I have already issued guidance to Treasury senior staff that says, 
in part: ``To afford any new investments, we will have to take new 
approaches to solving old problems. I expect each bureau and policy 
office to identify opportunities for innovation that will transform how 
Treasury fulfills its missions in order to both improve performance and 
reduce cost.''
    In addition, the President has announced his intention to nominate 
Dan Tangherlini to be our Assistant Secretary for Management and 
Budget. Consistent with the President's mandate, I will look to Mr. 
Tangherlini to scour the Treasury's budget for efficiencies and cost 
savings. He comes to the job with an impressive track record of working 
on budget, management and performance issues with District of Columbia 
Mayor Adrian Fenty, and I am convinced that he will bring the same 
results-oriented approach to the Federal Government.
              repairing and reforming the financial system
    The President has assigned the Treasury to repair key sectors of 
our economy so that they help revive growth and produce broadly shared 
prosperity.
    The Treasury has been working to repair and reform every major 
element of our financial system, and to fill gaps in the system so that 
it benefits all Americans.
    Last month, Federal banking supervisors announced results of the 
stress tests that we asked them to conduct on our 19 largest financial 
institutions. The aim of these assessments was to ensure that these 
institutions have sufficient capital buffers to absorb the losses that 
they could suffer under worse-than-expected economic conditions and 
continue to make the loans necessary to sustain recovery.
    The clarity and transparency provided by the tests has helped 
improve market confidence in the banks, making it possible for them to 
collectively raise nearly $90 billion through private equity offerings, 
bond issuances without Government guarantees and sales of business 
units.
    On housing, Treasury is working with HUD to bolster our housing 
markets by helping to drive down mortgage interest rates and by 
assisting responsible homeowners to refinance into more affordable 
mortgages or modify their at-risk loans to avoid preventable 
foreclosures.
    In terms of the non-bank financial sector, Treasury is working to 
revive critically important securitization markets for both new and old 
asset-backed securities.
    We have begun to boost new consumer and business lending by re-
starting the markets for asset-backed securities that financed almost 
half of all lending in this country before the crisis. There were more 
securities of this type issued the 4 months after we launched our 
effort than in the preceding 9.
    Additionally, Treasury is about to join with private investors in 
seeking to restart the markets for legacy mortgage loans and securities 
that are now stuck on bank balance sheets, keeping these institutions 
from making new loans to families and businesses.
    As we have made repairs to the financial system, we have understood 
that repair alone is not enough. We must also reform the system so that 
it is less prone to crises of the dimensions that we now face.
    In the next few weeks, we will outline a comprehensive plan of 
reform that will include systemic risk regulations to ensure that no 
large and interconnected firm or market can take on so much risk that 
its failure could destabilize the entire financial system. The plan 
calls for bolstering consumer and investor protections. And it will 
streamline our out-of-date regulatory structure so that our regulatory 
system matches the size, shape and speed of our modern financial 
system. Together, these changes will help prevent another crisis of the 
magnitude that we have just lived through, and give the Government new 
tools to better cope with similar problems should they occur in the 
future.
    In addition to the financial system, Treasury is helping to ensure 
that the Nation has a viable auto industry in the future. We are 
working with General Motors and Chrysler to make sure these companies 
make the changes necessary to again prosper. As President Obama has 
said ``we cannot . . . must not . . . and will not let our auto 
industry simply vanish.''
    The resources for administering key elements of both our financial 
and auto repair efforts were authorized by the Emergency Economic 
Stabilization Act.
    These activities are being handled by our Office of Financial 
Stability (OFS), which is focused on ensuring that TARP funds serve the 
public purpose of economic and financial stabilization; that they are 
fulfilling this purpose in ways that protect taxpayers; and that we can 
provide a clear account to the Congress and the American people about 
the effectiveness of the funds' use.
    In order to administer TARP and ensure compliance by TARP 
recipients, OFS has had to quickly assemble a substantial staff. OFS 
staffing levels, which were at 88 when I arrived in office, had risen 
to approximately 165 by the end of last month and are expected to rise 
to 225 by next fiscal year. The office's budget for next fiscal year 
will total $262 million, a 6 percent decline from the current fiscal 
year's $279 million. The change is largely due to a decline in 
estimated spending on contracts as part of the program's initial start-
up.
    While TARP is proving effective at improving the immediate 
stability of the financial system, the scope of the issues that this 
administration and this Department face extend beyond TARP to include 
striking the delicate balance between intervention and allowing market 
participants latitude to operate; devising a new financial regulatory 
structure for the future; and working through the tough problems of 
what form our Government-sponsored enterprises, Fannie Mae and Freddie 
Mac, should take as we emerge from this difficult period.
    All of these issues fall to Treasury's Office of Domestic Finance, 
which, together with OFS, is having to operate on new policy terrain, 
tackling problems that the country has not faced in generations and for 
which we have few guideposts in our immediate past.
    That is why the workload of the Office Domestic Finance has already 
expanded greatly, and is all but certain to expand still further. And 
it is why we are seeking to modestly increase its size and bolster its 
expertise in several critical areas.
    Our budget requests an additional $8.7 million for the office to 
add 26 full-time equivalent (FTE) positions to the staff. This 
represents a 26 percent increase from the office's current fiscal year 
staffing of 101.
    The additional funds will be used to create two new Deputy 
Assistant Secretary positions, one for housing finance, small business 
and consumer issues, and a second for capital markets. These two new 
officials will lead teams that will perform the economic and 
institutional research necessary to ensure that we understand all of 
the policy options in each of these areas and choose the most effective 
ones for solving our problems.
    As we seek additional funds for Treasury, we must also seek them 
for the front-line institutions that will sustain our economic recovery 
and ensure that its benefits are broadly shared.
    Our budget would more than double the resources of the Community 
Development Financial Institutions (CDFI) Fund to $243.6 million. The 
fund's mandate is to help low-income, economically distressed 
communities that were poorly served by our financial system even in 
economic good times, and--although they had nothing to do with causing 
current conditions--have been significantly hurt by the economic and 
financial fallout of the crisis that we now face.
    The $136.6 million, or 128 percent increase in funding, would allow 
this program to support financial institutions in making job-creating 
investments and in providing access to capital in communities that are 
often considered too risky for mainstream financial institutions to 
serve. By targeting lenders and borrowers in these communities, the 
Fund would help some of our most vulnerable populations weather the 
crisis and benefit once recovery is underway.
    The aim of the fund is to make sure that we provide distressed 
communities with more than simply Government grants and aid. We must 
also build the capacity of their local financial institutions to ensure 
that capital is flowing to homebuyers and businesses so that they can 
finance their own economic futures. Since its inception in 1994, the 
fund has directed nearly $1 billion to distressed communities, and 
allocated $19.5 billion in tax credits through its New Markets Tax 
Credit program.
    Financial institutions funded through the CDFI program make loans 
to small businesses and micro-enterprises and take equity positions in 
them. They provide mortgages to low-income homebuyers, and finance 
developers of low-income housing and community facilities, such as 
charter schools, health clinics and child care centers.
    One example can be seen right here in the Anacostia neighborhood of 
Washington, DC. City First Bank--a local CDFI--and Charter Schools 
Development Corporation partnered to provide a $13.3 million New 
Markets Tax Credit for the Thurgood Marshall Academy, the city's first 
charter school focused on law, serving 360 students in grades 9 through 
12 and achieving a 100 percent college acceptance rate for its first 
three graduating classes.
    Historically, the CDFI program has been heavily oversubscribed and 
has had to turn away qualified applicants. For example, in the current 
fiscal year, the program for CDFI financial and technical assistance 
awards is budgeted at $55 million, but it expects to receive 
applications for more than $500 million in funding.
         redesigning the tax system for fairness and efficiency
    The President has asked Treasury to redesign and bolster 
enforcement of our tax code so that it supports growth, sets the stage 
for our return to a sustainable fiscal path, and accomplishes these 
goals in a manner that is fair, efficient and supportive of our 
society's broadest goals.
    To make good on the President's assignment, our budget requests a 
modest increase in funding for Treasury's Office of Tax Policy and more 
substantial increases to expand IRS enforcement activities and to 
improve its information technology.
    Treasury has moved quickly in implementing the more than 30 tax 
provisions of the President's economic recovery plan. Treasury also has 
played an integral role in designing the tax provisions of the 
President's fiscal year 2010 budget, and it will play a similar role in 
implementing these.
    The President has made clear that he will not seek any major 
revenue increases until 2011 when the recovery should be firmly in 
place. He has, however, been equally clear that once recovery is 
underway, we must get our fiscal house in order or risk having 
Government borrowing crowd out productive private investment. Treasury 
and the White House will work with Congress to make the tax changes 
that are necessary to reduce deficits and to do so in a manner that is 
fair to all Americans.
    As part of our efforts to make sure that the tax system is working 
for recovery and is operating fairly, we have designed new policies to 
curb the use of off-shore tax havens, close the international tax gap, 
remove tax incentives for companies to shift jobs overseas, and replace 
these incentives with ones that encourage creation of jobs at home.
    Our tax work on the recovery plan, the fiscal year 2010 budget, and 
these international tax issues are just the beginning of an ambitious 
agenda for this administration.
    On healthcare, the President has made clear that the road to fiscal 
discipline and to solvency for Medicare and Social Security runs 
through overall healthcare reform. Although much of the cost of the 
President's reform plan will be covered by savings from the system, we 
will need to design programs to cover some of the costs in ways that 
are fair to all Americans and do not harm the economy. Treasury is 
deeply involved in this effort and in the related work to expand 
coverage and improve our healthcare system in other important ways.
    On retirement and economic security, Treasury and, in particular, 
the Office of Tax Policy, is taking the lead in developing and actively 
working with Congress to flesh out the initiatives proposed in the 
President's budget to help enhance retirement security and savings for 
the half of working Americans who have no retirement provisions beyond 
Social Security. These proposals would make it easier for people to 
save for their own retirement, either through their workplaces or on 
their own, and would move us toward universal retirement savings 
coverage.
    On climate change, Treasury is already working closely with 
Congress to design the auction mechanisms that will be needed to 
implement the administration's greenhouse gas cap-and-trade program.
    Our Office of Tax Policy has been deeply involved in all of these 
issues from the outset of the administration. Like our Office of 
Domestic Finance, its workload already has substantially increased and 
is certain to grow as the health reform, retirement security and 
climate change debates get underway in earnest.
    At the moment, the Office of Tax Policy's career staff includes 30 
lawyers and 44 economists as well as support staff for an overall 
staffing level of 93. This is lower than its usual complement of over 
100 professionals.
    Our fiscal year 2010 budget would increase the office budget by 
$4.9 million to add 15 full-time equivalent (FTE) positions in order to 
increase overall staffing to 108, and would therefore represent a 
return to historical norms. The additional staff is needed to perform 
analysis and revenue estimates for new policy proposals, conduct 
research for, among other things, congressionally mandated studies, and 
develop regulations and guidance for new legislation.
    The vast majority of the new funds that we request in this budget 
are for improving the enforcement efforts and the information 
technology of the IRS.
    As I have said, $332 million would go to new IRS enforcement 
efforts, including $128.1 million to improve international tax 
compliance. The balance of these funds would be used to support three 
critical programs: 755 employees to increase examinations of tax 
returns for businesses and high-income individuals; 300 employees to 
expand the IRS document matching program, which compares tax returns to 
other forms such as W-2s and 1099s; and an additional 491 employees to 
improve collection operations and build two new IRS automated 
collection center sites.
    Turning to IT, our Budget requests a $90 million increase in 
funding to protect taxpayers' personal records from the increasing 
number and sophistication of Internet-based attacks. With these funds, 
the agency will deploy state-of-the-art, automated tools to improve 
record access management, risk assessment and system auditing. This 
effort would address concerns noted in the past by both the Government 
Accountability Office and the Treasury Inspector General for Tax 
Administration.
    Our budget also requests an additional $18 million for systems to 
help the IRS return review program detect noncompliance and fraudulent 
refunds, and a $22 million increase to continue modernizing the 
agency's core taxpayer account database and modernized the e-File web-
based platform.
              reengaging with the world on economic issues
    The President assigned Treasury to ensure that this country 
reengages with the world, not just on issues of war and peace, but also 
on the current crisis, and on issues crucial to our common economic 
futures.
    This is a global crisis. Recovery here depends on recovery abroad. 
We are working closely with other major economies to put in place the 
fiscal stimulus and make the financial repairs necessary to ensure U.S. 
and global recovery.
    The United States is seeking to mobilize the financial resources of 
the better-off nations to help the emerging and developing economies 
that have been especially hard-hit by this crisis. We are doing this 
for more than simply humanitarian reasons; as recently as last fall, 
these economies accounted for fully 42 percent of all U.S. exports.
    Last month, the President and leaders of the other G-20 nations 
agreed on the need to make more than $1 trillion in financial resources 
available to support global growth and trade.
    Those funds include our commitment of up to $100 billion for an 
expanded New Arrangements to Borrow, a permanent back-up mechanism that 
provides the International Monetary Fund with supplemental resources to 
help emerging markets and developing nations weather the crisis.
    As part of our effort to rekindle global growth for the sake of our 
own recovery, we are seeking to meet our past and present financial 
commitments to the multilateral development banks that help emerging 
and developing countries.
    Although the funds to do this are not directly within the purview 
of your Subcommittee, I mention them to illustrate how Treasury's 
entire budget is tailored to let us fulfill the missions that the 
President has set out for us. Our budget request includes $2.5 billion 
for international programs, most of which would serve to meet our past 
and present commitments to the multilateral development banks.
    Our financial reform effort in the United States must be matched by 
similarly strong efforts elsewhere in order to succeed.
                               conclusion
    Before I end, let me say a word about the Department's staff. I 
have the honor of leading a team of smart and dedicated individuals who 
are working to make our Government more effective and our society 
fairer, who are following a long tradition of debating policies 
fearlessly on their merits, doing what is right and not what is 
expedient, and drawing on the best ideas and expertise that are 
available. They are performing an incalculable service to our country 
in these challenging times, and I am immensely grateful to them.
    The Department of the Treasury is responsible for promoting the 
Nation's economic prosperity and protecting its financial security. We 
advance our interests around the world through the strength not only of 
our economy but of our ideas.
    This President and Treasury have already begun the hard work of 
recovery and reform. Our fiscal year 2010 budget will allow us to 
pursue these critical goals, and deliver the balanced and sustainable 
growth that the American people seek and deserve.

