    [Senate Hearing 111-817]
    [From the U.S. Government Publishing Office]

                                                            S. Hrg. 111-817

      FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR FISCAL
                                   YEAR 2011

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

                                    HEARINGS

                                    before a

                              SUBCOMMITTEE OF THE

                COMMITTEE ON APPROPRIATIONS UNITED STATES SENATE

                         ONE HUNDRED ELEVENTH CONGRESS

                                 SECOND SESSION

                                       on

                                    S. 3677

        AN ACT MAKING APPROPRIATIONS FOR FINANCIAL SERVICES AND GENERAL
    GOVERNMENT FOR THE FISCAL YEAR ENDING SEPTEMBER 30, 2011, AND FOR OTHER
                                    PURPOSES

                                   __________

                      Commodity Futures Trading Commission
                       Consumer Product Safety Commission
                            Federal Trade Commission
                         Office of Personnel Management
                       Securities and Exchange Commission
                          United States Postal Service

                                   __________

             Printed for the use of the Committee on Appropriations

           Available via the World Wide Web: http://www.gpo.gov/fdsys

                                   __________

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                          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
                            Dale Cabaniss (Minority)
                        Brooke Hayes Stringer (Minority)
                           LaShawnda Smith (Minority)

                             Administrative Support

                              Molly Barackman-Eder

                                C O N T E N T S

                                  ----------

                            Thursday, March 18, 2010

                                                                       Page
    United States Postal Service.....................................     1

                           Wednesday, March 24, 2010

    Office of Personnel Management...................................    61

                           Wednesday, April 14, 2010

    Consumer Product Safety Commission...............................   111

                           Wednesday, April 28, 2010

    Commodity Futures Trading Commission.............................   141
    Securities and Exchange Commission...............................   165

                             Thursday, May 20, 2010

    Federal Trade Commission.........................................   195

      FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR FISCAL
                                   YEAR 2011

                                  ----------

                            THURSDAY, MARCH 18, 2010

                                           U.S. Senate,
               Subcommittee of the Committee on Appropriations,
                                                        Washington, DC.
        The subcommittee met at 2:40 p.m., in room SD-192, Dirksen
    Senate Office Building, Hon. Richard J. Durbin (chairman)
    presiding.
        Present: Senators Durbin and Collins.

                          UNITED STATES POSTAL SERVICE

    STATEMENT OF HON. JOHN E. POTTER, POSTMASTER GENERAL,
                CHIEF EXECUTIVE OFFICER

                 OPENING STATEMENT OF SENATOR RICHARD J. DURBIN

        Senator Durbin. My apologies to those of you who were here
    on time when we weren't. I would like to blame the Senate
    leadership, except I'm part of it.
        And we had a rollcall that went a little bit longer than we
    expected.
        Good afternoon. And I'm pleased to convene this hearing
    before the Senate Appropriations Subcommittee on Financial
    Services and General Government. Our focus today is on the
    financial circumstances facing the United States Postal Service
    (USPS). This is the first in a series of hearings which we're
    planning this spring as we start to develop our fiscal year
    2011 spending bill.
        I'm glad that my friend and fellow member of the
    subcommittee Senator Susan Collins of Maine is here today. And
    other colleagues may join us, as their schedules allow.
        We are all familiar with that famous maxim, ``Neither snow
    nor rain nor heat nor gloom of night stays these couriers from
    the swift completion of their appointed rounds.'' Its origin is
    a reference to the ancient courier service of the Persian
    Empire in Herodotus' ``Histories,'' dating to 450 B.C. It's
    also inscribed over the James Farley Post Office in New York
    City. And it has, over time, been an often-spoken but
    unofficial motto ascribed to the dedicated work of the men and
    women of the United States Postal Service.
        America's Postal Service has enjoyed a vibrant history,
    dating back to the system instituted by Benjamin Franklin, as
    chairman of the committee of the Second Continental Congress in
    1776. This history is rooted in a single, stalwart principle,
    that every person in the United States, no matter who, no
    matter where, has the right to equal access to secure,
    efficient, and affordable mail service.
        Today alone, letter carriers and truckers will drive 4.1
    million miles to deliver 584 million pieces of mail to more
    than 150 million residences, businesses, and post office boxes
    across our Nation. Today alone, 1.1 million customers will go
    online to the Postal Service Web site to conduct $608,000 worth
    of postal business, and another 7 million customers will go
    into a physical post office building. Today alone, $224.4
    million in revenue will be received, 584 million mail pieces
    will be processed and delivered, 115,000 plus address changes
    will be processed, 3,000 plus new addresses will be added to
    the postal network, and 402,000 plus gallons of fuel will be
    consumed. And today alone, like each day of the year, no tax
    dollars will be used to operate the United States Postal
    Service.
        Even amid these captivating day-in-the-life statistics, we
    continue to witness a remarkable, even revolutionary,
    transformation of the modes of personal communication and
    business interchange, from electronic mail and online bill
    paying, to instant messaging and social networking, via the
    Internet. As a result, mail volume has continued to spiral in
    decline, dropping from 213 billion pieces in 2006 to 177
    billion pieces last year. Couple this with an economic
    recession, and you see circumstances that have dramatically
    impacted the ability of the U.S. Postal Service to thrive and
    to meet its goals.
        The Postal Service recently unveiled an action plan of
    proposals to address grim realities that its expenses will
    likely continue to outpace revenues. It is prudent that we
    engage in a thoughtful and open national dialogue on the wisdom
    of the solutions proposed by the Postal Service.
        Monday through Saturday mail delivery dates back to 1863.
    It's been mandated in our annual appropriations bill for over a
    quarter of a century. I didn't know that. I knew it was in
    there, but nobody ever talked about it until there was a
    proposal to go to 5-day service, and then they said, ``Senator
    Durbin, Senator Collins, this is your issue.'' And that's why
    we're here today.
        Serious questions need to be asked and answered before
    Congress simply changes the course and embraces major changes
    in mail delivery. Who will benefit? Who is going to be harmed?
    Can we mitigate the impact? What savings will actually be
    gained? How reliable are the estimates that we're working with?
    What will we sacrifice? Will it drive mailers away or divert
    more commerce to the Internet or postal competitors? Have all
    the options been identified and explored? Will a reduction in
    delivery service enhance, or will it hinder, the long-term
    position of the Postal Service as a vital component of
    America's economy, a $900 billion industry? Even if the
    delivery frequency is changed, is the Postal Service still
    contemplating a rate hike and closing or consolidating
    facilities? What will be the impact on the postal workforce? I
    think these issues are just the tip of the iceberg. We'll start
    talking about them today.
        As the chairman of this subcommittee of jurisdiction, which
    provides a small stream of annual reimbursement payments, known
    as ``revenue foregone,'' and the current author of the bill
    that carries the nearly 30-year-old mandate that 6-day delivery
    and rural delivery of mail shall continue at no less than the
    1983 level, I welcome the opportunity to provide this forum.
    I'm also interested in learning more details about the array of
    proposed reforms. I am going to welcome the Postmaster General,
    after I yield to my colleague, the ranking member of this
    subcommittee, Senator Susan Collins of Maine.