                          MORTGAGE FORECLOSURE

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

                     TROUBLED ASSET RELIEF PROGRAM

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

                         EXECUTIVE COMPENSATION

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

                      FAILED BANKING INSTITUTIONS

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

                              TOXIC ASSETS

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

                          AUTOMOBILE INDUSTRY

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

                      FINANCIAL REGULATORY REFORM

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

              TROUBLED ASSET RELIEF PROGRAM: RESERVE FUND

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

               EXTENSION OF TROUBLED ASSET RELIEF PROGRAM

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

           TRANSPARENCY OF THE TROUBLED ASSET RELIEF PROGRAM

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

           REPAYMENTS UNDER THE TROUBLED ASSET RELIEF PROGRAM

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

                      CREDIT CARD INTERCHANGE FEES

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

             STAFFING OF THE TROUBLED ASSET RELIEF PROGRAM

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

                   AUTOMOBILE DEALERSHIP TERMINATIONS

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

                      FINANCIAL REGULATORY REFORM

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

                 TERMINATION OF AUTOMOBILE DEALERSHIPS

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

                            FEDERAL DEFICITS

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

                      FINANCIAL REGULATORY REFORM

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

              FINANCIAL PRODUCT SAFETY COMMISSION PROPOSAL

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

                               USURY CAP

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

                           REGULATORY REFORM

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

                   STRESS TESTS AND ECONOMIC RECOVERY

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

               REFORMING GOVERNMENT SPONSORED ENTERPRISES

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

                     ADDITIONAL COMMITTEE QUESTIONS

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

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

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

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

                  troubled asset relief program (tarp)
    Question. TARP places strict limitations on compensation for 
executives of companies receiving financial assistance from the federal 
government, and the Recovery Act strengthened those restrictions after 
weaknesses in the original TARP restrictions emerged. GAO reports that 
Treasury has been working to increase oversight and compliance with 
executive compensation restrictions, including the new provisions 
included in the Recovery Act.
    Please provide an update on the steps Treasury is taking to 
institute a clear, robust process to monitor compliance with the 
executive compensation restrictions.
    Answer. On June 15, 2009, Treasury published an Interim Final Rule 
(``IFR'') entitled ``TARP Standards for Compensation and Corporate 
Governance'' that implements the executive compensation provisions of 
the Recovery Act. The IFR sets forth detailed restrictions on executive 
compensation applicable to TARP recipients, as well as periodic 
reporting and certification requirements and other procedures for 
monitoring compliance. The IFR also provides for the appointment of a 
Special Master, who has the responsibility to (i) review and approve 
the compensation of each of the 25 most highly compensated employees of 
each TARP recipient that has received exceptional assistance, (ii) 
review and approve the compensation plans applicable to the next 75 
most highly compensated employees of each such TARP recipient, (iii) 
review prior compensation paid to Senior Executive Officers by TARP 
recipients and negotiate the return of any payments that are found to 
have been contrary to the public interest, and (iv) issue interpretive 
guidance under the rule. All TARP recipients will be required to submit 
detailed compensation information in order to facilitate the review 
process.
    Question. In light of criticism that Treasury was not requiring 
institutions receiving TARP funds to provide detailed reports on their 
use of taxpayer dollars, Treasury has required that all participants in 
the Capital Purchase Program complete a monthly survey of lending 
activities. Treasury has declined to seek any further details on any 
TARP recipients' use of funds, with the exception of Citigroup and Bank 
of America, citing that such data would not be useful and would be 
difficult to gather.
    However, the Special Inspector General for TARP sought more 
detailed data from over 350 TARP recipients and found that banks were, 
in fact, able to provide a reasonable level of detail on their use of 
funds. The IG reported: ``. . . one thing is clear: Treasury's 
arguments that such an accounting was impractical, impossible, or a 
waste of time because of the inherent fungibility of money were 
unfounded.''
    Why has Treasury declined to require more detailed reporting from 
TARP beneficiaries?
    Answer. It is important to distinguish between Treasury's capital-
enhancement programs and its other programs. The Capital Purchase 
Program, Capital Assistance Program and institution-specific programs 
for AIG, Citigroup and Bank of America are designed to provide capital 
to cushion against losses and allow financial institutions to continue 
operating in the ordinary course of business, including lending to 
consumers and businesses. In order to serve its purpose, capital must 
be available for any legitimate business purpose. Although Treasury 
requires applicants for the Capital Assistance Program to specify how 
they intend to use the funds, accounting for actual use of particular 
dollars invested as capital is not a meaningful exercise and therefore 
not required. Because banks' double-entry bookkeeping systems do not 
trace the paths from creating liabilities (receiving capital) to 
investing in assets (making loans), we cannot precisely attribute the 
contribution of TARP capital to particular uses. The banks can, 
however, report trends in loans and other uses of funds, and we do 
require that they report such to Treasury.
    On the other hand, Treasury's home ownership preservation program, 
small business lending initiative, auto industry programs, and the 
terms of Treasury's participation in the Term Asset Backed Securities 
Loan program impose specific limitations on the use of TARP funds, and 
require controls and periodic reports to insure that those limitations 
are respected.
    Question. When Congress approved TARP, the expectation was that 
TARP funds would be used to purchase toxic assets--mainly, assets 
related to subprime and other troubled mortgages. Since then, TARP has 
evolved into 12 separate programs aimed at addressing different stress 
points in the market and at rebuilding a basic lending capability for 
domestic markets. The complexity of this program has created a 
communications challenge. GAO reported in March 2009 that TARP is still 
very poorly understood by Congress and the public. GAO reports that 
Treasury has not yet developed an effective strategy for communicating 
with Congress, the public, and other stakeholders.
    How can Treasury's actions support increasing confidence in the 
financial markets if the public does not have a basic understanding of 
the goals of TARP?
    How can the Department better articulate and justify its strategy 
so that Americans and the markets can regain confidence in the economy?
    What can Treasury do to educate concerned members of the public?
    Answer. Treasury publishes a wealth of information about TARP 
investments and the activities of the Office of Financial Stability. In 
addition to transaction reports detailing every transaction, monthly 
financial reports, and tranche reports that review how each $50 billion 
of TARP funds have been spent, Treasury posts on its 
FinancialStability.gov website all program descriptions, guidelines, 
frequently asked questions and answers, contracts, press releases, and 
a variety of other information about TARP. Treasury also maintains a 
separate MakingHomeAffordable.gov website that sets forth extensive 
information about Treasury's homeownership preservation programs.
    Nevertheless, Treasury recognizes that public perceptions of TARP 
could benefit from improved communications. To that end, Treasury is in 
the process of developing and implementing an overall communications 
strategy that will include regular proactive briefings for Congress and 
the press, clearer explanations of TARP programs and OFS activities, 
discussions of progress being made in achieving program objectives, and 
expanded efforts to communicate with and educate the public about the 
goals and achievements of TARP.
    Question. Firms that repay preferred stock purchased under the TARP 
program will also have the option to repurchase warrants that Treasury 
holds at Fair Market Value.
    How is Treasury ensuring that the valuation of the warrants is 
accurate so that taxpayers get a return at fair market value?
    Answer. Treasury will ensure that taxpayers' interest are protected 
by conducting a process to determine whether to accept the bank's 
initial determination of the fair market value of the warrants. 
Treasury has developed a robust set of procedures for evaluating 
repurchase offers, based on three categories of input: market prices, 
financial modeling, and outside consultants/financial agents.
    Question. Contracts for implementing TARP include the primary, 
large contract for the asset manager, Bank of New York Mellon, as well 
as smaller contracts for tasks such as legal and accounting services. 
These contracts have for the most part been priced on a ``time and 
materials'' basis. GAO has warned that such contracts are considered 
``High Risk'' to the taxpayer dollar. This is because, unlike fixed-
price contracts, the structure of the time-and-materials contracts 
provides no incentive for the contractor to control for cost or labor 
efficiency. In a recent TARP review, GAO reported that in response to 
GAO's warning, Treasury has converted two time-and-materials contracts 
into fixed-price arrangements and is closely assessing new contracts to 
identify those that may effectively utilize a fixed-price contract.
    What do TARP officials consider when determining the appropriate 
compensation structure for new contracts?
    Is Treasury conducting a thorough, comprehensive review of all of 
its existing contracts so that more can be converted to fixed-price, 
lower-risk arrangements?
    Answer. Treasury considers the degree to which the contract 
requirements can be clearly defined to permit negotiation of a 
reasonable price. In the legal services contracts, the requirement to 
create novel, unprecedented financial structures for government 
investment in private corporations inhibits Treasury's ability to 
accurately predict the level of effort that will be required. Over 
time, as certain transactions are repeated, our ability to reasonably 
predict the level of effort increases. Treasury gathers data on the 
number of hours required to complete transactions and uses the data to 
negotiate fixed prices on a per transaction basis.
    Opportunities have been limited thus far to convert significant 
number of contracts to fixed-price due to the difficulty in estimating 
with a reasonable degree of accuracy the extent or duration of the 
required services. Due to this high degree of uncertainty, fixed-price 
arrangements may not be appropriate for many TARP contracts. Treasury 
selects appropriate contract types based on the risk to successful 
performance and the capacity to negotiate a fair and reasonable price 
for the required services. Given the still-evolving nature of TARP, and 
the challenge of reasonably forecasting the level of effort required to 
design new financial structures and execute transactions, premature 
conversion to fixed price contracts would place Treasury at risk of 
agreeing to too high a price for services rendered. Treasury is 
gathering cost data from all of its time and materials and labor hour 
contracts to identify areas where the level of effort can be reasonably 
predicted, and the costs associated with those efforts, to support the 
future negotiation of fixed pricing for follow-on work where 
appropriate.
                                 ______
                                 
               Questions Submitted by Senator Ben Nelson
    Question. While much of the focus up until recent weeks has been 
placed on the auto manufacturers, the dealerships also have much at 
stake. Considering that the Treasury has provided auto manufacturers 
with a significant amount of funding and has taken on significant 
ownership in these companies, how much of the assistance already 
provided is the Treasury prepared to allow to dealerships that have 
lost their franchise designations and have been left with few options?
    Answer. Both General Motors (GM) and Chrysler and have committed to 
operating with transparency with regard to the dealership closings. The 
plans to consolidate dealer networks were developed by each company 
over a long period of time and were a part of their overall plans to 
restructure in order to achieve financial viability. Without the funds 
provided by the Treasury Department, GM and Chrysler's entire dealer 
network might have been eviscerated. Chrysler has worked to have the 
majority of its inventory off of the rejected dealership lots. GM has 
set up an appeals process for its rejected dealers and is providing 
them with 18 months of support to allow them to dispose of their 
inventory, which GM believes should be a sufficient amount of time 
given current inventory levels.
    Question. No one disputes the importance of the domestic auto 
industry to our country and economy. Everyone understands we aren't 
only talking about the auto manufacturers. For instance in my state we 
are also talking about the dealerships, parts supplier, and a host of 
other industries that are either touched directly or indirectly by the 
auto industry.
    However, I have great concerns about the United States government 
having an open-ended ownership stake in private companies because of 
the assistance that the federal government has provided.
    What oversight is the Treasury Department prepared to take or 
conditions established so that domestic automakers are being good 
stewards of taxpayer money and can ensure the taxpayers of a return of 
their investment?
    Answer. The government expects to protect the taxpayers' investment 
by managing its ownership stake in a hands-off commercial manner. Both 
companies now have new Boards of Directors comprised of distinguished 
business professionals who will help guide these companies through 
their ongoing restructurings. The Treasury Department will continue to 
monitor the taxpayer's investment under the TARP program and will seek 
to dispose of the ownership interest as soon as is practicable.
    Question. While the federal government is a reluctant stakeholder 
in domestic companies, what should the American taxpayer expect when it 
comes to the divestment of funds they've provided to these auto 
companies? Are there benchmarks of solvency that are established or are 
planning on being established that will allow the taxpayers to be 
repaid of their investment in the auto companies? Will repayment of 
federal funds be on a continual basis?
    Answer. The return will depend on the overall market, the economy, 
and the recovery of the auto sector. The decision to provide funds to 
the companies by the current Administration was based upon a 
determination that the companies have viable business plans. As a 
result, we will monitor GM and Chrysler's performance and seek the 
return of taxpayer funds as soon as is practicable.
    Question. How can technology best be utilized to maximize 
transparency with regard to TARP transactions and the use of TARP funds 
by recipients? How can we ensure that this information is available as 
quickly, comprehensively and understandably as possible, for the 
benefit of both taxpayers and market participants?
    Answer. Improving the ways in which the Office of Financial 
Stability (OFS) communicates its activities and shares relevant data 
with the public, market participants, and our oversight bodies is one 
of my highest priorities. Treasury has already improved its ability to 
share information through the development of our website, 
FinancialStability.gov, and I fully expect that the Internet will 
continue to play a central role in our efforts to operate in as 
transparent a fashion as possible.
    We are working to add to the website's functionality, increase the 
resources available through the site, and develop additional features. 
I believe we need to expand the ability of people to interact with OFS, 
such as through a question and answer feature, and offer presentations 
of information tailored to the widest possible audience, including 
those people who do not regularly read the business page or follow the 
financial markets.
                                 ______
                                 
              Questions Submitted by Senator Susan Collins
    Question. An analysis of the Obama administration budget proposal 
by the Congressional Budget Office projects that the public debt ratio 
will double in 10 years, to 82 percent of GDP. This would be the 
highest debt level since World War II.
    The CBO analysis also shows that the Obama budget will produce a 
deficit level averaging 5.3 percent of GDP across the 10-year budget 
window. Worse, the deficit level will be rising--not shrinking--toward 
the end of the 10-year period, reaching 5.7 percent in 2019.
    Last month, you told Bloomberg Television that: ``It's very 
important that this Congress and this president put in place policies 
that will bring those deficits down to a sustainable level over the 
medium term,'' and you added that the proper deficit target is 3 
percent of GDP or smaller.
    What policies do you believe should be put in place to reduce the 
deficit to 3 percent or less of GDP over the long term?
    Answer. When we developed the fiscal year 2010 budget, we projected 
that the budget deficit would shrink to just above 3 percent of GDP on 
average during 2012-2019. The Administration's Mid-Session Review 
projections show a higher deficit outlook, with deficits averaging just 
above 4 percent of GDP over that period. This increase is primarily 
driven by changes in our economic assumptions, based on new data on the 
severity of the recession that weren't available when we developed the 
fiscal year 2010 budget.
    Our first priority is to make sure that we do not choke off 
recovery in the near term by taking actions to reduce the deficit in 
the near term. As the recovery proceeds and the temporary surge in 
spending retreats, the deficit will fall. The process of developing the 
2011 budget will include proposals for further deficit reduction to the 
extent that they are needed to put the nation back on a fiscally 
sustainable path.
    Question. Thinking about our long-term debt situation for the 
moment, do you believe that it will be necessary to raise taxes to 
achieve a 3 percent deficit-to-GDP level?
    Answer. We agree that it is important to keep the deficit at a 
sustainable level relative to GDP in the long term. The proposed fiscal 
year 2010 budget moved the budget deficit to about 3 percent of GDP, 
with a combination of some programs that raise revenue and put fiscal 
restraint on discretionary spending. The updated economic assumptions 
in the Mid-Session Review, which reflect a more severe recession than 
evident when the 2010 budget was developed, have raised projected 
deficits relative to GDP over the 10-year budget window. We would 
consider a wide range of approaches consistent with the President's 
commitment if we see the need to further lower the deficit after the 
economy recovers.
    Question. In his testimony before the House Budget Committee last 
week, Federal Reserve Chairman Bernanke made the point that the debt 
cannot be sustained unless ``debt and interest payments . . . are 
stable or declining,'' with ``tax rates [that] are not so high as to 
impede economic growth.'' Do you agree with the Chairman that higher 
taxes can impede economic growth?
    Answer. Most economists agree that high tax rates can hurt economic 
growth and that taxes should be as low as possible while still funding 
the needs of the United States. But large and rising deficits that 
become a permanent part of the economic landscape also pose a threat to 
economic growth. They destroy confidence in the economy and reduce 
business capital spending, which will lower productivity and the 
standard of living.
    In the longer term, all policymakers will need to balance the goal 
of creating a sustainable fiscal path with the goal of keeping taxes 
low. It does the economy no good overall to have a large deficit that 
saps business and consumer confidence and crowds out business spending 
just to keep taxes low. And likewise, it does the economy no good if 
needed government programs are unfunded--with attendant consequences 
for productivity and quality of life--just to keep taxes low.
    We look forward to working with the Congress to find a sustainable 
balance of policies in keeping with the President's commitments.
    Question. The Treasury Department has an abysmal record for 
implementation of major capital IT investments. Some of these failures 
include FinCEN's Bank Secrecy Act (BSA) Direct System, IRS's web-based 
Electronic Fraud Detection System, and the abandoned Treasury 
Communication Environment.
    As of last week, the Director of FinCEN was unable to explain to 
Appropriations Committee staff the anticipated total cost for the new 
BSA IT system. The FinCEn Director could also not explain how the 
fiscal year 2010 requested budget increase of $11 million would be 
used. Given that this is a complex, multi-year effort, we would like to 
have more details about the fiscal year 2010 request and the long-term 
project costs. Secretary Geithner, can you tell us how the $11 million 
would be spent and what the long-term costs of this project will be?
    Answer. The fiscal year 2010 President's budget request is part of 
a larger, multi-year initiative, that provides the ability to begin the 
integrated BSA IT Modernization Effort, including the full scope of BSA 
IT modernization capabilities. The fiscal year 2010 request of $10 
million will be combined with base resources of $2.5 million to begin 
the project.
    Specifically, the resources included in the fiscal year 2010 
President's budget will be used to complete the planning, requirements, 
architecture and design (Lifecycle Milestone 3) activities for the 
following projects:
  --Infrastructure
    --IT Modernization Development and Test Environment
    --Storage Area Network (SAN)
  --Registered User Portal
    --User portals
    --Access Control
    --Identity Management
  --E-Filing
    --E-Filing
    --E-Forms/Paper Filer Analysis
    --Shared Filing Services/Work in Progress Database
  --System of Record (SOR)
    --SOR
    --Bulk Data Dissemination
    --Basic Query
    --Alerts
  --Query Audit Log
  --Advanced Analysis
    --Proactive Analysis
    --Analytic/Visualization Tool
    In terms of long-term costs, initial estimates are for a 4-year 
project plan estimated at $120 million; however, in order to create the 
most cost-effective solution for the taxpayer's dollar, estimates will 
be refined and adjusted based on the results of the fiscal year 2009 
requirements and alternatives analysis.
    Question. The stimulus provided the CDFI Fund with $100 million for 
additional grants under its core and Native American programs and to 
cover associated administrative expenses. The stimulus also gave the 
Fund an additional $3 billion in new markets tax credits. These new 
resources coupled with the Administration's fiscal year 2010 request of 
$243.6 million represent a huge expansion of the Fund's programs from 
the fiscal year 2009 appropriation of $107 million.
    The last two financial audits issued by the Treasury Office of 
Inspector General cited a ``significant deficiency'' in the CDFI's 
monitoring of grant recipients to determine if those recipients had 
complied with their grant agreements. The auditors reported that CDFI 
managers continued to have difficulty communicating with each other. 
The auditors called this situation a ``significant deficiency.'' I 
understand that the Treasury moved the chief financial officer's 
function out of the CDFI to the Department even though CDFI is required 
to have a CFO. Taken together, it appears that this office has some 
serious management and operational problems.
    Mr. Secretary, in light of the large increase for the CDFI in the 
budget request, could you please comment on these issues? Specifically 
I'd like to know what actions the Department has taken to ensure that 
CDFI is making grants and awarding tax credits in a speedy but 
responsible manner, and how CDFI will monitor those grants to determine 
the money is used for their intended purposes.
    Answer. Although Treasury's Office of the Inspector General (OIG) 
did identify concerns with respect to compliance monitoring and 
management communication, no material weaknesses were identified in 
either the fiscal year 2007 or fiscal year 2008 audits, and the CDFI 
Fund received a clean opinion on its fiscal year 2008 balance sheet. 
Since fiscal year 2007, the Department, in conjunction with the CDFI 
Fund, has taken action to improve the efficiency and operations of the 
CDFI Fund, bolstering: (1) the awardee selection process, (2) 
compliance monitoring, (3) management communication; and (4) other 
areas to better meet the CDFI Fund's mission and provide better service 
to stakeholders and constituents. In addition to improving operational 
efficiency, these steps were taken to ensure that the CDFI Fund is in 
alignment with Treasury directives, orders, policies, procedures, and 
guidelines. Treasury is confident that the CDFI Fund has the necessary 
systems and processes in place to ensure the full integrity of its 
award programs.
Awardee Selection
    The CDFI Fund has an extremely rigorous application selection 
process that ensures awards are made in an expeditious and responsible 
manner. Further, the Fund has developed compliance monitoring protocols 
and systems to ensure that award funds are used for their intended 
purposes.
    In fiscal year 2008, the CDFI Fund began working with an outside 
consultant to evaluate and streamline the CDFI Program award review and 
selection process. The resultant new Standard Operating Procedures 
streamline the application process and strengthen internal controls and 
accountability. Among other benefits, through these new procedures, the 
CDFI Fund reduced fiscal year 2009 grant selection decisions by about 
60 days and reduced the time from award selection to disbursements by 
120 days. In fact, the CDFI Fund anticipates disbursing substantially 
all of the $98 million in Recovery Act award dollars within 60 days of 
award announcement.
    With respect to its two largest programs, the CDFI Program and the 
New Markets Tax Credit (NMTC) Program, applicants are required to 
submit uniform application materials. Each funding application is rated 
and scored independently by three readers, followed by a Quality 
Assurance reviewer. Applications meeting previously established minimum 
aggregate scoring thresholds are considered eligible for an award. 
These eligible applicants are then reviewed again and an award 
determination is made.
    There are several internal control safeguards that mitigate against 
any one person being able to exercise undue influence over the 
selection of awardees, including:
  --Conflict of interest policies preclude a reader from reviewing an 
        application of an applicant for which the reader has a 
        previous, current, or potential relationship, financial or 
        otherwise.
  --Readers score applications independently and in remote locations. 
        They do not discuss their reviews with other team members. 
        Reviewers cannot communicate directly with one another 
        regarding their applications without first making contact with 
        the Quality Assurance reviewer.
  --Review Forms provide instructions to readers with respect to how 
        each element is to be scored, thus helping to limit reader 
        variance.
  --The relative weight ascribed to each scoring element is computer-
        generated and unalterable by the reader, thereby limiting the 
        degree to which a reader can change the outcome of an overall 
        application score.
  --Each Review Form is reviewed by a Quality Assurance reviewer to 
        ensure that (i) the reader followed the scoring guidelines and 
        (ii) the scores are appropriate, given the reader's ratings and 
        narrative.
  --If a reader review results in a scoring anomaly, the application is 
        re-scored by a fourth reviewer and the anomalous score will 
        likely be disregarded.
  --If the Selecting Official varies significantly from the 
        recommendation of the review manager, a third person (the 
        Reviewing Official) is engaged to make a final determination.
Compliance Monitoring
    The significant deficiencies noted by the Treasury Inspector 
General for the compliance area focused on a lack of consistency in 
following established written policies and procedures to determine 
awardee compliance. The auditor's recommendation to address these 
significant deficiencies was to increase staff resources dedicated to 
compliance and monitoring. The CDFI Fund implemented these 
recommendations, hiring a compliance manager and additional staff, as 
well as providing additional training to the compliance staff. It also 
updated compliance monitoring policies and procedures related to 
awardee financial statements.
    With respect to awardee compliance and performance monitoring, the 
CDFI Fund has developed automated on-line data collection tools, known 
as the Community Investment Impact System (CIIS) and the CDFI 
Compliance Monitoring System (CCMS), through which CDFI Program and 
NMTC Program awardees report institution- and transaction-level 
information and reports to the CDFI Fund annually, along with their 
audited financial statements. The CDFI Fund uses these reports to 
verify compliance with award agreements, and they are a valuable source 
of data for program evaluation and dissemination of information about 
the CDFI industry.
    In addition to reviewing the annual financial statements and 
reports from all of its awardees, the CDFI Fund engages in ``desk 
audits'' and site visits each year to a small percentage of awardees. 
Desk audits are ordered when a potential issue of non-compliance is 
discovered through standard review of annual reports, and generally 
require the awardee to provide additional clarifying information and/or 
supporting documentation. Site visits may be conducted in response to a 
particular incidence of non-compliance, and are scheduled for a random 
sample of awardees.
Management Communication
    The Department takes very seriously the Inspector General's 
findings with respect to the need to improve management communication 
within the Fund, and has instituted a number of initiatives to address 
this concern. In addition to weekly meetings with the management team, 
the CDFI Director has established quarterly all-hands meetings and 
monthly brown-bag lunches with the staff to ensure employees have an 
opportunity to raise concerns, receive recognition for exemplary work 
and discuss cross-cutting issues impacting all of the Fund's programs.
    Recently, the Fund established the position of Chief Operating 
Officer to bring together core management and administration functions.
    In addition, the Fund has encouraged program managers to conduct 
offsite planning retreats with their staff. Three out of seven managers 
have already held these sessions; the remaining four will be convened 
within the next 60 days.
Steps and Actions Taken to Improve CDFI Fund Operations
    Numerous other steps and actions taken to improve CDFI Fund 
operations include:
  --Comprehensive, third-party assessment of the CDFI Fund's financial 
        management functions and capabilities, which resulted in the 
        appointment of Treasury's Assistant Secretary for Management/
        Chief Financial Officer as the CDFI Fund's Chief Financial 
        Officer. Through this action, the CDFI Fund benefits from 
        standardized financial management and internal control 
        processes, enhanced cost effectiveness, and improved risk 
        management.
  --Creation of new programmatic Standard Operating Procedures by Booz 
        Allen Hamilton, which were implemented in late fiscal year 2008 
        and continue to be refined.
  --Comprehensive skills assessment (conducted by Booz Allen Hamilton) 
        of CDFI Fund program staff, to identify the resources necessary 
        to carry out the new Standard Operating Procedures.
  --Assessment of the CDFI Fund's human resource functions and the 
        transfer of services to the Office of Human Resources, which 
        allows CDFI Fund employees and managers to have consistent with 
        the rest of the Department's employees, in addition to the 
        establishment and implementation of human capital policies and 
        procedures approved by the Office of Human Resources.
  --Procurement of a minority-owned vendor to provide support in 
        updating position descriptions of all employees, training in 
        writing employee specific performance plans using Treasury's 
        new performance management system, and tailoring Individual 
        Development Plans for all CDFI Fund employees to reflect the 
        new Standard Operating Procedures and defined roles and 
        responsibilities.
  --Implementation of ``best practice'' recruitment tools so as to 
        recruit a diverse talent pool, including the use of multiple 
        recruiting mechanisms and hiring authorities.
  --Development and implementation of a new strategic plan for fiscal 
        year 2009 with line staff involvement.
  --Establishment of a performance-based awards program to encourage 
        continued improvements of the CDFI Fund's programs and 
        operations through motivation and reward of employees.
  --Creation of a strong collaborative working relationship with union 
        representatives to identify bargaining unit employee needs and 
        concerns.
    Question. Mr. Secretary, during your recent trip to China, I was 
troubled by the response you were given by some in China when you 
attempted to assure the Chinese that their investments in U.S. 
Treasuries are ``very safe.'' As the Washington Post put it in an 
editorial on Friday, the fact that the Chinese question the 
trustworthiness of bonds backed by the full faith and credit of the 
United States should serve as a ``wake up call'' for all Americans.
    China is currently the largest purchaser of U.S. Treasurys and many 
high level Chinese officials are worried about the safety of their 
assets and have begun to push for alternatives to the dollar as a 
reserve currency. Such a move would be disastrous for the United States 
and world economy. How do you intend to avoid such a move by the U.S. 
Government's largest creditor?
    Answer. We are confident that the dollar will remain the major 
currency of use in international transactions and thus a major reserve 
currency. The attractiveness of the dollar to foreign investors is the 
unparalleled breadth, depth, and liquidity of U.S. financial markets 
and the confidence that foreign investors have in the long-term 
prospects of the American economy and American economic policy.
    As Secretary of the Treasury, I am committed to ensuring that the 
U.S. economy and U.S. financial markets are vibrant, robust, and open 
to foreign investors. In addition to ensuring a growing economy, the 
President is committed to reducing the medium- and long-term federal 
budget deficit and securing fiscal sustainability.
    Question. Treasury has pumped at least $70 billion into the failing 
multinational corporation, AIG. This insurance company nearly failed 
not because of its insurance business but because it had engaged in 
hundreds of Credit Default Swaps transaction which it could not cover 
when counterparties all came calling for payment at the same time. AIG 
used much of the TARP funds to pay these counterparties, not only 
Goldman Sachs, but many foreign banks, including Deutsche Bank and 
Societe Generale. The Special Inspector General has raised questions 
about whether Treasury could have used its contribution to AIG as 
leverage to monitor these payments and force these counterparties to 
accept a ``haircut'' on their payments. After all, without Treasury's 
injection of funds, AIG would have failed and they likely would have 
received nothing at all. Do you believe Treasury missed an opportunity 
to save taxpayer dollars?
    Answer. When evaluating the costs to the taxpayer of Treasury's 
support of AIG, the benefits also should be taken into account.
    The disorderly failure of AIG would have caused direct damage to 
the system as a whole and would likely have lowered overall risk 
appetite throughout the system due to the heightened uncertainty that 
such an event would have generated. As with all of our TARP programs, 
we have two goals--preserving the stability of the financial system as 
a whole and making sure that the taxpayers are protected and 
appropriately rewarded for the risk they are taking. The mitigation of 
systemic risk generates significant, but difficult to quantify, 
benefits for taxpayers.
    Moreover, Treasury makes every effort to protect the taxpayer. 
Treasury works with AIG to maximize the chances that AIG can repay the 
government for its very significant financial support. In this way, the 
success of AIG as a business and the success of AIG's restructuring are 
very much in the taxpayer's medium- to long-term interest.
    Treasury understands that, as a steward of taxpayer dollars, we 
must work hard to ensure that the financial support offered to AIG is 
not wasted or abused.
    Treasury's ability to impose ``haircuts'' on AIG's derivatives 
counterparties is extremely limited due to the nature of derivatives 
contracts. Most derivatives trades are governed by standardized 
contracts (ISDAs) and many have so-called credit support annexes or 
CSAs, which govern the posting of collateral. The purpose of a CSA is 
to mitigate counterparty credit risk, thereby enabling the parties to 
focus on pricing and trading the underlying risk factors instead of 
worrying about whether their counterparty will be able to pay, should 
the trade swing in their favor. This feature facilitates liquidity, 
price discovery, risk transfer, and the functioning of markets 
generally.
    Under a CSA, the failure to meet a collateral posting obligation in 
full generally constitutes an event of default and results effectively 
in the immediate termination of the underlying trades. Most of the 
governing contracts also contain a provision that a default on any 
other such contract (e.g., with another counterparty) constitutes a 
default on that particular one, which gives rise to so-called ``cross-
default risk.'' Put simply, if AIG were to unilaterally ``haircut'' one 
of its counterparties by posting less than the contractually obligated 
amount, that would constitute an event of default, trigger cross 
defaults, and result in mass trade terminations. In the fall of 2008, 
AIG had almost 50,000 derivative trades in a wide variety of asset 
classes with over 1,000 counterparties. Defaulting then would have 
destabilized an already fragile market.
    This is why the Administration has proposed a special resolution 
regime to give the government the tools necessary for an orderly 
resolution of complex non-bank firms, in which creditors and 
counterparties may share in the losses.
                                 ______
                                 