                       STATEMENT OF SENATOR SUSAN COLLINS

        Senator Collins. Thank you, Mr. Chairman.
        Let me begin by expressing my appreciation to you for
    holding this important hearing to discuss the dire and
    declining financial condition of the Postal Service, an
    institution that is critical to our economy and our way of
    life.
        The Postal Service, as the chairman has pointed out, is one
    of our oldest institutions. It is the lynchpin of a $900
    billion mailing industry that employs close to 9 million people
    in businesses as diverse as paper manufacturing, printing,
    catalog companies, publishing, newspapers, and financial
    services.
        I must say, Mr. Chairman, that I'm experiencing a sense of
    deja vu in attending today's hearing on this topic. The
    Homeland Security and Governmental Affairs Committee has held
    14 hearings related to the Postal Service and its financial
    crisis since 2003, and I chaired the vast majority of those
    hearings. I want to commend you, Mr. Chairman, for holding
    another hearing to address this complex and seemingly eternal
    issue.
        Nine years ago, in 2001, the Government Accountability
    Office (GAO) first placed the Postal Service on its high-risk
    list, because it faced formidable financial, operational, and
    human capital challenges that threatened its long-term
    viability. Five years later, as the result of the passage of
    postal reform legislation in 2006, which I authored with
    Senator Carper, the GAO removed the Postal Service from the
    high-risk list. But, last year the Postal Service, losing
    billions, and facing a crisis, once again was added to the
    high-risk list.
        Approximately every 3 years--in 2003, in 2006, and again
    last year, in 2009--the Postal Service has come to Congress
    seeking relief from its financial obligations in exchange for
    promises of future profitability. The Postmaster General's
    request to Congress for relief from its retiree health benefit
    payments and from its obligation to deliver mail 6 days a week
    is just the most recent in a long history of Postal Service
    requests for financial assistance in exchange for the promise
    of becoming financially solvent--someday.
        In 2003, Congress passed postal reform legislation--I
    coauthored--that reduced the Postal Service's pension costs by
    approximately $9 billion. In 2006, the Postal Accountability
    and Enhancement Act that Senator Carper and I authored relieved
    the Postal Service of a $27 billion obligation, primarily by
    transferring the Postal Service's obligation for retirement
    benefits for its employees with prior military service to the
    Treasury Department. In 2009, Congress voted, at the Postal
    Service's request, to reduce by $4 billion a retiree health
    benefits payment that was due on September 30. I reluctantly
    supported this reduction, too--in fact, I cast the deciding
    vote--because the fact is that the Postal Service simply could
    not make the full payment.
        My point is, and my frustration is, that, over and over
    again, the Postmaster General has promised that if only
    Congress would allow the USPS relief from its financial
    obligations and take other actions, it would be on a solid
    financial footing. But, time and time again, I've been
    disappointed in the results after I've agreed to these
    requests; indeed, led the fight on these requests.
        During the past year, the Postmaster General has been
    particularly critical of the payment stream set up in the 2006
    law in exchange for the elimination of the expense of the
    escrow requirement and the transfer of the retirement
    obligations for employees with previous military service to the
    General Treasury. Yet, this very payment obligation from which
    the Postal Service now seeks relief was part of a
    recommendation from the Postal Service to prefund its future
    retiree health benefits. When the law passed in 2006, here's
    what the Postal Service said, and I quote: ``The new law
    directs the Department of the Treasury to resume the funding of
    military pensions for postal employees and abolishes a
    federally mandated escrow requirement, directing those monies
    to prefund retiree health benefits. Over the next decade, these
    changes will free the Postal Service of future legacy costs. We
    are now on firm financial footing for the future.''
        Now, after the Postal Service, in my judgment, has been
    slow to take advantage of the increased flexibilities also
    provided by the 2006 law, the Postmaster General has once again
    returned to Congress seeking billions in relief from its
    liabilities and once again making promises of improvements.
        I will, of course, carefully consider the Postmaster
    General's latest request. I've already proposed stretching out
    the payment schedule to ease the burden. But, we simply cannot
    just wish away these liabilities, or pretend that they do not
    exist.
        I also support allowing the Postal Service more flexibility
    in determining its infrastructure needs. It may well be more
    convenient for customers, as well as less expensive for the
    Postal Service, to locate postal services within a grocery
    store or a pharmacy within some communities.
        With respect to 5-day delivery, the Postal Service will
    have to present a compelling case that reduced delivery will
    not further depress volume, setting off a death spiral. It's
    going to take all the members of the postal community,
    including the postal management, its dedicated employees,
    members of the mailing community, Congress, and the
    administration, to contribute to the solution to this financial
    crisis.
        I look forward to today's dialogue and hope it will not be
    a prelude for a similar discussion 3 years from now.
        And I thank the chairman for his indulgence.
        Senator Durbin. Thank you, Senator Collins.
        Our first witness is Postmaster General John Potter, who's
    served since 2001. He is America's 72d Postmaster General,
    starting as a career postal employee in New York in 1978, and
    he leads the second-largest civilian workforce in the United
    States.
        Postmaster General Potter.

                      SUMMARY STATEMENT OF JOHN E. POTTER

        Mr. Potter. Good afternoon, Chairman Durbin and Ranking
    Member Collins. I appreciate the opportunity to discuss the
    serious financial situation of the United States Postal
    Service.
        Today, we stand at a critical juncture. I see both
    challenges and opportunities ahead for the Postal Service and
    all of our stakeholders.
        In the short term, the Nation's economy has experienced the
    worst decline in decades, a decline that significantly affected
    most every sector of the U.S. economy, especially large mailers
    in the financial and housing sectors, and caused the largest
    reduction in mail volume history.
        The Postal Service faces further reductions in volume due
    to a tremendous revolution in technology, a revolution that has
    fueled a global transformation from an Industrial Age to an
    Information Age, a transformation that was accelerated by the
    downturn in the economy. This situation has resulted in the
    diversion of traditional mail to electronic mail and in the
    rise of online bill paying and other practices. We also face
    severe challenges, some deriving from mandates imposed over
    time through regulation and legislation.
        As a result, the Postal Service finds itself on a fiscal
    course that is unsustainable. This situation could not have
    been avoided, and no one is to blame. No one could have
    envisioned the economic crisis that has rocked this country and
    the mail. At just about halfway through fiscal year 2010, we
    project a loss of approximately $7 billion. In 2006, we reached
    a record level of 213 billion pieces of mail. For fiscal year
    2010, we expect volume to be about 166 billion pieces. That
    means one in five pieces of mail has disappeared. As a result,
    the cost of delivering a piece of mail has risen. Our revenues
    are simply not keeping up with the cost of supporting a system
    designed to serve a much larger volume of mail.
        The declines in mail volume and revenue have caused us to
    rethink everything that we're doing. We've managed aggressively
    and took actions within our control. We took aggressive cost-
    cutting measures and reduced costs by $2.8 billion in 2008, by
    more than $6 billion in 2009, and this year we plan to take out
    another $3.8 billion in costs. Postal employment, which was
    over 800,000 10 years ago, is now below 600,000, and with the
    help of our unions and management associations, we did this
    without layoffs. But, we are rapidly reaching the point of
    diminishing returns. Only so much can be cut before service
    suffers. Overcoming our financial challenges will be an
    enormous undertaking. If we are to succeed, rapid, aggressive,
    and fundamental changes are absolutely necessary.
        Accordingly, we have developed a plan for action--a plan of
    action for the next decade that is bold, but is also balanced,
    in that it considers the interest of all stakeholders in the
    mail. To help develop our plan, we engaged three of the world's
    most experienced and respected management consulting firms:
    McKinsey & Co., The Boston Consulting Group, and Accenture,
    LLC. We asked each firm to independently conduct studies, talk
    with stakeholders, and produce ideas that would help close the
    growing gap between our revenues and expenses without undue
    impact on our customers. The consultants projected that there
    will be 150 billion pieces of mail in 2020, and that without
    significant changes, cumulative losses could exceed $238
    billion by that time.
        Drawing from the consultants' recommendations, we crafted a
    balanced and reasonable plan for a financially sound future.
    Our solutions are: to restructure the prefunding of retiree
    health benefit payments; adjust the number of mail delivery
    days; continue to enhance and expand all alternate access to
    our products and services; establish a more flexible workforce;
    apply the consumer price index cap to all market-dominant
    products, as opposed to just by class; introduce more new
    products and services, consistent with our mission; establish
    more clearly defined, appropriate, and agile oversight. Some of
    these solutions could be implemented quickly, while others
    require more time to achieve. And no one solution is the answer
    to reversing our financial condition.
        The financial position--picture for the Postal Service is
    grim, and without changes, will surely worsen. We urgently need
    your help and legislative change. No matter which decisions are
    made, it's absolutely critical that they be made in a timely
    fashion.
        The two most urgent changes which we'd like you to consider
    are a restructuring of the funding payments for retiree health
    benefits and a change in the frequency of mail delivery.
        Regarding the retiree health benefits, the Postal Act of
    2006 requires us to prefund 73 percent of all future retiree
    health benefits, a 75-year liability, in just a 10-year period
    of time. The aggressive annual prefunding payments average $5.6
    billion, along with separate insurance payments that average
    $3.4 billion annually. Although we recognize our obligation to
    prefund retiree health benefits, in this economic environment,
    we no longer have the ability to pay at the accelerated pace.
    The trust fund holding our payments had a balance of more than
    $35 billion at the end of 2009, which is sufficient to pay the
    premiums for all of our roughly 500,000 currently participating
    retirees, through their expected lifetimes.
        Another large financial burden is a statutory requirement
    for 6-day mail delivery. There is no longer sufficient volume
    to sustain the cost of the 6-day delivery network. Reducing
    delivery frequency would substantially reduce our annual costs
    by approximately $3 billion. Recent independent surveys show
    that consumers support this change.
        In anticipation of a possible change, we've developed a
    comprehensive operations plan for 5-day delivery that will
    address all possible impacts. We will seek an advisory opinion
    from the Postal Regulatory Commission at the end of this month.
    Should Congress allow a change, we would provide 6 months'
    notice, prior to putting a change in place, ensuring a smooth
    transition for our customers and our employees.
        Although changes in retiree health benefits and delivery
    frequency will go a long way to helping alleviate our financial
    pressures, they will not be enough to make the Postal Service
    profitable. We also need an improved model of oversight, and
    that provides us with the management flexibility to adjust our
    operations network to reflect the rapid decrease in mail
    volume, expand our products and services, that we may react
    more rapidly and aggressively to market-driven environment,
    base prices for our market-dominant products on demand and cost
    of each individual offering.
        We require and need the help of Congress, because many of
    the solutions that we just described, those with significant
    changes, are not within our control. We do not have the
    unilateral power to change employee wages or benefits, change
    the legacy costs of retiree health benefits, change delivery
    frequency, diversify our products and services, change prices,
    or address Civil Service Retirement System (CSRS) overfunding.
        Our plan is a path to a future in which the Postal Service
    will remain a vital driver of the American economy and an
    integral part of every American community. Even in an
    increasingly digital future, the mail, which is projected to
    total about 150 billion pieces in 2020, will remain a powerful
    delivery and marketing channel, a preferred means of commercial
    and personal communication for many purposes, and a complement
    to e-commerce.

                               PREPARED STATEMENT

        Thank you for your support of our ongoing efforts to ensure
    a solvent and sound Postal Service. I look forward to working
    with you and other Members of Congress to achieve the passage
    of legislation that will address our near-term and future
    challenges, and I would be pleased to respond to any questions
    that you may have.
        [The statement follows:]

                      Prepared Statement of John E. Potter

        Good afternoon, Chairman Durbin, Ranking Member Collins, and
    members of the Subcommittee. I appreciate the opportunity to discuss
    the serious financial situation facing the United States Postal Service
    and to provide details of our plan for reducing the number of mail
    delivery days, should a frequency change be approved by Congress. I
    also would like to share aspects of our new action plan for the next
    decade titled, ``Ensuring a Viable Postal Service for America.''
        For over 235 years, the Postal Service has provided trusted,
    affordable universal service to the nation. Our goal is to continue to
    do so. As the members of this Subcommittee are well aware, the Postal
    Service is in a dire financial situation. The situation has occurred
    despite the efforts of Congress through passage of the Postal
    Accountability and Enhancement Act of 2006 (Postal Act of 2006). Our
    current financial circumstances have come about in spite of the massive
    efforts of Postal Service management and employees who have adopted
    aggressive cost-cutting measures to save over $1 billion each year
    since 2001. For 2009 alone, the savings exceeded $6 billion.
        Our financial situation has many causes: a severe national
    recession that significantly affected the financial and housing
    sectors, which were important users of the mail; the powerful and rapid
    evolution of new technologies that have diverted mail to other
    channels; and the changing use of the mail to communicate and conduct
    business. This situation could not have been avoided and no one is to
    blame. No one could have envisioned the economic crisis that has rocked
    this country.
        Further complicating the fiscal health of the Postal Service are
    limitations under which we operate, including:
      --A statutorily mandated requirement to provide 6-day a week
            delivery.
      --Accelerated annual payments to pre-fund a significant portion of
            our retiree health benefit obligation.
      --A restriction to not close Post Offices solely on an economic
            basis.
      --The requirement to submit to binding arbitration to finalize labor
            contracts.
      --Constraints on our ability to restructure and streamline our
            processing and distribution networks.
      --Restrictions on the types of products and services the Postal
            Service can offer.
      --A lack of clarity between the role of the Governors of the Postal
            Service and the Postal Regulatory Commission (PRC), and an
            oversight model that adds unnecessary burden and time to
            decision-making.
        Without critically needed fundamental changes, the Postal Service
    expects significant losses in fiscal year 2010 and in each year into
    the near future. Our fiscal year 2010 financial plan estimates a
    revenue decline of roughly $2 billion and a net loss of approximately
    $7 billion. These projections assume there will be no changes this year
    in the number of mail delivery days per week or in the current retiree
    health benefits prefunding schedule. If we were not to react and simply
    move forward with business as usual, the Postal Service is likely to
    have a cumulative loss of $238 billion by 2020.
        The Postal Service ended fiscal year 2009 with a net loss of $3.8
    billion, despite cost-cutting efforts that yielded more than $6 billion
    in cost savings and a $4 billion reduction in the required 2009 payment
    to the Postal Service Retiree Health Benefits Fund (PSRHBF) provided by
    the enactment of Public Law 111-68. We are very grateful to Congress
    and the Administration for that legislation. However, Public Law 111-68
    did not restructure the PSRHBF payments beyond 2009, and the Postal
    Service continues to be in financial crisis. We urgently need retiree
    health benefits legislative restructuring from Congress.
        In fiscal year 2009, mail volume continued to drop. At 177 billion
    pieces, volume was down 26 billion pieces or 12.7 percent from the
    previous year--representing the largest volume decline in Postal
    Service history. Our volume losses continue against a backdrop of an
    ever growing mail delivery network that presently has more than 150
    million delivery points.
        The $6 billion in savings we successfully achieved during fiscal
    year 2009 included a reduction of 115 million workhours--the equivalent
    of 65,000 full-time employees. For fiscal year 2010, our plan is to cut
    an additional $3.8 billion of costs, including the elimination of
    approximately 90 million more workhours. In addition to workhour
    reductions, our targeted activities will include maximizing operational
    efficiencies, re-negotiating contracts with major suppliers, continuing
    the freeze on construction of most new facilities, and using our
    pricing flexibility to grow new revenue. We have also worked closely
    with our union representatives to agree on adjustments that reduced
    costs and increased delivery efficiency. We also will continue to
    aggressively pursue initiatives to generate new revenue.
        Given that the mail volume declines and financial pressures will
    continue throughout the next decade, the choices for overcoming this
    serious situation are not easy and there is no single remedy that can
    return the Postal Service to good financial health. But we do have an
    action plan for the next decade--one that is both ambitious and
    aggressive. Through a careful and comprehensive effort, we have
    identified a set of the most reasonable business choices for the Postal
    Service and the customers we serve.
        To help develop our plan we engaged three of the world's most
    experienced and respected management consulting firms: McKinsey &
    Company, The Boston Consulting Group, and Accenture, LLC. We asked each
    of these firms to act independently and to conduct studies and have
    conversations with postal customers, mailers, labor associations,
    regulators, and mailing industry stakeholders. We wanted them to gather
    information to help us determine the likely state of the mailing
    industry and the Postal Service over the next decade. Our expectation
    was for the consultants to produce ideas that would allow the Postal
    Service to close the growing gap between our revenues and expenses
    without undue impact on our stakeholders.
        The consultant's key findings included the following:
      --Without fundamental changes, the Postal Service's losses will
            continue. By 2020, cumulative losses will exceed $238 billion.
      --Mail volume will decline by roughly 15 percent to about 150 billion
            pieces in 2020, from a 177 billion pieces in fiscal year 2009.
      --The mix of mail received by the Postal Service will change; First-
            Class Mail will fall sharply and Standard Mail will stay fairly
            flat. First-Class Mail contributes more toward covering
            institutional costs, which supports the processing and delivery
            network.
      --The Postal Service could close the gap by as much as $123 billion,
            without statutory or regulatory changes, by taking product and
            service actions, by continuing to improve processes and
            productivity, by adopting workforce flexibility improvements,
            and by pursuing purchasing savings. Achieving this level of
            savings will be extremely challenging.
      --Key areas were identified and options provided to close the
            remaining $115 billion gap. However, legislative and regulatory
            changes are needed to achieve them.
      --The best way to address the financial challenges and preserve the
            strength of the Postal Service and the entire mailing industry
            is through a comprehensive approach that balances the needs of
            all key stakeholders.
        The Postal Service created its plan--Ensuring a Viable Postal
    Service for America--upon thorough review and consideration of the
    consultant's recommendations. The plan provides options to address the
    challenges we face and is a balanced and reasonable approach to
    creating a financially sound future. No single option will be able to
    close the whole $115 gap; if it came to pass that only one option were
    used to close the gap, it would likely cause severe disruptions that
    would have significant adverse impacts. To implement the plan, a number
    of fundamental changes are necessary, some of which would require
    legislative changes from Congress. Our solutions are as follows:
      --Restructure the Prefunding of Retiree Health Benefits.--We request
            that Congress permit these payments to be deferred and shifted
            to a ``pay-as-you-go'' system comparable to what is used by the
            rest of the Federal government and the private sector. This
            would provide the Postal Service with an average of $5.6
            billion in cash flow per year through 2016. In addition,
            overpayments to the CSRS pension fund by the Postal Service
            also need to be resolved.
      --Delivery Frequency.--We request that we be permitted to adjust the
            number of mail delivery days to better reflect current mail
            volumes and customer usage.
      --Expand Access.--We will continue to modernize our channels for
            alternate access by providing services where our customers are.
            We also will continue to increase and enhance customer access
            through private sector retail partnerships, kiosks, and
            improved online offerings. However, the Postal Service needs to
            be relieved of the statutory prohibition against closing a Post
            Office for solely economic reasons.
      --Workforce.--We will work during our upcoming collective bargaining
            negotiations to establish a more flexible workforce that is
            better positioned to respond to changing needs of our customers
            and take advantage of the over 300,000 voluntary separations
            projected to occur over the next decade. We would also ask that
            Congress pass legislation that requires an arbitrator to take
            the financial health of the Postal Service into consideration
            in making an arbitration determination.
      --Pricing.--We request that Congress apply the Consumer Price Index
            price cap to the entire basket of Market-Dominant products,
            rather than the current restriction which caps prices for every
            class at the rate of inflation. This will allow pricing to
            respond to the demand for each individual product and its
            costs. In addition, we will use our existing flexibility to
            pursue an exigent price increase. Assuming other parts of our