           Questions Submitted by Senator Christopher S. Bond
                              toxic assets
    Question. The Administration seems to be still treating the 
symptoms but not the cause of the financial credit crisis. Throwing 
billions of taxpayer dollars at the banks without cleansing the toxic 
assets is simply throwing money down a rat hole. And it appears that 
your plan to address the toxic assets--the so-called PPIP program--may 
never get off the ground given FDIC Chairman Sheila Bair's recent 
announcement to postpone the program. Many people, including myself, 
are highly skeptical of the PPIP program, in the first place, since it 
is voluntary for the banks to participate. Without forcing the banks to 
clean up their balance sheets and expected losses mounting in the 
commercial and residential real estate markets and credit card markets, 
we are simply postponing their day of reckoning.
    In your testimony, you seem to indicate that Treasury intends to 
still move forward with PPIP.
    How do you intend to go forward with the PPIP program given the 
government's inability to attract bank participation since it is 
voluntary? Is there a Plan B?
    Answer. Treasury is committed to the Legacy Securities PPIP, and we 
have been finalizing the details over the past several months. The 
Legacy Securities PPIP will address the market for commercial mortgage-
backed securities (MBS) and non-agency residential MBS. Treasury 
announced in early July that it had selected nine pre-qualified fund 
managers that will receive up to $30 billion in investments from 
Treasury. As of October 5, 2009, Treasury announced three additional 
closings of Public-Private Investment Funds (PPIFs) established under 
the Legacy Securities Public-Private Investment Program (PPIP), 
bringing the total number of initial closings completed to five. As of 
October 5, total Treasury commitments to these five PPIFs amounts to 
$16.67 billion, of which $9.20 billion has been closed on. Including 
private capital, total PPIP closings to date amount to $12.27 billion. 
Fund managers have established relationships with small, minority- and 
women-owned businesses. Following an initial closing, each PPIF will 
have the opportunity for two more closings over the following 6 months 
to receive matching Treasury equity and debt financing, with a total 
Treasury equity and debt investment in all PPIFs equal to $30 billion 
($40 billion including private investor capital).
    Financial market conditions have improved since the early part of 
this year, and many financial institutions have raised substantial 
amounts of capital as a buffer against weaker than expected economic 
conditions. However, these legacy assets are still highly illiquid 
despite significant increases in the prices of many of these 
securities. The difficulty of obtaining private financing on reasonable 
terms to purchase these assets has limited the ability of investors to 
reduce liquidity discounts in legacy assets. The lack of clarity about 
the value of these legacy assets has also made it difficult for some 
financial institutions to raise new private capital and has continued 
to clog balance sheets.
    One of the PPIP's primary objectives is to facilitate price 
discovery and reduce excessive liquidity discounts that have been 
embedded in legacy asset prices. As capital is freed up, U.S. financial 
institutions should engage in new credit formation. Furthermore, 
enhanced clarity regarding the value of legacy assets should increase 
investor confidence and enhance the ability of financial institutions 
to raise new capital from private investors. Finally, an inherent link 
exists between the new issue securitization market and the secondary 
market performance of legacy assets. As spreads compress in the legacy 
asset market, new securitization issuance should come to market at 
reasonable borrowing costs. The new issue securitization market is an 
absolutely critical component of lending in the economy.
                           regulatory reform
    Question. Clearly, our financial regulatory system must be 
addressed since it played a role in the current credit crisis. One of 
the core issues is how to address ``too big to fail'' companies. Some 
argue that ``too big to fail'' is now ``too big to exist.''
    Is anti-trust reform being considered as part of the 
Administration's regulatory reform proposal? How are you proposing to 
align the incentives properly to prevent future irresponsible behavior 
by financial institutions and future taxpayer-funded bailouts?
    Answer. While effective enforcement of anti-trust laws is an 
important part of protecting consumers and competition in the financial 
sector, we have not proposed anti-trust reform as part of our 
regulatory reform proposals. We do not believe that the risks we 
propose to address are directly related to competition issues that can 
be addressed through an anti-trust framework.
    In the past 2 years, we learned that the system was not resilient 
enough to bear the failure of a large, interconnected firm or contain 
the damage from such a failure on the broader economy. The problem was 
that such firms had not been required to maintain sufficient capital 
and liquidity cushions and were not supervised on a consolidated basis. 
In other words, they were not required to internalize the risks they 
presented to the financial system. Our plan fixes that.
    Under our plan, firms that could present risks to the stability of 
the financial system if they failed will be subject to much higher 
standards so that the risk of failure will be lower. Moreover, our 
special resolution regime for nonbank financial firms gives the 
government an effective tool for an orderly resolution, in which 
creditors and counterparties may share in the losses rather than a 
bailout. In addition, we will reduce incentives for risk taking by 
reforming and raising capital standards for financial firms and working 
to address misalignment of incentives in specific markets, like the 
securitization markets, through such steps as requiring originators or 
sponsors to maintain an economic interest in the performance of a 
securitization.
    Finally, we have proposed steps to align the compensation of 
executives with the long-term interests of shareholders so that they do 
not have incentives for excessive risk-taking--both through regulation 
and supervision of financial firms and through corporate governance 
reform, such as ``say on pay'' legislation and legislation requiring 
independent compensation committees on corporate boards of directors.
                      social and economic missions
    Question. There is growing concern about asking weakened financial 
institutions to carry out the government's economic and social 
policies. While I understand the pressure to have bailed-out banks more 
engaged in efforts such as foreclosure mitigation, the danger is more 
financial losses that will be covered with more taxpayer funds. 
Further, this leads to more government involvement in dictating private 
business practices.
    What is the Administration's exit strategy when it comes to those 
financial institutions--such as Fannie and Freddie, Citi--who are being 
required by the government to carry out various social policy programs? 
How will you avoid the negative consequences of forcing these entities 
to fulfill the inherent conflicting goals of serving shareholders and 
meeting the needs of the public good?
    Answer. Given the important role that Fannie Mae and Freddie Mac 
play in the mortgage market, their participation in efforts to reduce 
preventable foreclosures is vital to speeding the housing recovery. The 
future of Fannie Mae and Freddie Mac will require careful consideration 
of the appropriate role of the Federal government in the mortgage 
market. The Administration has committed to undertaking a wide-ranging 
initiative to develop recommendations by early next year on the future 
of Fannie Mae and Freddie Mac. There are a number of options for the 
reform of the GSEs, including: (i) returning them to their previous 
status as GSEs with the paired interests of maximizing returns for 
private shareholders and pursuing public policy home ownership goals; 
(ii) gradually winding-down their operations and liquidating of their 
assets; (iii) incorporating the GSEs' functions into a federal agency; 
(iv) introducing a public utility model, in which the government 
regulates the GSEs' profit margin, sets guarantee fees, and provides 
explicit backing for GSE commitments; (v) instituting a conversion to 
providing insurance for covered bonds; or (vi) dissolving Fannie Mae 
and Freddie Mac into many smaller companies.
    The 2008 Housing and Economic Recovery Act (HERA) reformed and 
strengthened the regulation of Fannie Mae and Freddie Mac by 
establishing a Federal Housing Finance Agency (FHFA) as a new 
independent regulator. In addition to the establishment of FHFA, HERA 
also provided FHFA with enhanced authority to develop regulations 
regarding the safety, soundness, and the mission activities of Fannie 
Mae and Freddie Mac.
                              stress tests
    Question. Many experts question the reliability of the stress tests 
that were conducted on the large banks. Some believe that the results 
are too optimistic because the tests were too lenient and banks 
bargained with the government to reduce their capital needs. Further, 
to meet the capital levels required by the stress test results, it was 
reported that banks are relying on preferred-stock conversions for 22 
percent of their fundraising. One financial expert stated that 
``Conversions from preferred to common don't do anything; you can just 
ignore them.''
    Do you stand by these tests? If so, can you assure the American 
taxpayer that they will not be asked to fund additional rounds of 
bailouts for these large banks? Will you conduct more stress tests? If 
so, under what circumstances would you conduct more stress tests?
    Answer. The Supervisory Capital Assessment Process (SCAP) or 
``stress test'' was a carefully designed, stringent test. The test was 
designed to account for the highly uncertain financial and economic 
conditions by identifying the extent to which our largest banks are 
currently vulnerable to a weaker than expected economy in the future.
    Supervisors applied a historically high set of loss estimates on 
securities and loans, as well as a conservative view towards potential 
earnings that could act as a buffer against those losses. For instance, 
the 2-year, loan-loss rate assumed under the ``more adverse'' scenario 
exceeds the observed 2-year loss rates for U.S. commercial banks from 
1920 to present.
    Since the stress test results were announced more than $80 billion 
of total private capital has been raised by the 19 participating 
institutions. This additional private capital reduces the likelihood 
that the U.S. government will need to inject additional public capital 
into the banking system. Treasury must balance the desire to exit its 
investments in private sector entities as quickly as is practicable 
with the need to ensure that such a withdrawal does not put the 
progress that the Obama Administration has made in restoring financial 
stability at risk. To that end, Treasury will continue to provide 
support where it is necessary to sustain confidence in the financial 
system and to support critical channels of credit to households and 
businesses. The SCAP focused not only on the amount of capital but also 
on the composition of capital held by the largest banks. That is, SCAP 
focused on the proportion of capital that is common equity. The SCAP's 
emphasis on common equity reflects the fact that common equity is the 
first element of the capital structure to absorb losses, offering 
protection to more senior parts of the capital structure and lowering 
the risk of insolvency. All else equal, more common equity gives a bank 
greater permanent loss absorption capacity and a greater ability to 
conserve resources. Therefore, while we were particularly pleased with 
the record amounts of new common equity that was raised following the 
SCAP, we also believe that exchanges of preferred stock for common 
stock have enhanced the ability of some of our largest institutions to 
withstand a weaker than expected economic scenario.
    Currently there are no plans to conduct another stress test of the 
largest banks.
                             protectionism
    Question. Despite history's lessons on how protectionism 
contributed to the Great Depression, there continues to be active 
efforts from some in Congress to push trade protectionism, which will 
clearly endanger our economic recovery. There are reports that the 
``Buy American'' provision in the stimulus has slowed down some 
projects and has contributed to some job losses. Now, there is an 
effort on the House side that is pushing protectionism further on 
climate change legislation by tying federal aid to companies that only 
develop and produce plug-in cars in the United States.
    What is the Administration's official policy on protectionism and 
free trade? What is the Administration doing to prevent the growth of 
protectionism? Will it work to stop these types of protectionist 
measures?
    Answer. President Obama has clearly stated that trade is a key 
engine for U.S. economic growth and job creation. The President has 
also emphasized the importance of avoiding protectionism in responding 
to the financial and economic crisis.
    As part of the commitment made by G-20 Leaders to avoid 
protectionist trade measures, the World Trade Organization (WTO) was 
tasked to monitor and report on trade and trade policy-related 
reactions to the financial and economic crisis, a process in which the 
United States actively participates. While continued vigilance is 
important, thus far the process appears to be working--in large part 
due to the presence of WTO rules and the effect of very visible 
individual and collective monitoring. Moreover, where protectionist 
measures are identified, the United States will engage our trading 
partners in both bilateral and multilateral settings. Enforcement of 
WTO rules is a top priority.
    With respect to the American Recovery and Reinvestment Act of 2009, 
we appreciate that Congress responded to the President's call to avoid 
protectionism in responding to the financial crisis and included a 
provision in the Recovery Act that ensures that the ``buy American'' 
requirement is applied in accordance with U.S. international agreements 
on government procurement. Public comments have been solicited on an 
interim Federal procurement rule and interim OMB guidance implementing 
the ``buy American'' requirement in the Recovery Act. After a thorough 
review of the public comments, a final rule and final OMB guidance will 
be prepared with the aim of ensuring that the law is implemented 
effectively and consistently with the objective of promoting economic 
recovery and job creation.
    As the Congress prepares legislation, the Administration will 
continue to review proposed bills with a view to ensuring that they 
avoid protectionism and that they are fully consistent with our 
international trade obligations.
                        repayment of tarp funds
    Question. The Administration has begun some banks to repay funds 
from the Troubled Asset Relief Program (TARP).
    For these cases--especially those who are still considered ``too 
big to fail''--how can you assure the taxpayer that they will not 
return to the government trough for more bailout funds? Can you 
definitely say that they will not be back for more taxpayer-funded 
bailouts?
    Answer. The government's Supervisory Capital Assessment Program 
(SCAP), the so-called ``stress test'', estimated the capital needs for 
major banks under an adverse economic scenario. In particular, the SCAP 
estimated losses that those banks are likely to incur through 2010 and 
the appropriate level of loan loss reserves at the end of that period. 
The estimated losses and the required level of reserves took into 
account the potential for significant additional declines in housing 
prices and further increases in mortgage defaults resulting from, among 
other things, interest rate resets. We believe that the SCAP captured 
the likely capital needs of the major banks under an economic scenario 
that is more adverse than what we, and private forecasters, expect. 
Since the stress test results were announced, many major banks have 
raised a substantial amount of new private capital. This additional 
private capital reduces the likelihood that the U.S. government will 
need to inject additional public capital into the banking system. 
Treasury must balance the desire to exit its investments in private 
sector entities as quickly as is practicable with the need to ensure 
that such a withdrawal does not put the progress that the Obama 
Administration has made in restoring financial stability at risk. To 
that end, Treasury will continue to provide support where it is 
necessary to sustain confidence in the financial system and to support 
critical channels of credit to households and businesses.
                              auto rescue
    Question. The Administration has orchestrated and forced the car 
companies into bankruptcy but seems to be reluctant to force failed 
large financial institutions like Citi into restructuring.
    Why are you treating failed financial institutions differently from 
GM and Chrysler? If Citi is not forced into a FDIC-like restructuring, 
how can you assure the taxpayer that they will not return for 
additional bailouts?
    Answer. In acting to help financial institutions such as Citigroup 
and the automotive industry, the overarching goals of the 
Administration have been the same: promote the liquidity and stability 
of the financial system and protect the taxpayer. The actions taken 
have depended on the particular circumstances facing the different 
institutions.
    The Administration took action to help the automotive industry in 
order to prevent a significant disruption to the industry, as 
conditions in the industry posed a risk of creating significant 
disruptions to financial market stability and negative effects on the 
real economy of the United States. One of the conditions on which the 
Administration initially provided loans to these companies was that 
they develop viability plans. As a result of development and 
consideration of these plans, it became clear that the best way to 
achieve viability was for GM and Chrysler to substantially restructure 
their businesses. Due to a variety of factors, Chapter 11 bankruptcy 
proved to be the most effective means of accomplishing this important 
goal.
    Last fall, the Administration and Congress believed quick, forceful 
action was necessary to stabilize the financial system and certain 
financial firms. With Congressional authorization, these actions were 
taken to meet the specific needs of the time and to address the 
distinct difficulties faced by financial firms as a result of the 
crisis. The Treasury initially provided support to Citigroup on the 
same terms as over 650 institutions received funding pursuant to the 
Capital Purchase Program. The Treasury subsequently determined that 
additional assistance was needed to Citigroup pursuant to the Targeted 
Investment Program. This program is used when an institution is 
sufficiently important to the nation's financial and economic system 
that a loss of confidence in the firm's financial position could 
potentially cause major disruptions to credit markets or payments and 
settlement systems, destabilize asset prices, significantly increase 
uncertainty, or lead to similar losses of confidence or financial 
market stability that could materially weaken overall economic 
performance. This assistance is provided on terms that are more 
restrictive than those under the CPP program. These include more 
stringent restrictions related to executive compensation, dividend 
payments, share repurchases, corporate expenses, internal controls and 
other matters.
    Citigroup was also one of the banks examined as part of the 
government's Supervisory Capital Assessment Program (SCAP), the so-
called ``stress test'', which estimated the capital needs for major 
banks under an adverse economic scenario. In particular, the SCAP 
estimated losses that those banks are likely to incur through 2010 and 
the appropriate level of loan loss reserves at the end of that period. 
The estimated losses and the required level of reserves took into 
account the potential for significant additional declines in housing 
prices and further increases in mortgage defaults resulting from, among 
other things, interest rate resets. We believe that the SCAP captured 
the likely capital needs of the major banks, including Citigroup, under 
an economic scenario that is more adverse than what we, and private 
forecasters, expect. Since the stress test results were announced, many 
major banks have raised a substantial amount of new private capital. 
This additional private capital reduces the likelihood that the U.S. 
government will need to inject additional public capital into the 
banking system. Treasury must balance the desire to exit its 
investments in private sector entities as quickly as is practicable 
with the need to ensure that such a withdrawal does not put the 
progress that the Obama Administration has made in restoring financial 
stability at risk. To that end, Treasury will continue to provide 
support where it is necessary to sustain confidence in the financial 
system and to support critical channels of credit to households and 
businesses.
                        Internal Revenue Service