            plan can be implemented, the exigent price increase will be
            moderate and not occur before 2011.
      --Expand Products and Services.--We ask that Congress permit us to
            evaluate and introduce more new products and services
            consistent with our mission. This will allow us to better
            respond to changing customer needs.
      --Oversight.--We ask that Congress provide us with more clearly
            defined, appropriate, and agile oversight and more streamlined
            processes. This will help to achieve the solutions in our
            action plan.
        As you can see, some of these solutions could be implemented
    relatively quickly within the short-term, while others would require
    much more time to achieve. No one solution is the answer to reversing
    our financial condition. And doing nothing--the status quo--is not an
    option. We believe a balanced approach that provides the Postal Service
    with the flexibility to respond to market dynamics and the speed to
    bring products to the market quickly, and that incorporates initiatives
    focused on cost, service, price, new product, and changes in the law
    would be the best approach. It is also the one that is most likely to
    perpetuate a financially sound Postal Service, able to meet the needs
    of the American people.
        We are ready to proceed with our plan. But we need Congress to
    provide the legislative reform necessary for us to begin our recovery
    and move forward.
        Now, I would like to discuss in greater detail the financial burden
    the Postal Service faces with respect to retiree health benefits. A
    provision established in the Postal Act of 2006 requires the Postal
    Service to prefund 73 percent of all future retiree health benefits--a
    75-year liability--in just a 10-year period ending in 2016. This
    prefunding mandate is not shared by other Federal agencies or private
    sector companies. The aggressive schedule, a product of budget scoring
    rules, requires the Postal Service to make annual prefunding payments
    averaging $5.6 billion into the PSRHBF. In addition, the law requires
    the Postal Service to make separate insurance premium payments for
    retirees that average $3.4 billion annually through 2016.
        When the prefunding payment schedule was being considered in 2006,
    the Postal Service envisioned that it would be able to make the
    payments, while knowing it was a challenging goal. Since then, however,
    circumstances have changed dramatically. Between 2006 and 2009, mail
    volume fell by 17 percent and revenue fell by 6 percent. We no longer
    have the ability to meet this unique statutory requirement to prefund
    retiree health benefits at the accelerated pace. The enormous
    obligation costs the Postal Service and its customers--not taxpayers--
    $55 billion in prefunding over the 10 year period. The Postal Service
    recognizes its obligations to fund its retiree health benefits;
    however, our financial circumstances must be recognized. I would note
    that the trust fund holding the Postal Service's payments had a balance
    of more than $35 billion at the end of fiscal year 2009. Thirty-five
    billion dollars is sufficient to pay the premiums for all of our
    roughly 500,000 currently participating retirees through their expected
    life times.
        The Postal Service greatly appreciates the action taken by Congress
    last year to enact legislation that restructured the payment for 2009.
    However, for 2010 and beyond, there is no assurance that similar
    adjustments will be granted. A restructuring of the payment obligation
    is urgently needed to allow the Postal Service to continue to fulfill
    its mission now and in the future. Legislative change would also reduce
    the need for the Postal Service to borrow funds from the U.S. Treasury
    for the sole purpose of depositing the money into the PSRHBF. We
    recognize there are a number of options, ranging from making no changes
    to the statutory payments schedule to adopting the Postal Service's
    Inspector General (IG) recommendation that Congress remedy a Postal
    Service over-funding of its Civil Service Retirement System obligation.
    The Postal Service supports the IG's recommendation. However, what the
    Postal Service needs is a relatively quick decision by Congress on how
    this issue will be addressed to provide the Postal Service clarity as
    we consider other options to close the gap.
        Next, I would like to provide greater details on our request to
    change the frequency of the number of mail delivery days each week. The
    statutorily mandated requirement for 6-day mail delivery has been in
    existence since 1983 and it places a very large financial burden on the
    Postal Service. Due to the unprecedented decline in mail volume, there
    no longer is sufficient volume to sustain the cost of the current 6-day
    delivery network. The number of pieces of mail per delivery has
    declined from an average of 5 pieces in 2000 to 4 pieces in 2009, which
    represents a 20 percent reduction. Assuming a scenario of 5-day
    delivery and fiscal year 2009 mail volume, the amount of mail per
    delivery would increase to more than 5 pieces. Revenue per delivery
    point dropped by 24 percent between 2000 and 2009, because our largest
    volume declines occurred in profitable First-Class Mail.
        Moving to 5-day delivery is absolutely necessary to ensure
    financial viability, both now and into the future. Reducing the
    frequency of delivery is the single most effective way for the Postal
    Service to substantially reduce operational costs--allowing us to
    reduce annual net costs by approximately $3 billion. It would greatly
    assist us with regaining a portion of our financial footing and help to
    ensure that affordable universal service is maintained nationwide.
        Market surveys conducted independently and on behalf of the Postal
    Service show that customers want to see the Postal Service survive and
    flourish. Most are willing to accept the elimination of Saturday
    delivery to reduce the Postal Service's losses. And, most would rather
    have Saturday delivery eliminated than have stamp prices increased
    significantly, as would be needed to ensure the Postal Service's
    financial stability. I would also like to cite the results of a Gallup
    survey conducted in June of 2009. The survey showed that 66 percent of
    those polled favored a change to 5-day delivery ``as a way to help the
    Postal Service solve its financial problems'' over other alternatives
    such as increasing postage prices or closing local Post Offices. This
    result was echoed by studies conducted by Rasmussen in 2009 and 2010.
        In anticipation of a possible change, we have conducted extensive
    stakeholder outreach through dozens of meetings with customers. We
    identified mailer issues and ensured their consideration in our
    planning. These exchanges helped us to understand and address the needs
    of the mailing industry and the public concerning a potential change in
    the frequency of mail delivery. The Postal Service has developed a
    comprehensive operations plan for 5-day delivery that addresses all
    possible impacts from required software programming modifications to
    workforce adjustments and that addresses issues raised by our
    customers, to the extent possible. Two major assumptions guided the
    development of the concept: existing service standards would be
    maintained and any changes would comply with existing collective
    bargaining agreements.
        Our plan for 5-day delivery, which we will file with the PRC later
    this month, will present an overview of our 5-day delivery concept and
    include cost and revenue impacts. As currently envisioned, our concept
    for 5-day mail delivery service would include the following:
      --Residential and business delivery and collections would be
            discontinued on Saturday.
      --Post Offices that are usually open on Saturdays would remain open.
      --Post Office Boxes would receive mail delivery on Saturday.
      --Express Mail would continue to be delivered 7 days a week,
            including Saturday and Sunday.
      --Remittance mail (bill payments) addressed to Post Office Box and
            Caller Service customers would be made available to recipients
            7 days per week.
      --Firm hold outs (mail that a business picks up at the Post Office)
            would be available for Post Office Box addressed mail Monday
            through Saturday, nationwide.
      --No mail pick-up from blue collection boxes on Saturdays except for
            dedicated Express Mail collection boxes.
      --Acceptance and drop-shipping of destinating bulk mail would
            continue on Saturday and Sunday.
      --Alternate contract locations would remain open 7 days a week on
            their normal schedules.
      --Access to all of our online services via usps.com would continue to
            be available 24/7.
        The Postal Service is fully aware that before a change in the
    number of delivery days could be adopted, legislative action would be
    required by Congress to amend the appropriations language that mandates
    6-day a week delivery. Should Congress approve a change that grants us
    the latitude to change the frequency of mail delivery, know that we are
    committed to implementing an in-depth communications plan for our
    customers and our employees to make the transition as smooth as
    possible. Upon approval, we intend to provide our customers with 6
    months notice prior to implementing a change which we estimate would be
    no earlier than mid-2011. The impact on our employees would be minimal
    and it would occur through attrition, not layoffs.
        Another issue for the Postal Service involves limitations that
    delay or prevent adjustments to our network operations and workforce.
    Despite these constraints, we are continuing to identify, pursue, and
    implement various solutions and strategies to make operational
    activities more efficient and reduce costs to help mitigate the impact
    of our financial difficulties. Some of the efforts we have adopted to
    improve efficiency and produce cost savings include consolidating
    functions, adjusting delivery routes, and restructuring administrative
    and processing operations--all while continuing to maintain excellent
    service levels.
        The Postal Service needs more flexibility to respond quickly to a
    changing business environment. We need legislative and regulatory
    changes to allow us to modernize our network of facilities to meet
    changes in customer needs and mail volume. We are completing a process
    of reviewing retail facilities located in larger urban and suburban
    areas to identify sites where we have a number of facilities in close
    proximity. This process will help us determine where consolidations are
    possible so that we may conserve our resources and adapt our customer
    access to current needs. Related to these efforts, on March 10, 2010,
    the PRC issued an Advisory Opinion to the Postal Service concerning our
    Station and Branch Optimization and Consolidation Initiative. In its
    opinion, the PRC agreed with our approach and made a number of
    recommendations which we are in the process of reviewing.
        Business processes that involve evaluating and relocating or
    consolidating retail outlets are reasonable and warranted practices
    used by many companies to streamline their operations and reduce costs.
    Often when a business is losing money, they resort to selling a portion
    of their assets, closing locations, or other options such as laying off
    employees. Here are just a few examples of business actions taken by
    private companies to improve their financial condition:
      --In 2009, Sears closed 62 underperforming stores and initiated an
            aggressive global digital strategy.
      --In November 2009, L.L. Bean announced it would be closing an outlet
            store in Portland, ME.
      --In September 2009, a news item reported that Citigroup was
            considering shutting or selling some of its 1,001 branches in
            North America following a $45 billion Federal bailout. In 2008,
            Citigroup announced it was cutting its workforce, worldwide, by
            14 percent, through the sale of some units or through layoffs.
      --In 2008, Starbucks announced it was closing 5 percent--more than
            600--of its stores. In 2009, it announced it would close an
            additional 300 stores.
      --In 2009, GM told 1,100 dealerships that it would drop them from its
            retail network effective October 2010; GM also discontinued the
            Saturn, Pontiac and Hummer lines of cars.
      --A January 2010 news item reported a 10 percent cutback in the
            number of available airline seats, caused by airlines using
            smaller planes or reducing the number of flights.
        If the Postal Service were provided with the flexibilities used by
    businesses in the marketplace to streamline their operations and reduce
    costs, we would become a more efficient and effective organization.
    Such a change would also allow us to more quickly adapt to meet the
    evolving needs, demands, and activities of our customers, now and in
    the future.
        The Postal Service is committed to continuing to fulfill the needs
    of customers. To help alleviate the concerns of our customers and to
    better match their changing retail needs, we have been emphasizing the
    easy and convenient availability of our expanded alternate access
    points. Today, 30 percent of retail revenue is generated by means other
    than a Post Office counter. Increasingly, customers are paying for
    postage stamps and conducting business at thousands of supermarkets,
    drug stores, and other postal retail partners, and by using our
    automated kiosks, and our website, usps.com. Our world class web site
    is available 24/7 to everyone with online access. The Postal Service
    continues to be committed to fulfilling the needs of customers. Postal
    customers now can access the services they need using a variety of
    readily available options including free carrier pick up of outgoing
    mail at every address. For many customers, these alternatives are
    simply more convenient and more suited to their lifestyles. Largely as
    a result of changing customer preferences, Post Offices had 117 million
    fewer transactions in 2009 than in 2008.
        Throughout this difficult period, our employees continue to deliver
    very high levels of service.
        As just one example, during quarter one of fiscal year 2010--and
    for the fifth straight quarter--our employees attained a score of 96
    percent for the on-time delivery of single-piece overnight First-Class
    Mail. Our dedicated and hard working employees deserve tremendous
    credit for their successful efforts to provide excellent service under
    very challenging conditions.
        Even so, the financial picture for the Postal Service is grim and
    without changes the situation will surely worsen. Mail volume has
    sharply declined from a peak of 213 billion pieces in 2006 to 177
    billion pieces in 2009. Despite extraordinary efforts to cut costs, the
    Postal Service incurred multibillion dollar net losses in the last 3
    years. With many fixed operational costs that cannot be eliminated
    without diminishing service levels, we are running out of ways to cut
    more costs.
        Nonetheless, the Postal Service is continuing to pursue available
    options to grow revenue during these challenging economic times. We
    understand that to best serve the American people in 2020 and beyond,
    we must be able to quickly offer products and services that meet the
    mailing and shipping needs of our customers. However, at present we
    must work within the framework provided in the Postal Act of 2006.
        One excellent example of how we employed the full range of
    strategies available to us to successfully compete and generate revenue
    was our popular Priority Mail Flat Rate Box promotional campaign during
    2009. The campaign offered customers a simple, economic way to ship
    their goods. We used a highly integrated media plan that incorporated
    TV, direct mail, print and digital advertising and we encouraged our
    retail clerks, letter carriers, and other employees to actively
    participate in and support the campaign. By being aggressive, we
    managed to avoid the double-digit revenue declines in the expedited
    market. We attribute this success to the pricing freedoms provided to
    us under the Postal Act of 2006, proven advertising, and outstanding
    customer service.
        In 2009, we also introduced our first Summer Sale. Working with the
    PRC, we developed the Summer Sale concept that provided a 30 percent
    price discount on incremental volume of advertising mail available for
    3 months during the summer. Over 400 of our largest customers
    participated in the sale and mailed a significant number of incremental
    pieces of Standard Mail.
        The success of the Summer Sale led to the design and launch of a
    similar stimulus program for First-Class Mail. This program offered a
    20 percent credit on the volume of presorted and automation First-Class
    Mail cards, letters and flats exceeding an established threshold. We
    know that mail is a powerful tool to help businesses grow. These sale
    programs help to ensure our customers know that they matter to us and
    we want to help them grow their business.
        Another positive aspect of the Postal Act of 2006 has provided the
    Postal Service the ability to offer contract pricing to commercial
    customers. Prior to this time, everyone paid the same price no matter
    how much volume they shipped. With contract pricing, we can now compete
    somewhat more effectively with private carriers on price, which has
    allowed us to grow our profitable package business. Contract pricing
    has become a key strategy to grow our commercial business with large
    and medium sized customers. However, these pricing freedoms fall short
    of the freedoms our competitors enjoy, since each postal contract must
    be approved by both by our Board and our regulator, the PRC, in advance
    of implementation. Streamlining these requirements would enable us to
    capture more revenue opportunities with sufficient oversight to limit
    risk.
        By 2020, the Postal Service plans to expand products and services
    across targeted mail and package segments to increase profits by $2
    billion. We will continue to work to increase direct mail use among
    small and medium-sized businesses, and to increase volumes in both
    First-Class Mail and advertising mail through targeted promotions. We
    also will continue to leverage our last-mile network to deliver
    packages to all households, forming partnerships with others serving
    the growing e-commerce industry. We also will continue to grow other
    retail services, such as passports and Post Office Box rentals to
    increase revenue. However, if we had the authority to offer a wider
    range of products and services consistent with our business, we could
    bring in more new revenue.
        We urgently need legislative change from Congress. Without it, the
    Postal Service may have difficulty paying all of the obligations due
    this year. At present, our financial situation raises significant
    uncertainty about our ability to generate sufficient cash flows to fund
    the large cash obligations due in September. In addition, we believe
    the liquidity of the Postal Service will be seriously threatened
    beginning in early fiscal year 2011, to the point where it will impact
    our ability to meet payroll and other financial obligations, as we will
    come dangerously close to running out of cash.
        At present, the two most immediate changes the Postal Service
    urgently needs from Congress involve legislation that provides a
    restructuring of the prefunding payments for retiree health benefits
    and allows the Postal Service to reduce the frequency of mail delivery.
    Although these two changes will go a long way in helping to alleviate
    the financial pressures facing the Postal Service, by themselves they
    will not be enough to make the Postal Service profitable. The Postal
    Service must address the fact that mail volume is declining, especially
    First-Class Mail volume which has historically made a substantial
    contribution to support the overall network. Therefore, we need the
    flexibility to adjust our operations network to reflect this rapid
    decrease in today's mail volume, which will continue to decline for
    sometime into the future. We also need the ability to expand our
    products and services, and ensure prices for our Market-Dominant
    products are based on the demand and cost of each individual product.
    And finally, all of these changes need to be reinforced with more
    clearly defined and appropriate oversight roles for our many regulators
    and with more streamlined processes.
        We understand that to best serve the American people now and in
    2020 and beyond, the Postal Service must be leaner and have the ability
    to quickly respond to customer mailing needs.
        Our action plan is a path to a future in which the Postal Service
    will remain a vital driver of the American economy and an integral part
    of every American community, and will continue to deliver the greatest
    value of any comparable post in the world. If given the flexibility to
    respond to an evolving marketplace, the Postal Service will continue to
    be an integral part of the fabric of American life for a long time to
    come.
        The mail and the Postal Service will continue to play a vital role
    in the personal and commercial lives of all Americans over the next 10
    years and beyond. Even in an increasingly digital 2020, the mail will
    remain a powerful delivery and marketing channel; a preferred means of
    commercial and personal communication for many purposes; and a
    complement to e-commerce. In order for this to happen, today's
    constraints must be removed so that over the next decade the Postal
    Service can become as dynamic and adaptive as the marketplace and
    customers we serve.
        Thank you for your support of our ongoing efforts to ensure a
    solvent and sound Postal Service.
        I look forward to working with you and other members of Congress to
    achieve the passage of legislation that will address our near-term and
    future challenges.
        I would be pleased to respond to any questions you may have.