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

               OPENING STATEMENT OF COMMISSIONER SHULMAN

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

                           PREPARED STATEMENT

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

                        REGULATION OF PREPARERS

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

                          MISTAKES ON RETURNS

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

                       REFUND ANTICIPATION LOANS

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

                  PERFORMANCE ON TOLL-FREE PHONE LINES

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

                      PHISHING AND DATA PROTECTION

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

                                TAX GAP

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

                        REGULATION OF PREPARERS

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

                 INTERNATIONAL ACTIVITY AND THE TAX GAP

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

                     BUSINESS SYSTEMS MODERNIZATION

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

                      CUSTOMER ACCOUNT DATA ENGINE

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

                    INFORMATION TECHNOLOGY SECURITY

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

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

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

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

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


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

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

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

                     ADDITIONAL COMMITTEE QUESTIONS

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

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

  --Communications--numerous vehicles are used to keep employees 
        updated on the consolidation plan and to assist employees in 
        minimizing the impact of consolidation, including:
    --Newsletters--the Andover campus developed and distributed a 
            publication titled ``Changing Times'' to employees on a 
            regular basis beginning in February 2008. The issues have 
            addressed various consolidation issues and include employee 
            Q&A's.
    --Webpage--info included on Andover SP webpage includes 
            newsletters, FAQ's, and information on Article 19.
    --Employee Meetings--management holds routine meetings with 
            employees to provide consolidation updates and ensure 
            employees are aware of the effect consolidation will have 
            on their current and future positions.
    --Flyers and handouts--will cover topics such as buyouts, early 
            outs, and job swaps.
    --Info to employees in non-work status--pertinent information is 
            mailed to seasonal employees in non-work status.
  --Training--provided on various topics to assist employees in 
        continuing with or finding new employment, including:
    --How to apply for positions on USAJobs, the official job site of 
            the federal government.
    --How to a prepare a resume.
    --How to interview for a job.
    --How to apply for a job swap (will be conducted in Andover at a 
            later date).
  --Term Hiring--In an effort to minimize the employee affect from 
        consolidation, sites scheduled to consolidate began hiring Term 
        employees at least 2 years prior to consolidation. The Andover 
        site initiated this practice in 2003, 6 years prior to 
        consolidation. This hiring practice has helped to mitigate the 
        effect of consolidation on our career and career conditional 
        employees by limiting the number of potential applicants for 
        continuing positions on the campus. Andover is the first 
        consolidating site where the number of Term employees exceeds 
        the number of career conditional employees.
  --Job Fairs--job fairs include employers from the private sector and 
        IRS Business Units that will remain at the campus after 
        consolidation.
  --Tuition Assistance--program offered to all IRS employees to assist 
        them in gaining the skills needed for continued employment.
  --Mock Interview Cadre--established to assist Andover employees with 
        upcoming interviews.
  --Link Line--a phone number established for Andover employees in non-
        work status to receive information on W&I job openings in 
        Andover Posts of Duty.
  --Career Link--Andover IRS is partnering with local Department of 
        Labor to establish an office within Andover IRS office to 
        provide career guidance, employment workshops, and reemployment 
        assistance.
  --Computer Kiosks--set up in Andover Posts of Duty for employees 
        without access to a computer to look for job vacancies or 
        update their Merit Promotion Questionnaire's (MPQs).
  --Employee Meetings--One-on-One meetings have been held with every 
        employee in Andover SP to determine future plans (i.e. 
        continued employment, retirement, etc.) and provide information 
        related to MPQ assistance, Mock Interviews, etc.
  --Job Vacancies--Weekly Career Opportunity Listing (COL) and USAJobs 
        vacancy announcements distributed to SP Operations for 
        dissemination to all employees, in order to keep them informed 
        of potential jobs, both internally and throughout the 
        government.
  --Employee Assistance Program (EAP) representatives are in attendance 
        at each RIF briefing and have committed to provide extended 
        services to SP employees during this transition.
                                 ______
                                 
           Question Submitted by Senator Frank R. Lautenberg
    Question. Federal receipts at the U.S. Treasury have declined 
nearly 19 percent for the first 7 months of fiscal year 2009 as 
compared to the same period in fiscal year 2008. A significant portion 
of this revenue loss is due to a decrease in tax receipts as a result 
of the current economic recession. To what extent do you expect tax 
revenues to increase as a result of federal efforts to create jobs and 
spur economic recovery?

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

    Answer. The IRS does not predict the effect legislation will have 
on tax revenues. The Joint Committee on Taxation and the Department of 
the Treasury under certain circumstances will provide estimates of the 
revenue effects of proposed but un-enacted tax legislation.
                                 ______
                                 
                Question Submitted by Senator Ben Nelson
    Question. In a Ways and Means Subcommittee hearing on June 4, 2009, 
you said you would like to work with Congress to provide the Internal 
Revenue Service with more discretion regarding imposition of the 6707A 
penalty for failure to include reportable transaction information with 
a taxpayer's return. Can you elaborate on what kind of discretion would 
be appropriate, especially in cases where taxpayers acting in good 
faith unknowingly failed to file--or, worse, were mislead into 
believing they did not need to file information about such 
transactions?
    Answer. As we have stated before, the IRS is concerned there are 
taxpayers who have been caught in a penalty regime that was not 
intended by the legislation. Many taxpayers are subject to this penalty 
and the amount due significantly exceeds the tax benefit resulting from 
the transaction. Furthermore, the statutory language does not allow for 
any adjustment to the penalty based on the tax benefit to the taxpayer. 
We may be open to changes that allow sufficient flexibility for a 6707A 
penalty to be proportional to the tax benefit associated with the 
reportable transaction giving rise to the penalty. This change could 
improve the fairness of the penalty, provide some measure of relief for 
virtually all taxpayers, and simplify tax administration.
                                 ______
                                 
              Questions Submitted by Senator Susan Collins
    Question. The IRS is in the midst of a significant hiring 
initiative for enforcement staff as a result of its fiscal year 2009 
budget. What enforcement areas will the new staff be focused on and 
what do you anticipate the resulting increased revenues to be?
    Answer. The enforcement staff hired in fiscal year 2010 will be 
focused on the activities listed below and will generate over $2 
billion in additional revenue once they reach full potential in fiscal 
year 2012.

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

    Question. Commissioner Shulman, how can we address the tax gap?
    Answer. The Internal Revenue Service and Treasury issued an update 
of the 2007 Tax Gap Strategy report in early July. That report 
addressed this question in detail.
    Question. Does IRS have an estimate of the tax gap attributable to 
international activities?
    Answer. No. The data on which we base our tax gap estimates do not 
generally allow us to separate international and domestic issues. 
Moreover, some forms of noncompliance do not lend themselves to a clear 
characterization based on geography.
    Question. If there is not an estimate of the effect of 
international activities on the tax gap, why is that the focus of the 
fiscal year 10 enforcement initiative?
    Answer. Globalization has led to an increase in international tax 
activity, which has historically been an area of significant concern to 
the IRS. For example, foreign tax credits claimed by U.S. corporations 
increased by 71 percent between Tax Years 2000 and 2007, while foreign 
tax credits claimed by U.S. individuals increased by 133 percent during 
that time period. Likewise, between 2001 and 2006, foreign-source gross 
income of individuals grew 86.6 percent in real percentage terms, 
whereas worldwide income reported on all individual U.S. tax returns 
grew only 14.8 percent during that period.
    Question. Please describe any plans the Service may have to develop 
an international tax gap estimate.
    Answer. We are conducting a pilot study, beginning with Tax Year 
2006, to extend our National Research Program (NRP) reporting 
compliance studies of individual returns to include a small sample of 
returns with international addresses. We hope to determine from this 
pilot how best to compile representative compliance data for this 
population. If successful, this approach may allow us to estimate this 
portion of the international tax gap. Future studies of corporation 
income tax reporting compliance will need to address this concern, as 
well.
    Question. IRS reduced its performance goal for providing telephone 
assistance from 82 percent last year to 77 percent this year. 
Commissioner Shulman, why was the goal reduced and what does it mean 
for taxpayers? In your opinion, does this lower level allow for 
sufficient access for taxpayers to speak directly with an IRS assistor?
    Answer. The IRS is dedicated to providing the best possible service 
regardless of the channel the customer chooses. Although the goal and 
actual CSR LOS was lower this year than in prior years, the IRS funded 
the Toll-free program in 2009 at higher levels than in prior years by 
allocating more staffing (full time equivalents (FTEs)) during filing 
season than in 2007 and 2008. The actual toll-free FTEs for 2007, 2008, 
and 2009 filing seasons were 3,067, 3,100 and 3,344, respectively. 
However, increased customer demand, the introduction of new programs 
such as the Identity Protection Specialized Unit, and increased 
complexity of the calls handled by assistors resulted in lower service 
levels, despite increased resources. From January 1st through April 18, 
2009, the IRS serviced over 39 million taxpayers through both assistor 
and automated telephone service during the 2009 filing season. This 
level compares to just over 35 million taxpayers serviced during the 
same time period during the 2008 filing season and 32 million serviced 
in 2007. On most days, taxpayers were able to get to an assistor if 
they chose to wait. We provided an estimated wait time to the vast 
majority of callers, so they could make an informed decision about 
whether to wait or call back at a later time.
    Question. This year, IRS's average actual telephone performance has 
been well below its goal. Next year, IRS can expect another year with 
high call demand given the Recovery Act tax law changes. What specific 
steps are you taking now to improve IRS's telephone performance for 
next year should call volume could remain high?
    Answer. We are taking numerous steps to prepare for the coming 
year. During the 2009 filing season, there were 4.8 million calls from 
taxpayers asking for their prior year Adjusted Gross Income (AGI) or 
Personal Identification Number (PIN), which is required by online 
filers to submit their returns electronically. For 2010, we are 
developing both a web and automated telephone application to provide 
this information to taxpayers without requiring interaction with an 
assistor. This enhancement will free up assistors to handle more 
complex taxpayer questions. We will be implementing improvements in our 
Toll-free menus, which will get customers to the right resource faster. 
We will be expanding the use of estimated wait time announcements to 
more applications and customers. Lastly, we are planning to increase 
the number of staff on-rolls at times of peak customer demand during 
the filing season, through seasonal hiring.
    Question. IRS has spent $2.6 billion on its business systems 
modernization effort since 1999. Its Customer Account Data Engine 
(CADE), a part of BSM intended to replace the Individual Master File, 
has cost over $400 million since work on it began almost 5 years ago, 
but CADE has only delivered about 15 percent of the full capability 
intended. Please explain this small return on investment?
    Answer. The IRS has received approximately $309.3 million in 
funding for CADE over the past 5 years. With that funding, the IRS has 
delivered a complete tax return processing system for approximately 40 
million taxpayers who are enjoying the benefits of substantially faster 
refunds. In addition, the CADE project has proved the IRS is capable of 
delivering a modern database with significant functionality, including 
improved financial accounting capabilities, which have allowed the IRS 
to make progress against addressing its material weakness in this area.
    CADE also already includes capabilities to process Forms 1040, 
Schedules A, B, C, D, E, F, R, SE and Form 1040A, Schedules 1 and 3 for 
single and married filers and filers with certain dependents; extension 
Forms 4868; decedent and surviving spouse returns; certain math error 
notices; online address changes; returns with disaster area 
designations; receipt processing; and last name changes. In addition, 
CADE has supported legislative tax refund programs, such as Telephone 
Excise Tax Refunds and the recent Economic Stimulus payments.
    The IRS created the statistic referenced in your question for 
different purposes during a very specific engineering analysis, and we 
never intended to reflect a holistic assessment of the status of the 
effort. It understates nearly half the percentage of taxpayers that are 
in the new system, and it also does not reflect that a substantial 
portion of the overall effort is expended in setting up infrastructure 
to process the very first tax return.
    Finally, any discussion of return on investment should recognize 
the public's return on IRS IT investments. Because of the IRS's 
progress on CADE, approximately $58 billion in refunds went out on 
average 5 days faster that they would under legacy systems. This 
improvement has real economic value to taxpayers, particularly those in 
difficult economic situations.
    Question. Of the vast extent of IT security weaknesses that exist 
in IRS current and modernized systems, how much improvement in data 
protection can the IRS make with the requested $90 million for IT 
Security and what data and systems are still vulnerable?
    Answer. The way IRS business is transacted, the way the Service 
operates, and the way core tax administration is conducted have 
changed. These activities now rely on an interdependent network of 
information technology infrastructures. At the same time, threats from 
cyberspace have risen dramatically and are growing increasingly more 
complex, harder to detect and prevent. In order for the Service to keep 
abreast of the latest security threats from cyberspace and elsewhere, 
more strategic and tactical investments will have to be made to protect 
against the debilitating disruption of the operation of the IRS' 
information systems or breaches of the sensitive personally 
identifiable information entrusted to us by the American taxpaying 
public.
    This initiative requests an increase of $90.0 million and 36 FTE to 
improve IT security and address specific components of the Computer 
Security Material Weakness. At the more strategic level, this budget 
initiative will:
  --Better ensure the integrity of the tax system and maintain taxpayer 
        confidence;
  --Allow the IRS to improve the privacy and security of taxpayer 
        information;
  --Segregate securely the development, testing, and production 
        environments for IT systems, and;
  --Implement the Federal Information Security Management Act (FISMA) 
        security compliance controls on all enterprise-wide Windows and 
        UNIX computing assets.
    At the more tactical levels, specific activities that will be 
included in this initiative are:
  --Implementation of Network Access Control to better manage what 
        devices are permitted to connect to the internal network. This 
        change will specifically strengthen controls over many of the 
        700+ remote places of duty.
  --Bolsters the disaster recovery capabilities for the enterprise.
  --Improve the replication of our production environment in our test 
        and development environments. This improvement will enable more 
        complete testing of security controls and their impact before 
        moving new applications into production.
  --Improving the real-time ability for the IRS to monitor and report 
        on the security posture of all devices on the IRS network. This 
        enhancement will allow the IRS to better understand how new and 
        developing threats could potentially affect core business 
        systems.
  --Implementing data leakage protection tools to monitor and control 
        the movement of sensitive information in and out of the IRS 
        network.
  --Providing an enterprise solution to deploy end-to-end audit log 
        collection, storage, and reporting to directly address a major 
        component of the Computer Security Material Weakness.
                                 ______
                                 