                         POSTAL SERVICE BUSINESS MODEL

        Senator Durbin. Thank you, Mr. Postmaster.
        Let me just ask a few questions. First, I'm trying to step
    back and look at your brand, what the American consumer sees
    when you say ``The U.S. Postal Service.'' And I'm sure there
    are a lot of things they can point to. First, the fact that I
    can take that Mother's Day card, put it in an envelope, put an
    address on it, and, for 44 cents, expect it to be delivered in
    a timely fashion to virtually any place in the United States of
    America. Forty-four cents. That is still an amazing bargain, by
    any modern standards. Second, that you do reach every corner of
    this country. Third, that there's reliable service. Now,
    occasionally there will be people who will complain, and I've
    complained about service in parts of my State, but, by and
    large, our Postal Service is as reliable, if not more reliable,
    than most any in the world. It is a system which people trust.
    They develop an ongoing working and social relationship with
    the men and women who work for the Postal Service.
        I know David Lasley, my personal mailman in Springfield.
    I've known David since he was in college, and he's a friend of
    our family. He's done little favors for us that go way beyond
    his responsibilities in the Postal Service. That helps a lot,
    in terms of explaining who you are and what you mean to so many
    people.
        Your competitors--the Internet--it's going to be up 24/7 no
    matter what you do. Those e-mails are going to be there Sunday
    at midnight, delivered back and forth. The people who deliver
    packages will deliver on Saturdays, and may charge a premium
    for it, which I think you're suggesting, too, as part of 5-day
    service.
        But, I guess what I'm getting to is, tell me what your
    business model looks like. When you start reducing your contact
    with postal customers and consumers, when you decide that
    you'll only be there 5 days instead of 6, tell me what it looks
    like to them, in terms of your long-term goal and your economic
    model, what your brand's going to be as you cut back on the
    service that's available to the people of this country.
        Mr. Potter. Well, we are very concerned about that, and
    that's why there were a number of surveys done of the American
    public to talk about the Postal Service and options that were
    facing the Postal Service. And, there was, for example, one of
    the things we surveyed was, we could save money by changing the
    location of your mailbox from your door or your curb to a
    street corner. That could save us almost $3 billion. But, over
    90 percent of Americans said, ``Absolutely not.'' That would be
    considered a major diminution in service. When they were asked
    about the frequency of delivery and the fact that we were
    considering going from 6-day to 5-day delivery, every survey
    I've seen--and there have been many done around the country--
    people look at that as a favorable option, versus either
    raising rates or doing something on the order of what I just
    described to you.
        They also recognize that they use and receive less mail.
    Today, the average address in America gets four pieces of mail
    a day.
        Senator Durbin. Boy, we're above average.
        Mr. Potter. And it's true. But, I think that oftentimes
    people look at their own mailbox and don't think about the
    averages. But, back in 2000, it was five pieces of mail per
    delivery per day. Today it's four, and we project that in 2020,
    it will be three.
        And the other thing that's interesting is you have the
    volume of mail that's going to every address. In addition to
    that, it's the mix of mail. In 2000, more of what was delivered
    to your home was first class than today; today, there's more
    advertising. So in 2000 dollars, we delivered $1.80 to every
    door, every day in 2000. Today, we're delivering $1.40 to every
    door, every day. And in 2020, the projection is, because the
    mail mix will continue to move in the direction of more
    advertising mail and less first-class mail, that we will be
    delivering $1 to every door every day.