           Questions Submitted by Senator Christopher S. Bond
                              enforcement
    Question. In the 1998 IRS Restructuring Act, Congress directed the 
IRS to refocus its mission not only to enforcement of the tax laws, but 
also serve the public and meet the needs of taxpayers. With the 
emphasis that you and the Administration has placed on enforcement, it 
appears that the pendulum is swinging further back to the ``bad old 
days'' of heavy handed IRS enforcement that led to the restructuring 
legislation in the first place.
    Are the enforcement initiatives that the IRS has announced this 
year coming at the cost of taxpayer service? What steps are you taking 
to ensure that taxpayer service remains an equal part of the IRS' 
mission?
    Answer. The IRS remains committed to a balanced program of 
assisting taxpayers in both understanding the tax law and paying the 
proper amount of tax.
    The fiscal year 2010 President budget request of $2.27 billion for 
taxpayer service will allow the IRS to continue improvements for both 
the quality and efficiency of taxpayer service, using a variety steps 
including, person-to-person, telephone, and web-based and self-serve 
methods to help taxpayers understand their tax obligations and pay what 
they owe.
    The IRS provides year-round assistance to millions of taxpayers 
including: Outreach and education programs; issuance of tax form and 
publications; rulings and regulations; toll-free call centers; IRS.gov 
web site; Taxpayer Assistance Centers (TACs); Volunteer Income tax 
Assistance (VITA) sites; and Tax Counseling for the Elderly (TCE).
    The IRS will continue to implement and administer these critical 
programs within the levels contained in the budget request.
                     business systems modernization
    Question. For many years, the IRS has struggled to update its 
computer systems to improve processing, enhance collections, and 
strengthen customer service. To address IRS' computer system problems, 
the Business Systems Modernization (BSM) was created. The center-piece 
of BSM is the Customer Account Data Engine (CADE) project.
    What is the status of BSM?
    Answer. The BSM program is a critically important component of the 
IRS's overall technology portfolio. In recent years, the IRS has 
consistently delivered on its commitments and is providing systems that 
deliver concrete benefits to taxpayers. Some of these benefits include:
  --CADE.--Issuing refunds for nearly 40 million taxpayers on average 5 
        days faster than existing legacy systems;
  --Modernized e-File.--Dramatically reduced processing error rates, 
        which eliminates rework for taxpayers and the IRS;
  --E-Services.--Delivering value-added, web-based services for 
        taxpayers and the tax practitioners who serve them;
  --Account Management Services.--Providing IRS customer service 
        representatives (CSRs) with faster and improved access to 
        taxpayer account data with real-time data entry, validation and 
        update of taxpayer addresses; and
  --Filing and Payment Compliance.--Placed more than 203,800 taxpayers 
        with Private Collection Agencies since September 2006, 
        facilitating the collection of more than $90 million on cases 
        formerly unassigned for active collection.
    The Modernized e-File project is on track to begin delivery of Form 
1040 and certain schedules in 2010, which will extend the benefits of 
this program to individual taxpayers.
    The CADE project has delivered a modern database with significantly 
more functionality than the Individual Master File, including improved 
financial accounting capabilities, which have allowed the IRS to make 
progress against addressing its material weakness in this area. In 
2008, the IRS refined the program focus to target an accelerated 
integration of the legacy and modernized databases to get all 140 
million taxpayers into a common relational database, and into a faster 
processing cycle. That database will serve as a strategic foundation 
for the IRS's next generation taxpayer service and compliance programs.
    Finally, as the IRS proceeds with its modernization efforts, we are 
mindful of maintaining a holistic, overall portfolio approach to our 
technology programs. In particular, we are focused on balancing our 
work on modernization with appropriate investments in core IT 
operations, and in particular, IT security.
    Question. When will the CADE system be able to handle all 
individual and business tax returns?
    Answer. The Commissioner has set a goal of completing the 
development of the taxpayer account database for all individuals, and 
moving to a faster processing cycle within 5 years. The team has 
developed and delivered a long-range plan, and is in the process of 
developing the BSM expenditure plan for fiscal year 2010, each of which 
provide further details on the interim deliverables for 2010 and 2011.
    In the interests of prioritization and focus, the IRS plans to 
deliver on the individual account database before upgrading the 
business tax account database.
                        private debt collection
    Question. With the start of the new Administration, the IRS 
abandoned its private debt collection program.
    What is your justification from a purely business case perspective 
for abandoning this program for collecting small-dollar, non-complex 
collection cases? Are we to assume that these tax debts will now just 
go uncollected, since IRS officials have previously testified that the 
agency does not have the staff to work these cases? Or, do you plan to 
pull staff off of more complex, higher-dollar cases to work the ones 
that were handled by the private debt collection program?
    Answer. In early 2009, the IRS completed a cost effectiveness study 
of the Private Debt Collection (PDC) program, supported by an 
independent review, which showed that it is reasonable to conclude that 
when working similar inventory, collection efforts are more cost-
effective using IRS employees rather than outside contractors. In 
addition, from 2002 to 2008, the percentage of potentially collectible 
inventory in active IRS collection status increased from 62.2 percent 
to 71.4 percent, and the dollar amount of potentially collectible 
inventory shelved due to lack of IRS resources declined from $7.6 
billion to $3.6 billion. These elements contributed to the March 2009 
decision not to renew contracts with the private collection agencies 
(PCAs).
    The IRS plans to work the types of cases that were assigned to PCAs 
as part of its overall collection strategy, which includes notice, 
telephone, and in-person contact. A part of this strategy is supported 
by a fiscal year 2010 IRS budget initiative which requests funding for 
two new Automated Collection System sites.
                                tax gap
    Question. The Administration's budget includes a number of 
proposals aimed at closing the so-called ``tax gap,'' many of which 
originated in the last couple of budgets submitted by the previous 
Administration. Yet, the last estimate that the IRS undertook to 
quantify the tax gap was in 2001.
    When is the IRS going to update its tax gap estimates so we can 
measure accurately the success of these initiatives?
    Answer. We do not have plans to update estimates of all components 
of the tax gap simultaneously for a common year since new data will not 
be available for all components at the same time. Furthermore, any 
post-initiative tax gap estimates will require compliance data to be 
compiled and analyzed for a tax year in which the initiatives are fully 
implemented. Since the tax gap estimates are, of necessity, very 
approximate, it would probably be more effective to estimate the effect 
of the initiatives by analyzing trends of observable tax data, such as 
tax revenue or enforcement revenue, accounting for other factors that 
have caused the trends to vary over time.
    Question. Does the IRS plan to estimate the extent to which the 
current tax gap is associated with taxpayers' intentional efforts to 
evade the tax law as opposed to honest mistakes due to the incredible 
complexity of our tax code today?
    Answer. The IRS seeks to be able to distinguish intentional 
noncompliance from unintentional mistakes. Several of our reporting 
compliance studies have tried to address this question. However, we 
have found that it is virtually impossible for auditors to know for 
sure what motivated an error. It is relatively easy for a taxpayer to 
claim that an error was an unintentional mistake (e.g., ``I lost my 
receipts,'' or ``I forgot about that income.''), whether that is true 
or merely an attempt to avoid penalties and more detailed scrutiny. 
Moreover, even if IRS employees could distinguish between intentional 
and unintentional errors, the unintentional errors among all returns 
would likely include both overstatements and understatements of tax in 
roughly equal amounts. Since the tax gap is defined as the aggregate 
amount of understatements net of overstatements, those unintentional 
overstatements and understatements are likely to cancel each other when 
added to the tax gap. If so, the tax gap likely includes very little 
net unintentional noncompliance. Having said that, though, the IRS 
seeks to minimize unintentional noncompliance since it represents 
unnecessary burden on both taxpayers and the IRS. It is also important 
to point out that, in addition to spawning unintentional errors, the 
complexity of the tax code undoubtedly creates opportunities for 
willful noncompliance.
    Question. Does the IRS plan to produce an estimate of how much of 
the tax gap is associated with international transactions, since the 
Administration has placed so much emphasis on this compliance area?
    Answer. We are conducting a pilot study, beginning with Tax Year 
2006, to extend our NRP reporting compliance studies of individual 
returns to include a small sample of returns with international 
addresses. We hope to determine from this pilot how best to compile 
representative compliance data for this population. If successful, this 
approach may allow us to estimate this portion of the international tax 
gap. Future studies of corporation income tax reporting compliance will 
need to address this concern, as well.
                   implementation of tax gap strategy
    Question. In 2006, the Treasury Department and the IRS prepared a 
strategy for addressing the tax gap, and in 2007, the IRS released a 
progress report on the implementation of that strategy.
    Please provide me an update on the implementation of the tax gap 
strategy, including new initiatives that the IRS plans to implement 
over the next 5 years to close the tax gap.
    Answer. The Internal Revenue Service and Treasury issued an update 
of the 2007 Tax Gap Strategy report in early July. That report 
addressed this question in detail.

                          SUBCOMMITTEE RECESS

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

 
  FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR FISCAL 
                               YEAR 2010

                              ----------                              


                         TUESDAY, JUNE 16, 2009

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

                     SMALL BUSINESS ADMINISTRATION

STATEMENT OF HON. KAREN G. MILLS, ADMINISTRATOR

             OPENING STATEMENT OF SENATOR RICHARD J. DURBIN

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

                SUMMARY STATEMENT OF HON. KAREN G. MILLS

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

                           PREPARED STATEMENT

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

                   SMALL BUSINESS DEVELOPMENT CENTERS

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

                           EMPLOYEE TRAINING

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

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

                   SMALL BUSINESS DEVELOPMENT CENTERS

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

                 AMERICAN REINVESTMENT AND RECOVERY ACT

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

                    SMALL BUSINESS ACCESS TO CREDIT

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

                  DEALER FLOOR PLAN FINANCING PROGRAM

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

                       SMALL BUSINESS CONTRACTING

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

                            LENDER OVERSIGHT

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

                        SMALL BUSINESS CLUSTERS

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

                     ADDITIONAL COMMITTEE QUESTIONS

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

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

                          federal contracting
    Question. Federal agencies reported that a total of $78 billion in 
Federal prime contract dollars went to small businesses in 2006. SBA's 
Inspector General and media reports have highlighted flaws in the 
Federal procurement system related to these contracts. There is 
evidence that large firms are awarded contracts reserved for small 
businesses. Further, federal agencies have inappropriately been 
counting contracts performed by large firms towards their small 
business procurement goals. SBA introduced a ``scorecard'' to rate 
small business procurement practices at federal agencies, including the 
accuracy of reporting data, and issued regulations to require small 
businesses to regularly recertify that they meet certain standards to 
be considered a small business.
    How is SBA working with other federal agencies to ensure 
contracting personnel are properly trained to understand how small 
business contracting preferences should be implemented?
    Answer. The SBA employs professionals, known as Procurement Center 
Representatives or PCRs. PCRs are the SBA's ``eyes and ears'' at the 
buying offices they cover, ensuring that small businesses, including 
8(a), HUBZone, SDVOSB and Women-owned small firms, are afforded the 
maximum, practicable opportunity to receive Federal prime contract 
awards. In addition to the informal training, which often occurs during 
the pre-award consideration stage ``negotiations'' between the PCR and 
contracting officers, our PCRs provide and participate in formal 
training events for buying office staff, including training on how 
small business contracting preferences should be implemented. Thus far 
in fiscal year 2009 (October 1, 2008-June 30, 2009), SBA's PCRs have 
provided training to more than 1,100 staff at Federal buying offices. 
Additionally, PCRs handle many requests for guidance/training from 
contracting officers on how small business preferences should be 
handled on a daily basis.
    Also, SBA has worked with other agencies to develop a series of 
data checks to help ensure data quality. The checks have been used in 
to help improve the quality of the 2007 data and reduce instances of 
businesses being incorrectly coded.
    Question. What recourses or remedies does SBA use when identifying 
an award to an ineligible entity?
    Answer. SBA has a number of programs to identify potentially 
ineligible entities for its programs. SBA's primary program for 
identifying an award to an ineligible entity (i.e., a firm that may be 
other than small (a large business) is our size determination program. 
If a contracting officer, an other interested party, or the SBA itself 
believes that a bidder on a Federal contract may have misrepresented 
its size, the SBA (through our field network of Size Specialists) will 
investigate the allegations and make a formal determination as to the 
firm's size. Our determination is provided to the contracting officer, 
other interested party (i.e., the protestor) and the protested concern, 
which under certain circumstances can appeal the SBA's findings. First, 
size is determined at the time of offer, so firms that are large now 
may still be counted as small for the life of a contract if they were 
small at the time of offer. However, SBA's recertification rule 
requires procuring agencies to accurately reflect a firm's change in 
size status if there is an acquisition, or merger, or, for long-term 
contracts, after 5 years and each option thereafter. Second, SBA 
performs formal size determination in response to protests that may be 
filed by unsuccessful offerors, the contracting officer or SBA, and 
these determinations apply to the procurement in question and are 
binding on the procuring agency. Third, if we determine that a firm 
willfully or recklessly misrepresented its size status, we may refer 
the matter to the SBA's Office of Inspector General or propose the firm 
for suspension or debarment.
    The SBA also maintains a Service Disabled Veteran-Owned Small 
Business (SDVOSB) protest program (at its headquarters) that will 
investigate claims that an entity may have improperly self-certified 
its SDVOSB status. Our findings are set forth in a formal 
determination. If we determine that the firm is not entitled to SDVOSB 
status, we will issue a formal determination which sets forth the 
evidence we considered as well the basis for our findings which is 
provided to the cognizant contracting officer for the appropriate 
action.
    Question. What other steps is SBA taking to oversee the accuracy of 
reporting on small business contracting?
    Answer. SBA has increased its oversight of agency contracting 
officers who enter the award data into the Federal Procurement Data 
System, which is the official database for Federal procurement 
information. As briefly described before, we recently provided Federal 
agencies with ``anomaly reports'' identifying specific individual 
contract action reports which may be miscoded. SBA works closely with 
the headquarters of those agencies to investigate these apparent 
discrepancies and to correct the FPDS database, as necessary.
    Additionally, the SBA is conducting 30 Surveillance Reviews at 
major Federal buying offices across the country. Part of these reviews 
involve an examination of contracts reported to have been made to a 
small business to determine if the awardee is indeed small and the 
level of due-diligence performed by the contracting officer when 
verifying the firm's size.
                       women-owned business rule
    Question. Under the Bush Administration, SBA issued a proposed rule 
that would limit the use of sole-source contracts for women-owned small 
businesses to four industries. SBA is currently developing a revised 
rule related to sole-source contracts for women-owned small businesses.
    When will the revised proposed regulation become public?
    Answer. One of the Agency's highest priorities is implementation of 
the WOSB Program as quickly as possible and in a way that withstands 
legal scrutiny. In furtherance of this goal, the Agency has been 
working on a revised regulation and is preparing to submit a draft 
proposed rule for inter-agency clearance. Although I am unable to give 
you a precise timeline on the WOSB Program implementation because of 
the nature of the regulatory process, the proposed regulation will be 
published in the Federal Register for public notice and comment as soon 
as practical.
    Question. What resources is SBA consulting to develop the new rule? 
How is SBA involving women business owners and other stakeholders?
    Answer. SBA has already received approximately 1,700 comments on 
the previous proposed rule and SBA is considering these comments in 
drafting a proposed rule. Through the standard regulatory process, SBA 
will submit a draft proposed rule to OMB for approval and inter-agency 
clearance. Once cleared, SBA will then publish a proposed rule in the 
Federal Register which will provide the public notice of the proposed 
rule and give the public an opportunity to comment on any aspect of the 
proposed rule. Upon the close of the comment period, SBA will 
incorporate all of the comments into the rulemaking record and proceed 
with an evaluation of each comment. SBA will then draft a final rule 
for publication in the Federal Register which will provide an analysis 
of the comments received.
                                 ______
                                 