                               FIVE-DAY DELIVERY

        Now, when you look at that, the question becomes, How can
    you improve the efficiency of delivery to make up for the fact
    that the revenue that you're bringing to every door, every day,
    changes? And working with our unions, we have done that. But,
    we have not been able to close the entire gap. And that's
    what's led us to the conclusion that one way to make delivery
    more efficient is to eliminate that one day of delivery. And
    again, surveys were done of the American people, and that were
    positive, not in the sense that everyone would prefer that we
    not change, but I think people understand that, given their use
    of the mail and the fact that it's declining, that a change has
    to occur, and this is one that was acceptable to them.
        Senator Durbin. So, let me ask you about specifics you must
    have taken into consideration. If there's a 3-day gap in
    delivery from Friday to Monday--in regular mail delivery--have
    you considered the impact on the delivery of pharmaceuticals
    and medicines, perishables, live animals, government checks
    such as Social Security checks and disability checks, holiday
    season issues? Some times of year, I know I'm flooded with
    Christmas cards and other cards that come in, where you're
    going to have a larger volume, where you're cutting down, for 3
    straight days, that delivery. And will public desire for
    Saturday delivery migrate to post office boxes? And will that
    mean that you'll have to have a larger volume of those? Are you
    anticipating that possibility?
        Mr. Potter. Let me just say that we have been doing a lot
    of research around 6- to 5-day delivery. We've reached out to
    40 stakeholder groups, major users of the mail, to determine
    how the elimination of a 6-day delivery might impact their
    businesses. The vast majority of people have told us that they
    will make arrangements.
        So, for example, pharmaceuticals: If you have an immediate
    need for prescription drugs, you go to your local pharmacy and
    get that filled. You're not relying on the mail. People who are
    in the mail are the ones who are getting their regular
    prescriptions on 90-day fulfillment, and so, there's time there
    for delivery. When it comes to other things, like advertising,
    magazines, Time has just moved their magazine delivery from
    Monday to Saturday, because they thought there was an advantage
    in the marketplace. We've worked with Time magazine, and they
    have said yes, they can make an accommodation and make a
    change.
        Now, what we've done in this process of reaching out to
    stakeholders is, we've changed our plan around 6- to 5-day
    delivery to make sure that we minimize the impact. So,
    initially, we just said we were going to close--not deliver on
    Saturday at all, including to P.O. boxes. Well, we heard back
    from people who receive remittances, and we're going to
    continue to process the mail and deliver it to P.O. boxes on
    Saturday.
        Senator Durbin. What do you anticipate would be the
    increase in volume to post office boxes if you went to 5-day
    delivery?
        Mr. Potter. We don't have a specific increase, because most
    of the folks who do receive bill payments in large quantity
    already have some kind of an arrangement where they have to
    pick up mail at a plant before it even gets to the post office,
    or they pick mail up at a post office, so they can get it early
    in the morning, as opposed to receiving it later. But what
    we're embarking on now--we will file, with the Postal
    Regulatory Commission (PRC), our complete plan for 6- to 5-day
    delivery. They will review that plan. I know that they are
    planning to have an outreach to customers, maybe those that we
    have not reached out to, and they will give us an advisory
    opinion on our plan. So, there will be a public forum for
    consideration.
        Over the last 6 months, we have modified our original plan
    to try and accommodate as many of the concerns that were raised
    by mailers, and I think we've truly narrowed the gap somewhat.
        Now I don't want to mislead anyone to think that we could
    satisfy everybody. There are certain people, for example,
    newspapers that have 6-day delivery, if we're not delivering on
    Saturday, we won't be able to accommodate. Some customers were
    concerned about, you know, would they be able to pick up their
    packages on Saturday. The post offices that are open Saturday
    today will be open Saturday in the future.
        So, again, where accommodations could be made, they have
    been made. It wasn't perfect. We do think that we will lose
    revenue. That is part of the plan that will be submitted, and
    it will be validated by the Postal Regulatory Commission. So,
    we do know there will be a revenue impact, but the net impact
    will be $3 billion in savings.
        Senator Durbin. So, that represents a little over 4 percent
    of your annual budget?
        Mr. Potter. Yes.
        Senator Durbin. And I assume you've taken a look at some
    other options to save money, other than cutting that 6-day
    service.
        Mr. Potter. Without a doubt. We have built into our plan
    $123 billion in savings over the next decade. So, this is--
    after we cut as aggressively as we could. And part of that plan
    includes consolidation of our processing facilities. We are
    concerned that there may be some oversight that would attempt
    to slow those processes down. But, you know, we know those
    opportunities exist, and we're ready to go after them.
        Senator Durbin. Let me go into another area here. You
    mentioned in your opening testimony the impact of changing mail
    delivery frequency, ``The impact on our employees would be
    minimal, and it would occur through attrition, not layoffs.''
    On what basis do you believe the impact would be minimal? Can
    you quantify the number of people working for the Postal
    Service, either as rural letter carriers, city letter carriers,
    other postal employees--all of the people that make up the
    Postal Service today--can you quantify the number of jobs that
    will be lost to save the $3 billion that you're talking about?
        Mr. Potter. Yes, that's part of the plan that will be
    submitted. Let me just make sure that I'm 100 percent clear on
    how we would achieve that. When I talk about employees, I'm
    talking about postal career employees. And so the way we would
    address the downsizing as a result of going from 6- to 5-day
    delivery will be first to eliminate overtime where it exists in
    the letter carrier craft. Second, it will be to eliminate some
    noncareer jobs that exist in the two crafts that are--rural
    letter carriers, as well as the city letter carriers.
        Senator Durbin. How many jobs would be lost in those areas?
        Mr. Potter. There are 13,000 rural--city letter carrier
    noncareer employees today--somewhere around 13,300, in that
    neighborhood. In the rural carrier area, we have some 40,000
    people who work 1 day a week. We would have to sit down with
    the union and work through what role they would play after we
    move from 6-day to 5-day delivery. And that's the reason we get
    the advisory opinion from the Postal Regulatory Commission, and
    after the law changed, there would be a 6-month period where we
    work through the issues around employment, as well as giving
    our customers the opportunity to change their operations to
    accommodate the 6- to 5-day delivery.
        Senator Durbin. But, I want to make sure I understand. When
    you use the word ``minimal,'' do you have a number in mind, or
    a percentage in mind, when it comes to any of these employee
    groups?
        Mr. Potter. In terms of noncareer? In terms of career----
        Senator Durbin. Do both.
        Mr. Potter. In terms of career employees, I don't
    anticipate we'd have to lay anybody off.
        Senator Durbin. And noncareer?
        Mr. Potter. And noncareer, we would eliminate jobs.
        Senator Durbin. Do you have a number in mind?
        Mr. Potter. Thirteen thousand noncareer jobs for----
        Senator Durbin. Oh, I see what you're saying.
        Mr. Potter [continuing]. City carriers and 45,000 people
    who work 1 day a week in the rural area.
        Senator Durbin. Okay.
        Mr. Potter. Okay.
        Senator Durbin. Senator Collins.
        Senator Collins. Thank you, Mr. Chairman.
        Let me pick up on the issue of 5-day delivery. One of the
    major problems that the Postal Service is facing is a reduction
    in volume. Would you agree with that?
        Mr. Potter. Yes.
        Senator Collins. And I believe your testimony indicates
    that there was a 12-percent reduction in volume last year. Is
    that accurate?
        Mr. Potter. Yes.
        Senator Collins. The--what is your estimate for the further