            Questions Submitted by Senator Mary L. Landrieu
                  federal and state technology program
    Question. The Federal and State Technology Program--or FAST--and 
the Rural Outreach Program provide opportunities for businesses in 
underutilized areas to participate in the SBIR and STTR programs. By 
providing matching funds through competitive grants, the FAST program 
has been successful in increasing total SBIR dollars for small 
businesses in participating states. Through Louisiana's participation 
in the FAST program, the state jumped from 47th in the United States to 
33rd in total SBIR dollars.
    The program hasn't been funded since 2004. Given these programs' 
past successes, do you support funding this program again at the level 
of $5 million?
    Answer. This program has not had enacted funding since 2004 and the 
2010 President's budget does not request funding. However, SBA and the 
SBIR/STTR agencies work diligently to ensure that awards support high 
quality innovations through a competitive process. To ensure high-
quality innovations, the program elicits applicants from across the 
country and outreach efforts by participating agencies attempt to 
elicit the widest range of applications possible to enhance the SBIR 
and STTR competitive processes.
                        women's business centers
    Question. For 20 years the Women's Business Center (WBC) program 
has successfully provided business counseling and assistance to women 
with an emphasis on those who are socially and economically 
disadvantaged. With the economic turmoil, this program, too, is seeing 
an increase in demand from entrepreneurs hoping to establish a small 
business, as well as requests from small business owners hoping for 
assistance as they attempt to survive through economic uncertainty. To 
demonstrate the negative impact on our local technical assistance 
providers, consider our Women's Business Center in New Orleans, which 
faced a $45,000 shortfall in funding in 2007--despite the increased 
demand for their services post-Katrina.
    Additionally, much of the country is still not served by this 
program; with Arkansas, Idaho, Kentucky, Montana, Wyoming, Washington, 
DC, Guam, Northern Marianas Islands and the U.S. Virgin Islands 
remaining without centers.
    Question. How much would it take to fund all of the present Women's 
Business Centers and fund a center for each of the states currently not 
served by one, at the full amount of $150,000?
    Answer. The President's budget would assist at least 150,000 
clients. Funding 9 additional WBCs within the program at $150,000 would 
cost $1,350,000.
    Question. Why would the President not request the $16.9 million 
that it takes to fund the present centers at the full amount?
    Answer. The current budget provides for a sustained level of 
performance for existing centers.
    In addition, the entrepreneurial development initiative will also 
serve similar economically or otherwise distressed populations.
    Question. Why not request at least what was enacted in 2009?
    Answer. The request provides an amount roughly equal to the 2009 
enacted amount.
                       7(a) loan guaranty program
    Question. The President requested $80 million for the SBA's 7(a) 
loan guaranty program for fiscal year 2010. Taking this program to zero 
subsidy in 2005, as the last Administration did, and shifting the cost 
to borrowers and lenders by raising the fees has been very 
controversial. We want this important source of long-term capital to be 
affordable for borrowers and attractive for lenders, and we want to 
build on the investment we made in this program from the Recovery Act. 
Nevertheless, $80 million is a big share of SBA's budget.
    Please explain why this $80 million is necessary and what are the 
consequences if we don't provide the funding?
    Answer. The 7(a) upfront borrower and ongoing lender fees are 
capped by statute in the Small Business Act. In fiscal year 2010, even 
with the historical (i.e., maximum) fees in place, the 7(a) program 
cannot execute at a zero-subsidy rate, due to higher defaults and 
economic assumptions. The Subsidy rate for fiscal year 2010 is 0.46 
percent. Therefore, in order to maintain the fully authorized program 
level ($17.5 billion), the Administration requests $80 million in 
credit subsidy. If the full request is not provided, the SBA would need 
to reduce its anticipated program level that the lower appropriated 
amount would support.
                                disaster
    Question. As I have mentioned, last year I worked closely with 
Ranking Member Snowe and former Chairman Kerry to enact significant SBA 
Disaster reforms as part of the 2008 Farm Bill. In particular, these 
reforms increased SBA disaster loan limits, improved disaster planning 
capabilities, and provided the Agency with new tools for future 
disasters.
    It is my understanding that some of these provisions were 
immediately implemented, while others are still in the process of being 
tested. As we approach the 2009 Atlantic Hurricane season, I would like 
an update from the Agency on its implementation of these reforms.
    Please provide us with a status on what has already been 
implemented and what is in the process of being tested or implemented.
    Answer. SBA quickly began implementation of the 2008 Small Business 
Disaster Response and Loan Improvements Act of 2008 (a.k.a. the Farm 
Bill), immediately after enactment. Many of the provisions were in 
place for SBA Disaster Assistance operations during the very active 
2008 Hurricane season.
    As of June 2009 SBA has met 19 of the 26 requirements. SBA has 
existing authority to undertake four of the seven remaining 
requirements, and three are in development stages.
    A spreadsheet with status of each provision is attached. This 
spreadsheet shows which provisions have been implemented or completed 
and which are still in process.

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

    Question. The President's request for SBA calls for $1.7 million to 
fund the two Guaranteed Disaster Loan Program Pilot Programs that we 
enacted as part of disaster reform?
    Answer. The President's budget request for 2010 calls for $1.7 
million to fund two Guaranteed Disaster Loan Pilot Programs. SBA has 
developed an outline for these programs which will be vetted with 
banking industry representative in two planned focus groups. It is 
imperative that we develop a program that the industry accepts to 
ensure participation when disaster activity warrants.
    Question. Will it be available for the 2009 Hurricane season? (Yes/
No)
    Answer. The guaranteed commercial lending programs will not be 
available for the 2009 Hurricane season.
             president obama's small business recovery plan
    Question. President Obama's plan to assist small businesses in 
gaining access to the credit markets contains elements of proposals 
that have been pushed by this Committee from the beginning of this 
economic downturn.
    Can you tell us how implementation of that plan is proceeding?
    Answer. Through the programs and funding provided in the Recovery 
Act, SBA has helped small businesses access the capital they need to 
survive the economic conditions. Recovery Act programs have helped 
through increasing lending through the 7(a) and 504 guaranteed loan 
programs, expanding the base of SBA lending partners, providing 
targeted assistance to struggling businesses through the ARC loan 
program, and allowing small businesses with higher dollar contracts to 
obtain SBA-backed surety bonds. All of the $675 million in SBA program 
funds are currently available to support small businesses.
    Question. Are there any lessons from your business background that 
can be applied towards improving SBA lending programs?
    Answer. Over the course of my career I've had the opportunity to 
gain valuable insight into the capital access challenges faced by 
entrepreneurs and small businesses. During the recession of the early 
1990s, I was operating small manufacturing companies that supplied the 
auto industry and that experience gave me a deep understanding of what 
our small businesses need today to survive this current downturn and to 
prosper in the years ahead. I've also had valuable experience with the 
funding needs of high-growth, high-potential companies that I've worked 
with over the years. That understanding of the capital needs small 
businesses have--whether you're a Main Street business or a high-growth 
potential business--is something I bring to this job and something that 
is guiding our current efforts at SBA to assess the efficiency and 
effectiveness of our programs and the systems through which we deliver 
them.
                          office of technology
    Question. The Office of Technology, which promotes and monitors the 
highly successful Small Business Innovation Research (SBIR) and Small 
Technology Transfer (STTR) programs, has seen its operating budget cut 
by more than half during the last 18 years. At the same time, the SBIR 
and STTR budgets have more than doubled, with participating SBIR and 
STTR Federal agencies allocating more than $2 billion to small high-
technology firms across the country each year.
    I find this trend very alarming, particularly when other agencies 
try to get out of complying with the SBIR and STTR laws, as happened 
with about $229 million in the Recovery Act, and I am interested in 
hearing your perspective on how the Office of Technology is handling 
its oversight responsibilities in light of its diminishing budget.
    In your opinion, does the Office of Technology have the staff and 
funding to meet the program's demands? (Yes/No)
    Answer. The budget provides $250,000 for the Office of Technology. 
Within this amount, the Office provides oversight of the SBIR and STTR 
programs. I also understand the value of rigorous oversight. That is 
why SBA has committed to developing comprehensive performance measures 
for the SBIR and STTR programs. Currently, no continuous or 
comprehensive measures exist for the programs. With performance 
measures in place, we can regularly evaluate the effectiveness of these 
programs. SBA is currently working to implement measures now.
    Question. As I just noted, without adequate funding, the Office of 
Technology cannot function as it was intended and cannot support the 
SBIR and STTR programs. The Committee believes that in order to provide 
the Office with the resources it requires, there should be at least 
$1.5 million allocated for the Office to go toward additional staff, 
oversight, outreach, travel, and maintenance of its databases.
    Would you disagree that at least $1.5 million would be an 
appropriate amount to meet with needs of the Office of Technology, as 
Senator Snowe and I have recommended?
    Answer. The budget provides $250,000 for the Office of Technology. 
Within this amount, the Office will provide oversight for the SBIR and 
STTR programs and will pursue high-priority activities, such as the 
development of comprehensive performance measures to regularly evaluate 
the programs' effectiveness.
                        sba contracting programs
    Question. One of the principle functions of the SBA is to ensure 
that the Federal government meets its 23 percent small business 
contracting goal, specifically by reviewing more than $400 billion in 
federal contracts awarded each year. Several issues have been raised in 
the past with respect to the SBA not playing its proper oversight role 
with respect to contracting.
    First, do you intend to increase the contracting oversight staff at 
the SBA--Procurement Center Representatives (PCRs) and Commercial 
Marketing Representative (CMRs)? (Senator Snowe and I think we need 100 
more PCRs and 50 CRMS, which would require $15 million over time.)
    Answer. The SBA is in the process of reassessing our internal 
procedures regarding the criteria for placement of the PCRs and CMRs. 
As we add and/or replace PCRs and CMRs we want to ensure that they are 
placed in locations which can maximize their individual and group 
ability to assist the Government's small business contractor community. 
Specifically, we are working with the SBA's Office of the Chief 
Information Officer (OCIO) to move forward with the development and 
implementation of the electronic Procurement Center Representative 
(ePCR) program which will allow the Agency to further automate the PCR 
review process, making it possible for them to examine increased 
numbers of purchase requests while expanding the PCR's ability to cover 
Federal buying offices located outside their local commuting area. 
Implementation of the electronic Subcontracting Reporting System (eSRS) 
has enhanced the ability of our CMRs to more closely monitor the 
subcontracting programs in place at the large prime contractors within 
their portfolios by giving them access to ``real time'' data. 
Information entered into eSRS, available to the CMRs, provides for 
greater scrutiny of the prime's use of small businesses as 
subcontractors. As the CMRs have ready-access to the prime's reports 
they can respond more quickly to situations which require their 
attention. As information on Department of Defense large prime 
contractors is being entered into the eSRS, we believe that this 
additional availability of reporting data will only increase the 
effectiveness of the CMRs to effectively monitor the large primes.
    Question. Second, what plans do you have to ensure that minority 
small businesses--whether through the 8(a) program or as Small and 
Disadvantaged Businesses--have full access to the Federal marketplace?
    Answer. It is crucial that minority-owned small businesses are able 
to participate fully in the federal marketplace. One way to measure 
this participation is through the small disadvantaged business (SDB) 
procurement goal which has been established by statute at 5 percent. 
Over the past several years, the Federal government has consistently 
achieved and exceeded this goal.
    Our PCRs continue to work closely with the contracting officers at 
their assigned buying offices to ensure that all small businesses, 
including 8(a) program participants and SDBs have maximum practicable 
access to Federal procurement opportunities. Just recently, our PCRs 
undertook a major initiative with regard to the small business 
``parity'' issue in light of a recent GAO decision which seemed to give 
priority to HUBZone small business concerns over 8(a) firms in Federal 
contracting. The Office of Management and Budget released interim 
guidance that agencies should follow SBA's parity regulations, while 
the Executive branch undertakes a review of the GAO opinion. Our PCRs 
have undertaken substantial efforts to ensure that the parity rules are 
followed while the opinion is being reviewed. To this end, the PCRs 
have increased training for the contracting officers at the buying 
offices to ensure they understand the need to conduct adequate market 
research and have an awareness of their office's achievements relative 
to their goals when deciding which type of set-aside to use.
    Additionally, our PCRs are conducting 30 Surveillance Reviews at 
major Federal buying offices in fiscal year 2009. As part of these 
reviews, our PCRs are examining the individual buying office's 
compliance with the 8(a) Partnership Agreement, in place between the 
SBA and the higher Headquarters of the buying office reviewed.
    While access to federal contracts is one aspect of the business 
development offered through the 8(a) program, it is not the primary 
purpose of the program. Because the program is a business development 
initiative, the SBA is working diligently to better track assistance 
provided to 8(a) firms through the Business Development Management 
Information System (BDMIS) and the Business Development Assessment Tool 
(BDAT).
                                 ______
                                 
              Questions Submitted by Senator Susan Collins
    Question. What is the status of efforts to establish an economic 
stimulus lending program, a secondary market guarantee authority for 
pools of SBA 504 program first-lien mortgages, and SBA secondary market 
lending authority to make loans to important broker-dealers that 
operate in the SBA 7(a) secondary market?
    What are you seeing in terms lending to small businesses? Has the 
stimulus bill been effective in unfreezing the credit market for small 
businesses?
    Answer. To date, the Recovery Act efforts to eliminate fees and 
raise guarantees has helped restore access to capital for small 
businesses. Through reduced fee and higher guaranteed loans, the Agency 
has supported nearly $8 billion in lending to small businesses using 
$155 million in Recovery Act subsidy. Additionally, over 800 banks that 
had not made an SBA loan since October 2008 have made loans through the 
Recovery Act. At the same time, since March market activity and pricing 
in the 7(a) secondary market has rebounded from its severe contraction 
in 2008. Over the past 3 months, the average monthly loan volume 
settled from lenders to broker-dealers in the secondary market has 
risen to $335 million, moving closer to pre-recession averages.
    On June 15, SBA announced its ARC loan program, aimed at helping 
viable small businesses weather immediate financial hardship through 
interest free, deferred payment loans to help them make payments on 
existing, qualified debts. Since it was launched, the ARC program has 
been steadily ramping up. Through August 4, SBA has approved over 1,000 
loans totaling over $34.5 million.
    Two provisions in the Recovery Act were designed to address market 
disruptions in SBA's secondary markets for guaranteed loans. Both of 
these programs are entirely new and complex, requiring regulations, 
procedures, credit subsidy models and systems to implement. SBA is 
working diligently to develop and implement these programs.
    Section 503 established a new secondary market guarantee authority 
to provide SBA guarantees on pools of 504 first mortgage loans--which 
have not historically been guaranteed or securitized by SBA. The Agency 
has drafted regulations, credit subsidy models, procedural guidance and 
legal forms and agreements for this program. These documents are under 
review by OMB and through the inter-agency process. SBA has also 
started developing contracts and systems to implement this program.
    Section 509 established a new direct loan program to help broker 
dealers in the 7(a) secondary market finance their inventories of 
guaranteed loans. The Agency has drafted regulations, credit subsidy 
models, procedural guidance and legal forms and agreements for this 
program. These documents have been sent to OMB for inter-agency and 
Administrative review. SBA has also started developing contracts and 
systems to implement this program.
    Question. The Recovery Act directed SBA to initiate four new loan 
programs, and mandated revisions to other programs such as increasing 
SBA's guaranty on loans to 90 percent and increasing the size of surety 
bond guarantees. The SBA Office of Inspector General issued a Recovery 
Oversight Framework document identifying various risks to taxpayer 
dollars that could result from these new and revised programs. In 
addition, the OIG recently issued a report on unimplemented 
recommendations from prior audits that could affect the risks and 
performance of these programs. This included outstanding audit 
recommendations regarding the microloan program, which has now received 
additional funding under the Recovery Act.
    What resources is SBA planning to devote to other risk mitigation 
efforts to prevent or limit these risks?
    Answer. Lender oversight regulations were issued in the fall of 
2008 that established clear responsibilities and a supervisory and 
enforcement framework for lender oversight. Additionally, staffing has 
been increased by seven positions in the Office of Credit Risk 
Management over the past 2 years. Going forward, SBA recently re-
procured its contract for off-site monitoring and is: (1) making more 
information available to lenders and SBA staff for portfolio 
management; (2) redeveloping risk rating metrics to enhance their 
predictiveness; (3) integrating more dynamic, ongoing evaluation of 
lenders and loan portfolios; and (4) ensuring that trends or 
developments are identified and investigated when oversight activities 
surface them.
    In the case of the Recovery Act programs, SBA did a comprehensive 
risk assessment for each of the programs and developed a detailed risk 
mitigation plan for each program. Senior managers from Capital Access, 
Office of Credit Risk Management, Office of Chief Financial Officer, 
and the Office of General Counsel participated in the risk assessment 
and risk mitigation efforts. The Office of Inspector General reviewed 
the plans and provided detailed comments.
    What resources and efforts is SBA devoting to implementing the 
outstanding audit recommendations to improve efficiencies in these 
programs?
    Answer. The Agency has committed significant resources to improving 
lender oversight technology systems and has staffed up to meet the 
increased demands for new Recovery Act programs and for the processing, 
servicing and liquidation of Recovery loans.
    During fiscal year 2009, the Agency closed 66 OIG audit 
recommendations out of a total of approximately 200 at the start of the 
year and addressed in writing the majority of the 50 open GAO 
recommendations. Over the past 2 years, SBA reduced the average number 
of OIG audit findings from around 300 to approximately 150-170. In 
addition, per the 2002 Consolidated Reports Act, SBA's OIG publishes 
annually its Major Management Challenges (8 this year), with a 
scorecard rating system from red to orange to yellow to green. ``Reds'' 
have gone from 22 to 1 and the number of recommended actions from the 
high 80s to 26. We continue to work with OIG to incorporate lessons 
learned from previous audits and to develop corrective actions to 
minimize waste, fraud and abuse. Additionally, SBA has put in each 
senior executives job requirements a goal to address and resolve major 
audit findings in his/her respective program area.
    Question. Please describe the current Veterans' Assistance programs 
that SBA operates (1) by the SBA Vets Office, (2) by SBA Capital Access 
program, and (3) by SBA Entrepreneurial Development Office with a 
detailed description of loan programs (average dollar loans and average 
business size, geographic breakdown, total dollar volume) and grant 
programs (average dollar grants, average business size, total dollar 
volume).
    Also please describe SBA's staff efforts at outreach to other 
federal agencies (U.S. Department of Labor, especially its Veterans 
Employment and Training Services Office, and U.S. Veterans 
Administration, the U.S. Department of Defense), state and local 
governments, not-for-profit organizations and other stakeholders, and 
identify existing studies, programs, resources and all existing 
studies, programs, resources and all available federal funding to 
assist veterans in starting and/or growing a small business that 
conduct veterans' benefit programs.
    Answer. The SBA Office of Veterans Business Development (OVBD) is 
the lead SBA office for Veterans' Entrepreneurship. OVBD conducts 
comprehensive outreach to veterans including Reserve component members, 
for the formulation, execution, and promotion of policies and programs 
of the Administration that provide assistance to small business 
concerns owned and controlled by veterans, service-disabled veterans 
and reservists. The AA/VBD also acts as an ombudsman for full 
consideration of veterans in all Administration programs. OVBD, working 
with the Office of Capital Access, was responsible for the Agency 
establishing the Patriot Express Pilot loan program, which has approved 
3,828 loans for $324.2 million for an average loan amount of $84,702 in 
2 years, as of June 30, 2009; we enhanced the surety bond guarantee 
program for veterans, we established a special outreach and web based 
program for veterans and reservists in the SBDC program, we established 
a focused veterans and reservists on line program in SCORE, we market 
the Small Business Training Network to the veterans community, we 
established, and recently improved the Military Reservist Economic 
Injury Disaster Loan program, we provide funding to and manage the 
Veteran Business Outreach Center program, and we have expanded the 
District Office-Veterans Outreach Initiative. In addition, we oversee 
the government wide Service-Disabled Veteran Owned Small Business goal 
program, and OVBD provides training too and e-based ombudsman guidance 
to in excess of 10,000 veterans and reservists each year. OVBD works 
with the independent SBA Office of Advocacy in developing critical 
Advocacy research into veteran's entrepreneurship.
    To accomplish its primary responsibilities of outreach and to act 
as an ombudsman OVBD utilizes:
  --Veteran Business Outreach Centers (VBOC).--8 Veteran specific 
        business centers, which operate from a fiscal year 
        appropriation of $1.2 million or $150,000 each.
  --District Office-Veterans Outreach Initiatives (DO-VOI).--OVBD 
        Funding and support for district office Veteran Business 
        Development Officers.
  --E-Guidance and Ombudsman Assistance.--Program guidance provided to 
        agency customers via e-mail.
  --Service-Disabled Veteran Procurement.--Providing training SD 
        veterans and to contracting officials to improving SD Veteran 
        procurement opportunity.
  --Entrepreneurial Tools Development and Distribution.--Development 
        and distribution thousands of Veteran and Reservist specific 
        Program guides annually.
  --Policy and Program Development and Implementation.--Enhanced OVBD, 
        CA, ED, GCBD, ODA programs and policies for veterans and 
        reservists.
  --Inter and Intra Agency Coordination.--Coordination and cooperation 
        across SBA and representation, liaison and program and policy 
        development with DOD, DOL, DVA, State, local and private 
        Veteran Serving Organizations, numerous public presentations 
        each year, and representation of agency veteran program 
        resources with national media.
    Question. Though the Office of Government Contracting and Business 
Development, SBA's 7j program provides training to 8(a) firms (firms 
that are socially or economically disadvantaged). These firms are 
eligible for government contracts set-aside specifically for small 
businesses; however, because of a firm's status as a socially or 
economically disadvantaged firm, its employees need more than just 
financial opportunities to grow. These firms are also in need of 
technical assistance to help them meet the demands of these contracts. 
7j training is a significant part of the 8(a) program effort to promote 
small business opportunities and growth. Please give a status update 
report reviewing the last 5 years of the 7(j) program, including number 
of clients trained, length of training program, cost per client per 
training program, follow-up actions, description and examples of 
curricula provided, and all other relevant information that would 
provide the Committee with insight into the performance of the 7(j) 
program.
    Answer.

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

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

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

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

                           PREPARED STATEMENT

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

    Senator Durbin. Judge Bataillon.

                 STATEMENT OF HON. JOSEPH F. BATAILLON

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

                           PREPARED STATEMENT

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

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

                   DIFFERING CONSTRUCTION PRIORITIES

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

                          SAN DIEGO COURTHOUSE

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

                         LOS ANGELES COURTHOUSE

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

                   JUDICIARY'S 5-YEAR COURTHOUSE PLAN

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

                            MIAMI FBI OFFICE

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

                        CONSTRUCTION PRIORITIES

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

                       SALT LAKE CITY COURTHOUSE

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

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

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

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

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

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

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

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

All cost estimates subject to final verification with GSA.

                     ENERGY EFFICIENCY IN BUILDINGS

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

                     ADDITIONAL COMMITTEE QUESTIONS

    Senator Durbin. At this point, we are going to recess the 
subcommittee and tell you that there will be some written 
questions coming your way. Hope that you can respond to them on 
a timely basis and maybe by--we will leave the record open 
until Wednesday, June 24 at noon.
    [The following questions were not asked at the hearing, but 
were submitted to the Administration for response subsequent to 
the hearing:]
                 Questions Submitted to Paul F. Prouty
            Questions Submitted by Senator Richard J. Durbin
                      recovery act implementation
    Question. As part of the Recovery Act, GSA received $5.5 billion, 
of which $4.5 billion was designated for converting GSA facilities to 
High-Performance Green Buildings. The Act states that not less than $5 
billion of Recovery Act funds must be obligated by the end of fiscal 
year 2010. GSA has identified 43 buildings for ``full and partial 
building modernizations'' at an estimated total cost of approximately 
$3.1 billion. GSA has also identified 194 buildings for ``Limited Scope 
projects'' at a cost of approximately $800,000,000. In addition, the 
Recovery Act funds an additional $1 billion in construction projects. 
This is a significant increase in workload as compared with previous 
years, and recent press reports suggest that there may be as many as 
150 vacancies for contracting officers at GSA and shortages in other 
critical personnel areas.
    Given the volume of projects to be undertaken by GSA and the amount 
of funds to be obligated in fiscal year 2010, how can you assure the 
subcommittee that GSA will be able to responsibly obligate $5 billion 
or more by the end of fiscal year 2010?
    Answer. To ensure that we responsibly obligate $5 billion or more 
by fiscal year 2010, GSA has established a centralized program 
management office (PMO) within the Public Buildings Service (PBS) to 
oversee and manage recovery activities. The PMO is a small, cohesive, 
National Office staffed with high performing project managers and 
subject matter experts who are supported by contract/consultant 
resources.
    The PMO will: manage Recovery Act tracking and reporting efforts; 
support regional offices by providing contracts, subject matter 
experts, legal expertise, audit functions, workload/staff modeling, 
tools, and troubleshooting of program and project challenges; interface 
with stakeholders, including Congress and tenant Federal agencies; 
ensure that cost, schedule, and scope are completed as promised; 
identify resource needs and shift resources to accommodate changing 
program requirements; and establish a quality review plan to define and 
assess the key GSA information systems that may contain information 
required for full Recovery reporting and continually monitor and review 
the information required for compliance with Recovery Act reporting 
requirements.
    GSA's PBS has enhanced the reporting capabilities of its project 
tracking database to incorporate additional project milestones into the 
Variance Tracking Report, a management tool for monitoring and tracking 
project progress. This report also serves as an early warning tool so 
management can identify projects that are starting to deviate from the 
plan and promptly implement corrective activities.
    The PMO is undertaking regular and ongoing activities with the 
Office of Inspector General to ensure effective and efficient program 
execution, including pre-award audits and ongoing dialogue.
    GSA has implemented additional management controls and oversight 
mechanisms to ensure effective and efficient execution of recovery 
activities. For guidance, we are drawing on Agency-wide existing 
management controls, which are based on OMB Circular A-123, 
Management's Responsibility for Internal Control; the Federal Managers' 
Financial Integrity Act (FMFIA); OMB Circular A-127 Financial 
Management Systems; and the Federal Financial Management Improvement 
Act (FFMIA). GSA's internal control reviews are conducted for Agency 
program components to ensure that all significant risks are identified, 
tested, evaluated, and mitigated in a timely and effective manner.
    Question. Does GSA currently have sufficient staff to handle these 
projects?
    Answer. GSA is currently using several approaches to ensure there 
are sufficient resources to manage Recovery Act projects. Our 
approaches include deploying our experienced personnel to Recovery Act 
projects and backfilling with temporary hires as well as ``industry 
hires'' whose limited terms sunset with the expiration of the Recovery 
initiative. This solution fulfills our short-term need for a larger 
workforce without encumbering our long-term personnel goals. These 
industry hires are recruited from the ailing design, construction, and 
construction management industries.
    GSA is also hiring contractors to support GSA in such areas as data 
tracking and reporting, reviews of scopes, schedules and budgets, 
energy performance reviews, design services, construction contracting, 
technical expertise, and project management.
    GSA will continue to evaluate our resource needs on an ongoing 
basis, to determine where we have gaps and the best means to fill those 
gaps, including recruitment, contract staff, and redeployment of 
current staff. We are addressing resource requirements for 
accomplishing Recovery Act projects as well as our existing workload. 
We have sought approval from OPM to utilize various hiring authorities 
and are establishing national contract vehicles to supplement the 
workforce.
    Question. What is the optimal number of FTEs (GSA contracting 
officers, project managers, and support staff) needed to ensure that 
GSA will be able to award contracts for the 237 green building 
``modernization or limited scope'' projects and the $1 billion worth of 
new Recovery Act construction projects in a timely manner?
    Answer. GSA has conducted a series of workforce analyses to 
determine the resources needed to deliver Recovery projects. It was 
estimated that approximately 232 Government FTE and contractor 
positions are required in procurement, realty, architecture, 
engineering, project management, and program analysis to expeditiously 
and fully support the projects and programs tied to the Recovery Act. 
GSA will be re-directing existing resources, as well as hiring 
temporary resources, to meet this workload demand.
    Question. How does the optimal number compare to the actual 
staffing level?
    Answer. The optimal number of combined Government FTE and 
contractor positions is approximately 232 positions. To achieve this 
staffing level, PBS has redeployed current staff, recruited new hires, 
and procured contractor support to address resource requirements for 
accomplishing Recovery Act projects as well as our existing ongoing 
workload. We are on track to achieve this goal.
    Question. With respect to contract oversight, what is the optimal 
number of FTEs needed to ensure that these projects are appropriately 
monitored and contractors are delivering the products and services on 
time and at the proper cost?
    Answer. The optimal number of positions estimated above includes 
contract oversight resource needs. The 232 positions include managers 
and analysts who are dedicated to monitoring contractor performance and 
ensuring that projects are delivered in compliance with Recovery Act 
funding and GSA requirements, on-time and at the proper cost.
    Question. How does GSA plan to measure the environmental benefits 
of the Green Building projects in a quantifiable way?
    Answer. We are improving energy performance on a large scale with 
our full and partial building modernization projects and in specific 
ways with our limited scope projects. In both types of projects, we 
expect energy savings from new building controls and adjustments; 
lighting replacements; new roofs and windows: and building mechanical 
system upgrades. We are performing detailed surveys of each building to 
quantify the potential for energy savings. Once the surveys have been 
completed and the baselines identified, we will be able to estimate the 
energy consumption reductions for the building specific projects.
    Question. How does GSA plan to measure the number of jobs created 
by the projects?
    Answer. GSA will not prepare independent estimates of jobs created 
by our Recovery Act projects. Instead, we will support the 
Administration's efforts to collect job data directly from recipients 
of Federal contract awards and their sub-recipients.
    GSA has included provisions in our Recovery Act contracts 
consistent with interim Federal Acquisition Regulation (FAR) clause 
52.204-11. This FAR clause requires recipients of Federal contract 
awards to submit information required by Section 1512 of the Recovery 
Act through the www.FederalReporting.gov website.
    Question. What the basic distinction between a ``partial building 
modernization'' and a ``limited scope project?
    Answer. Generally, full and partial building modernizations adopt a 
``whole building approach'' and include repairs and renovations to 
multiple building systems in order to improve energy- and water-
efficiency of the entire facility. Building systems, in this case, 
include Heating, Ventilation, and Air Conditioning (HVAC), building 
envelope, or lighting. Limited scope projects focus on installing a 
specific green technology (such as intelligent lighting, or ENERGY STAR 
roofs) or addressing a single building system.
    Examples of repairs and renovations included in full and partial 
modernization projects include:
  --Adding thicker insulation than required by the newest energy codes 
        in climates where it makes sense;
  --Installing variable frequency drives to reduce energy and extend 
        the life of mechanical equipment;
  --Converting parking structure lighting to LED (light-emitting 
        diode), which dramatically lowers energy consumption, improves 
        safety and visibility and reduces maintenance as LEDs can last 
        two to three times as long as typical parking lot lights;
  --Retrofitting or replacing less efficient windows; and
  --Specifying dual flush toilets and waterless or low water urinals to 
        save water and reduce demand on aging city sewer systems.
    Examples of limited scope improvements include:
  --Installing intelligent lighting systems that provide daylight and 
        provide controls for occupants to adjust for ambient light 
        versus task light;
  --Replacing flat roofs with ENERGY STAR membranes; integrated 
        photovoltaic panels bonded to the membrane; or planted roofs. 
        These options offer benefits ranging from increasing the life 
        of the roof, to producing energy and to reducing the ``heat 
        island'' effect of a black roof; and
  --Accelerating the installation of advanced meters--required under 
        the Energy Policy Act to be completed by 2012. Advanced meters 
        enable us to better manage buildings by instantaneously 
        providing information on a building's energy use and 
        encouraging immediate operational changes.
    Question. What will be GSA's approach to prioritizing among the 43 
``full and Partial Modernization Projects'' for implementation? Among 
the 194 ``limited scope'' projects?
    Answer. GSA's priorities for ``Full and Partial Modernization'' and 
green ``limited scope'' projects are based on the purpose of the 
Recovery Act: (1) Stimulate the American economy by spending money 
quickly; and (2) Improve the environmental performance of Federal 
assets, particularly reducing our dependence on carbon-based fuels.
    Within these broad objectives, each class of project is prioritized 
based on the following criteria:
    Full and Partial Building Modernization projects:
  --High-performance features concentrating on energy conservation and 
        renewable energy generation.
  --Speed of construction start (job creation).
  --Execution Risk (ensuring that the projects will not fail due to 
        unforeseen conditions).
  --Facility Condition. The Facility Condition Index is a standard real 
        estate industry index that reflects the cost of the repair and 
        alteration backlog of a particular building relative to the 
        building's replacement value.
  --Improving Asset Utilization.
  --Return on Investment.
  --Avoiding Lease Costs.
  --Historic Significance.
    Limited Scope projects are prioritized based on energy performance 
(beginning with the worst performing buildings) and informed by 
existing physical condition surveys:
  --Projects are initially prioritized based on Energy Use Intensity: 
        Btus/Gross Square Foot.
  --This list is refined, based on input from Regions on specific 
        building conditions and operations.
  --Preference is given to projects in descending order of: energy 
        conservation, return, or high-performance improvement.
    No project is on our list if it does not deliver a positive return 
on investment.
                underutilized or excess federal property
    Question. Underutilized or excess federal property is a significant 
problem that puts the government at significant risk for lost dollars 
and missed opportunities. GAO reported in May 2007 that GSA reported 
258 buildings, with 13.8 million rentable square feet, as excess 
property. In order to help other agencies better serve the public by 
meeting--at best value--their needs for real property such as federal 
buildings and to meet its goal of exemplary management of buildings, 
GSA should reduce its excess and underutilized property.
    What strategy will GSA employ to help the federal government reduce 
its excess and underutilized property?
    Answer. GSA is responsible for managing the utilization and 
disposal of Federal excess and surplus real property government-wide, 
and we have a comprehensive strategy for promoting the effective use of 
Federal real property assets.
    GSA Properties.--GSA has over 1,000 properties in our portfolio, 
making the disposal of underutilized real property a considerable task. 
GSA works together with partner Federal agencies, State and local 
governments, nonprofit organizations, business groups, and citizens, to 
ensure that we create a lasting, positive impact on communities by 
making valuable government real estate available for numerous public 
purposes. Properties that are not conveyed to eligible recipients for a 
public purpose are sold by competitive bid to private individuals.
    In fiscal year 2008, GSA disposed of 13 of our own properties, 
valued at approximately $58.5 million. These disposals provided 
revenues of $56 million for the Federal Buildings Fund (FBF).
    Other Federal Agencies.--GSA supports the Administration's goals of 
disposing of unneeded real property and reducing Federal spending by 
providing a variety of asset management and disposal services to other 
landholding Federal agencies. GSA assists those agencies in developing 
asset management plans and strategies, in accordance with Executive 
Order 13327, ``Federal Real Property Asset Management'', and provides a 
variety of asset utilization and disposal services, including: 
Understanding the role of each asset in supporting agency mission 
objectives; examining current and future utilization alternatives; 
collecting and organizing title, environmental, historical and cultural 
information; and identifying real estate and community issues affecting 
the property.
    In fiscal year 2008, GSA disposed of 235 properties valued at 
approximately $192.2 million for other Federal agencies. GSA also 
conducted 26 targeted asset reviews to help agencies identify 
underutilized real property assets and improve their compliance with 
E.O. 13327.
                projects requested for fiscal year 2010
    Question. The 2009 Omnibus Appropriations Act required the fiscal 
year 2010 budget submission to include 5-year plans for Federal 
Building and Land port-of-entry projects. However, these plans have not 
been furnished to the Subcommittee.
    Why were these plans not included in the Budget submission? When 
will they be provided?
    Answer The 5-year capital plans required by the fiscal year 2009 
Omnibus cannot be completed without input from many different customer 
Federal agencies. Our customers' long-term requirements and GSA's needs 
have changed as a result of the substantial new funds provided in the 
Recovery Act. The complexities created by the Recovery funding--as well 
as the increased workload that it placed on Federal capital planning 
staff--made it difficult to prepare a 5-year forecast of capital 
investment needs in time to include it in the fiscal year 2010 budget 
submission.
    The required plans will be submitted as soon as they are 
coordinated. GSA will include the plans in future budget requests.
                            repair backlogs
    Question. Restoration, repair, and maintenance backlogs in federal 
facilities are significant and reflect the federal government's 
ineffective stewardship over its valuable and historic portfolio of 
real property assets. As part of its 2008 financial statement, GSA 
reported about $7.3 billion in capital repair and alteration work items 
that had not been addressed by ongoing projects.
    To what extent, if any, will the funding provided by the American 
Recovery and Reinvestment Act address these needs?
    Answer. GSA expects Recovery Act funds to reduce the backlog of 
traditional Repairs and Alterations (R&A) needs by $1 to $1.5 billion. 
Of the $4.5 billion of ARRA funds directed towards High-Performance 
Green Buildings, almost two-thirds has been dedicated to energy 
improvements and greening initiatives, and the remainder will directly 
address the R&A backlog. The $1.05 billion provided for Federal 
buildings and LPOE projects will be used for New Construction, and will 
not have a direct impact on our repair and alterations liabilities.
    Question. What action is GSA taking to ensure that recently 
constructed and recently renovated properties are maintained so the 
situation of allowing facilities to deteriorate does not continue?
    Answer. GSA strives to maintain a portfolio of assets that are in 
``Good'' condition, meaning needed repairs are less than 10 percent of 
the asset's functional replacement cost. GSA maintains the condition of 
these core assets through strategic reinvestment throughout the life of 
the asset. Asset condition is evaluated and monitored annually, through 
a series of asset management diagnostic tests. When repair and 
alteration needs are identified, such repairs are addressed through the 
minor repairs and alterations program. Recently constructed and 
recently renovated properties have few, if any, repair and alteration 
needs.
    GSA has made progress in improving the condition of its portfolio 
of assets through strategic management of existing assets, and Recovery 
Act funding provided for repair, modernization, and green initiatives. 
For example, 50 U.N. Plaza in San Francisco, CA, had been mostly 
vacant, and Recovery Act funding will allow this historic asset to be 
fully utilized again. However, despite the investments of the Recovery 
Act, GSA continues to face challenges from maintaining an aging 
building portfolio. The Recovery Act is expected to reduce GSA's R&A 
backlog by approximately $1 to $1.5 billion.
                                 ______
                                 
             Question Submitted by Senator Mary L. Landrieu
                             customs house
    Question. The New Orleans Customs House is a magnificent historic 
structure located on the edge of the French Quarter that dates back to 
1848. During Katrina, its roof failed, and the building suffered 
significant water damage. Since that time, GSA and Customs have 
dedicated funding to repair the building, and it is scheduled for re-
occupancy in the spring of 2010. The Customs House is the only National 
Historic Landmark building in GSA's Southwest Region, which is based in 
Fort Worth, Texas. This subcommittee included language in the previous 
year's appropriations report that mentioned the building by name and 
underscored its significance to the local community. Section 307 of the 
Stafford Act and GSA Policy Number 2851.5 both require that preference 
for reconstruction work following a major disaster be given to locally-
based firms. However, there are no Louisiana firms under contract to 
perform work on the Customs House.
    Will you and the Chief Architect of GSA work with my office to 
ensure that the agency complies with the Stafford Act and follows its 
own policy on Gulf Coast reconstruction projects, by allowing locally-
based Louisiana firms to participate in the restoration of the Customs 
House?
    Answer. Yes, GSA will work with Senator Landrieu's office to 
address any questions on the restoration of the New Orleans Customs 
House.
    Phase I of the New Orleans Customs House repair and alteration is 
for Hurricane Katrina reconstruction, and as such is governed by the 
Stafford Act. The design-build contract has been awarded to a local 
business: Carl E. Woodward, LLC, a New Orleans-based firm. The Phase I 
design firm is Waggonner & Ball Architects, also of New Orleans. As of 
July 2009, $36 million has been awarded. 95 percent of that amount, or 
approximately $34 million, has been awarded to Louisiana-based 
subcontractors.
    Phase II of the Customs House restoration does not involve any work 
covered by the Stafford Act, such as debris clearance, supply 
distribution, or reconstruction work. Nevertheless, GSA has awarded 35 
percent of the design contract to Waggonner & Ball Architects of New 
Orleans. The remainder of the Phase II design contract was awarded to a 
design firm that, while not locally-based, had extensive prior 
experience working on the Customs House, and was able to present a fair 
and reasonable price for the remaining design work. The construction 
contract for Phase II repair and alteration is anticipated to be 
awarded during or near January 2010. GSA is encouraging organizations, 
firms, and individuals residing or doing business primarily in New 
Orleans to submit proposals for the final portion of the Customs House 
restoration work, and is considering holding a local business workshop 
on the subject during autumn 2009.
    Re-occupancy of the Customs House is scheduled for Summer 2011.
                                 ______
                                 
              Questions Submitted by Senator Susan Collins
    Question. It seems like the $4.5 billion provided for converting 
GSA facilities to High-Performance Green Buildings will create a great 
deal of demand for ``green'' building products and technologies, such 
as LED lighting and solar roofing materials.
    Is the domestic market for these materials strong enough to meet 
these needs?
    Answer. GSA is investigating the capacity of American manufactures 
to provide products, particularly in the energy efficiency sector, to 
be installed and used in GSA's Recovery projects. GSA is using the 
services of a major construction management firm with close ties to the 
construction industry to analyze product requirements and project 
schedules. We are also using information already collected by the 
Department of Energy in this analysis. As part of this effort, GSA 
plans to manage project schedules and by extension, product orders, to 
level demand for specific manufactured products and materials.
    Question. Will all of these materials come from American 
manufacturers?
    Answer. The Recovery Act generally requires Federal agencies to 
utilize iron, steel, and manufactured goods produced in the United 
States for Recovery projects. GSA is asking the American manufacturing 
community to help meet its goal of ``on time, on budget, on green.'' 
Although specific requirements vary by product type and project, GSA 
strives to use American-made goods to the greatest extent possible on 
all Recovery Act projects.
    Question. Will GSA take any additional or extra steps to ensure 
that local, small businesses can compete to provide ``green'' products 
or services?
    Answer. GSA's Recovery Act projects provide many opportunities for 
small businesses:
  --GSA has planned over 200 high-performance green building limited 
        scope projects, which range in size from $114,000 to 
        $107,000,000, and together total just over $800 million.
  --Other opportunities include an additional $296 million for small 
        projects across the country.
  --Opportunities also exist in support service contracts, such as 
        acquisition and project management support.
    GSA will support small businesses through the use of new small 
business set-asides where adequate competition and competitive pricing 
can be achieved.
    GSA is also preparing a list of Indefinite Delivery, Indefinite 
Quantity (IDIQ) contract holders: This list will be made publicly 
available to assist small businesses in obtaining sub-contracts with 
existing GSA contractors. All bid opportunities will be advertising on 
www.FedBizOpps.gov.
    GSA is hosting partnering events that provide opportunities for 
small vendors to present qualifications and form relationships with 
prime contractors. We have also developed a communication network 
through small business associations, to provide information to vendors 
across the nation.
    GSA remains committed to negotiating aggressive small business 
subcontracting plans with our prime contractors for large design and 
construction contracts. As appropriate, GSA will publish prime 
contractor contact information online
    Question. GSA's lack of responsiveness to this Committee and to the 
Committee on Homeland Security and Governmental Affairs is very 
problematic. As you know, both Committees have oversight over GSA's 
policies and activities, and are responsible for ensuring that GSA is 
using Federal funds effectively. Inquiries to GSA--particularly 
questions relating to the Public Buildings Service and construction 
projects--take a very long time to generate responses, and sometimes 
are never answered.
    GSA frequently takes months to prepare responses to formal letters. 
Are you aware that this is a problem for GSA? Can you identify steps 
that you will take to improve this situation and ensure that GSA 
responds to Congressional inquiries--formal and informal--in a timely 
manner? If not, will you agree that this is a problem and will you 
commit to taking immediate steps to improve this situation?
    Answer. GSA is aware of the problem and we are currently analyzing 
our organizational structure and internal processes to correct this 
issue. The Public Buildings Service (PBS) has merged its legislative 
and correspondence offices into one office that reports directly to the 
PBS Chief of Staff. We have analyzed the correspondence process within 
PBS and are testing a new process starting July 30, 2009. We believe 
the new procedures will streamline the correspondence process within 
PBS and reduce the overall time it takes to return letters. In fact, 
PBS is aiming to reduce response time within PBS from months to 7 
business days. This would include receiving the letter, vetting the 
request, researching the answer, drafting a response, and obtaining 
proper internal clearance for the draft response, to ensure we have 
properly answered the letter.
    Question. The Fiscal Year 2009 Omnibus Appropriations Act includes 
separate provisions directing GSA to provide both a 5-year plan for 
Federal buildings and a 5-year plan for land ports of entry in fiscal 
year 2010 Congressional Budget Justification materials. GSA did not 
provide these plans in their budget justification materials and has yet 
to provide them to the Committee.
    If these plans are not available, what is the basis for GSA's 
fiscal year 2010 request for Federal building construction and land 
ports of entry? How can this Committee be certain that the projects 
included in your request are the best or most pressing needs for 
Federal construction?
    Answer. GSA's fiscal year 2010 request for New Construction 
projects concentrates on space consolidation efforts, for the Food and 
Drug Administration and the Federal Bureau of Investigation, and for 
mission-critical requirements that cannot be easily met in leased 
space.
    Our customers' long-term requirements and GSA's needs have changed 
as a result of the substantial new funds provided in the Recovery Act. 
However, the Recovery Act plan was based on shovel-ready projects, and 
a large number of high-priority needs remain that were not ``shovel-
ready'' at the time the Recovery Act plan was prepared.
    The required plans will be submitted as soon as they are 
coordinated. GSA will include the plans, as required, in future budget 
submissions.
    Question. Although GSA has not provided 5-year plans for Federal 
buildings or Land Ports of Entry, this Committee does have the 5-year 
courthouse plan of the Judiciary. But neither of the courthouses in 
GSA's request are on that list. The projects on the Judiciary's list 
are scored and ranked by fiscal year.
    In developing the fiscal year 2010 budget request, why did GSA not 
follow the priorities set out in the Judiciary's Five-Year Courthouse 
Plan?
    Answer. The funding provided by the Recovery Act allowed GSA to 
fund a large program of Courthouse requirements in fiscal year 2009 and 
fiscal year 2010; this freed up funds to meet the needs in Lancaster 
and Yuma with Federal construction.
    Our Recovery Act project plan includes 6 Courthouse New 
Construction projects, including the Austin Courthouse ($116 million), 
which is the highest priority Courthouse to be identified by Judiciary 
in their Five-Year Plan. The Recovery Act project plan also includes 
funds for repair and alteration work on more than 110 Courthouses.
    Question. What objective criteria led GSA to select Lancaster, 
Pennsylvania, and Yuma, Arizona, over the projects on the Judiciary's 
list?
    Answer. These projects were originally identified as potential 
lease construction projects. Both OMB and GAO have been closely 
reviewing lease construction scenarios and have determined that it is 
often not in the best interest of the Federal Government and the 
taxpayer. In this case, GSA performed a 30-year present value life 
cycle cost comparison between Federal construction and leasing. The 
analysis considered both the government's equity and its capital and 
operating costs in each alternative to determine the lowest net costs 
expressed in present value terms for a given amount of space. The 
inherently governmental nature and long term requirement of these 
courthouses make Federal construction a financially responsible 
solution. A lease construction project would involve annual above-
market rent outlays from the government over the life of the lease 
without any benefit of residual value at the end of the lease. The 
life-cycle cost analysis supports Federal construction as the best 
value to the taxpayer.
    The Courthouse project in Yuma, AZ was originally proposed as a 
lease construction project because funding was not expected to be 
available to meet the Judiciary's requirements with Federal 
construction. GSA was also working with the Courts to develop a 
potential lease construction project in Lancaster, Pennsylvania. If 
funding were provided through the 2010 Appropriations, both projects 
would be converted to Federal construction, which would allow for a 
government-owned solution and save taxpayer money.
    Question. GSA seems to have an inability or unwillingness to 
appropriately address the needs of local communities when planning and 
executing Federal construction projects. For example, this is apparent 
in GSA's dealings with the Madawaska, Maine community.
    Does GSA have a formal process for collecting public input on 
construction projects?
    Answer. At GSA, we take pride in our work with communities when 
planning and executing Federal construction projects. Large or complex 
development projects often engender competing views on community 
impacts. GSA conducts formal and informal communications with local 
communities throughout all stages of the design and construction 
process for new construction projects.
    During the planning stage of a project, GSA utilizes the process 
set forth by the National Environmental Policy Act (NEPA) to solicit 
public involvement and input from residents, business owners, local and 
state officials, and affected agencies. GSA typically hosts a public 
meeting to hear local concerns and provide contact information for 
those who want to comment directly to the agency. GSA takes into 
consideration issues raised by the public at these meetings or in 
writing to determine and update the scope of the prospectus development 
study. NEPA documentation is made available to local communities as it 
is developed. GSA then evaluates and responds to those comments as a 
part of our NEPA process.
    Additionally, GSA holds community open house meetings and hosts 
stakeholder meetings at key stages during project design. For example, 
GSA held a stakeholders' meeting for the Madawaska Land Port of Entry 
on March 31 of this year. Nearby businesses (Fraser Paper and Montreal, 
Maine, and Atlantic Railway, Inc.), Town of Madawaska officials, 
Congressional delegation representatives, and the facility's future 
tenant, the Department of Homeland Security's U.S. Customs and Border 
Protection, were invited to attend. The GSA design team presented an 
electronic building information model (BIM) showing the new port and 
incorporating a 4 dimensional (time visualization) demonstration of how 
traffic will flow through the new port.
    Question. Does GSA perform an objective review of citizen concerns, 
and notify the community of GSA's decision in a timely manner?
    Answer. GSA performs an objective review of citizen concerns for 
Federal construction projects. GSA immediately responds to oral 
questions received during open houses and stakeholder meetings, and 
addresses written comments submitted through the Agency's NEPA review. 
In the case of Madewaska, GSA thoroughly reviewed and responded to 
community concerns, questions and comments. Once substantive comments 
were addressed, GSA notified the community of how it evaluated and 
responded to comments in its final EIS.
    The timeliness of the GSA's responses can be best demonstrated by 
example. For the Madawaska Land Port of Entry, the Draft EIS was made 
available to the public on August 8, 2006. The public comment period 
started on August 3, 2006 and ended on September 22, 2006. GSA also 
hosted an open house on August 17, 2006, where 14 attendees offered 
oral comments and GSA received ten written comments. GSA received a 
total of 75 pages of public concerns and comments regarding its Draft 
EIS, including verbal and written comments. GSA objectively reviewed 
these comments and then responded accordingly in the final EIS, which 
was published in December 2006.
    Question. Approximately how many data centers does the Federal 
Government own? Approximately how many square feet of data center space 
does the federal government occupy in government owned facilities and 
contractor owned facilities?
    Answer. The Office of Management and Budget is currently gathering 
Government-wide information on data centers. Once we receive the 
updated information, we will be in a better position to answer these 
questions. We expect to provide the Committee with the answers by 
October 15, 2009.
    Question. What risk does the continued proliferation of federal 
data centers present to the federal budget and our nation's energy 
consumption?
    Answer. The proliferation of Federal data centers will increase 
energy consumption in order to support the facilities' environment 
control systems and information technology systems. Additional data 
centers, as historically constructed, would increase overall costs to 
the Federal government for construction and operation and maintenance, 
and not take advantage of modern concepts such as cloud computing and 
virtualization that can reduce IT cost, energy consumption and lower 
the cost of government operations. Future data centers should be built 
with a well-coordinated strategy that increases capacity and utilizes 
modern concepts such as green building, and other efficiencies that 
would otherwise not be realized.
    Question. Is GSA actively exploring how it can be a singular 
provider of data processing and storage capability to a large portion 
of the rest of the Federal Government?
    Answer. Yes, GSA is currently preparing a business case analysis to 
determine the viability of providing multi-tenant government-owned data 
centers that offer a fully acceptable risk mitigated data survivability 
solution to all Federal entities.
    To date, this analysis has focused on ensuring that Federal data 
centers provide adequate protection for our nation's most critical 
information and network infrastructures.
    Question. What role can intra-data center and inter-data center 
virtualization play in facilitating federal data center consolidation?
    Answer. These activities will reduce the footprint of information 
technology tremendously, through the provisioning of technology 
resources, and will assist in the reduction of Federal energy 
consumption. Data center virtualization will be one vehicle to 
realizing the cost savings and efficiencies proposed in this area by 
this Administration.
    Question. What challenges exist to GSA and other agencies on the 
statutory and regulatory levels to achieving a more consolidated 
federal IT infrastructure?
    Answer. We are currently gathering Government-wide information on 
data centers. Once we receive the updated information, we will be in a 
better position to answer these questions. We expect to provide the 
Committee with the answers by October 15, 2009.
    Question. What are some examples of excellence within the federal 
government with regard to pushing the consolidation agenda forward?
    Answer. We are currently gathering Government-wide information on 
data centers. Once we receive the updated information, we will be in a 
better position to answer these questions. We expect to provide the 
Committee with the answers by October 15, 2009.
                                 ______
                                 
               Question Submitted to Joseph F. Bataillon
              Question Submitted by Senator Susan Collins
    Question. GSA will be spending $1.5 billion of American Recovery 
and Reinvestment Act (Stimulus) funds on facilities in which the 
Judiciary is a tenant. Do you believe the projects that have been 
identified reflect the Judiciary's highest priority needs?
    Answer. The Judiciary's top space priority is the additional money 
needed to build the Los Angeles project. We were hopeful that stimulus 
funding was going to be provided to fund the estimated shortfall for 
the Los Angeles project that was authorized by the House and Senate. 
Thereafter, the Judiciary's space priorities are set forth in the 
attached Five-Year Courthouse Project Plan for Fiscal Years 2010-2014 
(Five-Year Plan). Only one courthouse that was on the Five-Year Plan, 
Austin, Texas, was included in the stimulus legislation ($116 million). 
The Judiciary recognizes and is appreciative of the fact that of the 
$4.5 billion appropriated for green buildings, we will receive almost 
$1.3 billion of that money for repair and alteration projects in 132 
buildings where the Judiciary is a tenant. In addition, two projects 
(Billings, Montana and Bakersfield, California) which the Judiciary and 
GSA had initially determined could best be provided through lease-
construct are now funded as federal construction projects through the 
stimulus legislation. The Judiciary's highest priority space needs, 
however, are reflected in the Five-Year Plan.

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

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

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

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

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

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

All cost estimates subject to final verification with GSA.

                         CONCLUSION OF HEARINGS

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

 
             MATERIAL SUBMITTED SUBSEQUENT TO THE HEARINGS

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

 
       LIST OF WITNESSES, COMMUNICATIONS, AND PREPARED STATEMENTS

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

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

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

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

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

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

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

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

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

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

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

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

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

 
                             SUBJECT INDEX

                              ----------                              

                  COMMODITY FUTURES TRADING COMMISSION

                                                                   Page

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

                       DEPARTMENT OF THE TREASURY

                        Internal Revenue Service

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

                        Office of the Secretary

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

                    GENERAL SERVICES ADMINISTRATION

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

                   SECURITIES AND EXCHANGE COMMISSION

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

                     SMALL BUSINESS ADMINISTRATION

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

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