    volume reduction that would be the result of going to 5-day
    delivery?
        Mr. Potter. I don't have a specific volume number. I do
    know that we would lose $200 million in profit. But, there is a
    detailed plan that lays that out by class of mail.
        Senator Collins. It's my understanding that the Postal
    Regulatory Commission hired some consultants to look at the
    reduction in revenue which reflected a 2-percent reduction in
    volume. Are you familiar with those studies?
        Mr. Potter. Yes, I am.
        Senator Collins. Do you disagree with that estimate?
        Mr. Potter. I think there's a slight difference between the
    Postal Service estimate and the Postal Regulatory Commission
    estimate.
        Senator Collins. There's a considerable difference in the
    estimates of savings. You have estimated that the Postal
    Service would save more than $3 billion annually by going to 5-
    day delivery. Is that correct?
        Mr. Potter. Yes.
        Senator Collins. And it's my understanding that in 2008,
    when the Postal Regulatory Commission looked at this issue, it
    estimated that savings under the plan would only be $1.9
    billion and that the Postal Regulatory Commission is now
    estimating savings of approximately $2 billion. That's a big
    difference; $3 billion to $2 billion. Why is your estimate of
    savings significantly higher than the PRC's?
        Mr. Potter. Ours is significantly higher because of the
    estimate for how much of the work that moves from Saturday to
    either Friday or Monday could be absorbed by operations. Our
    experience--because we have holidays today--when that occurs,
    90 percent of the workload is absorbed. The number that the
    Postal Regulatory Commission used was somewhere, I believe, in
    the neighborhood of 67 percent. We based our analysis on our
    actual experience. We have that experience today with holidays.
    And so, we are going to present, by the way, that information,
    as part of our plan, to the Postal Regulatory Commission. We
    hope that they'll review that information and that I anticipate
    that the data will prove our assumptions to be correct.
        Senator Collins. Well, that remains to be seen.
        Mr. Potter. It does.
        Senator Collins. But, it is----
        Mr. Potter. There's a process, and we'll follow it.
        Senator Collins. And I appreciate that, but that is a
    notable difference. You mentioned when you have holidays--one
    of the problems with eliminating Saturday delivery is we have,
    what, 10, 11 Monday holidays each year, on which there is no
    mail delivery. So, we're really talking about, in many months,
    there being a time where there would be delivery on Thursday
    and the next delivery would not be until Tuesday. You have
    talked about reaching out to the stakeholders, and that you
    were confident that you could mitigate the impacts. I'm
    confident that you're going to lose volume. And, I think all of
    us would agree on that. The question is how much, and whether
    the tradeoff is worth it.
        I've talked to weekly newspaper publishers in my State that
    put their newspapers in the mail on Thursday. It's delivered on
    Saturday. They're only publishing once a week, and what they
    tell me is, if the news doesn't get to their customers until
    Tuesday, in the case of a week where there's a Monday holiday,
    their customers are not going to subscribe to the paper. It's
    also a problem for daily newspapers, for obvious reasons. But,
    I think it's an even bigger problem for the weekly newspapers.
    And I've had the publishers say to me, they don't know what
    they're going to do, but they're going to explore alternatives
    to using the Postal Service. That's a real problem for you.
        Similarly, there's a lot of advertising mail that's time-
    sensitive. The sale is that weekend. Netflix. I've got to
    believe that Netflix, which relies on daily delivery of its
    movies, although I know you're talking to them, and I know that
    they're looking at being able to stream their movies, is
    concerned about what this would mean for their business model.
    And, by the way, isn't the result going to be that a company
    whose business model relies on daily delivery, like Netflix, is
    going to start streaming those movies and no use--no longer
    using the Postal Service at all? Those are the issues that
    concern me.
        So, let me ask you what is the bottom-line question, and
    this was one that the GAO is asking, as well. And that is, How
    would eliminating Saturday delivery affect the Postal Service's
    efforts to grow mail volume and encourage commercial mailers to
    expand their use of the mail?
        Mr. Potter. Well, first of all, I agree with every question
    that you had, and I am as concerned as you are about those
    issues. The local newspaper that mails and, right now, expects
    to have delivery on Saturday--obviously they have a choice on
    whether or not they want to deposit a day sooner and get the
    mail into the home on Friday. One of the things, when we talked
    last year about this--one thing I didn't realize, when we first
    had our discussion about this, was how many of the advertisers
    have actually moved to try and get mail delivered by Friday,
    because of what you just described. People shop on Saturday.
    Bill presenters want the bill in people's hands by Friday, so
    that they can pay over the course of the weekend. So, to be
    truthful, mail was moving in the direction away from Saturday
    anyway, because of the fact that they want--folks want the mail
    in people's hands so they can act on it over the course of the
    weekend.
        Now, one of the things that we have to consider is--and one
    of the things that we responded--because there was very fair
    criticism, by yourself and others last year, that we did not
    present a broad-based plan and that we were focused on one or
    two things. And that's why we hired the consultants, so that we
    could come and look at this from a broad-based perspective. And
    when you look at the future, a lot of the people that--you
    know, you just described Netflix--their business model is to
    move away from the mail today anyway.
        Senator Collins. Well, I can tell you, you're encouraging
    them to move faster.
        Mr. Potter. They might accelerate that pace. On the other
    hand, the people who do intend to be with the mail--and this is
    the key point--we have to keep mail affordable. So, price is
    very, very important to a lot of the advertisers who use the
    mail; in particular, cataloguers and others who use us for
    advertising. Price is extremely important. And when it comes to
    looking at advertising channels, you know, we're competing with
    the Internet. We're competing with mobile apps. We're competing
    with newspapers, television. And so, we have to keep our price
    competitive.
        And so, yes, something will be lost as a result of moving
    from 6- to 5-day delivery, but I look at what's being
    protected. What's being protected is the 150 billion pieces of
    mail that we anticipate being in the system. And it's a
    balancing act. I'm not going to say that it's not judgmental
    and it's not without its share of risk, but, given what we have
    going forward, I think it's a risk we have to take.
        Senator Collins. Well, when I look at financially troubled
    businesses--and there are, unfortunately, many in today's
    economy--they're trying to grow their business. They're trying
    to expand their service. They're trying to entice more
    customers. And it seems like you're choosing a route that goes
    in the opposite direction.
        Go ahead.
        Mr. Potter. Let me assure you, we're very much focused on
    growth. You know, we've had our first sale ever. We're out
    aggressively advertising priority mail. And I know that you
    would like us to do more, and we do intend to do more.
        Senator Collins. And the summer sale worked; it increased--
    --
        Mr. Potter. Right.
        Senator Collins [continuing]. Your volume----
        Mr. Potter. And we're going to----
        Senator Collins [continuing]. Which should tell you
    something.
        Mr. Potter [continuing]. Which we're going to do again this
    year. We're also working with the cataloguers who want year-
    over-year sales, not just specific seasonal sales, and we're
    going to do that, Senator. But, the real challenge here is a $7
    billion gap.
        Senator Collins. I know, but let me switch----
        Mr. Potter. Sure.
        Senator Collins [continuing]. Because I know I don't have
    much time left.
        One of the best sources of cost-saving ideas are from your
    employees; they're the ones on the front lines. And as you
    know, the President of the National Association of Postmasters,
    last year, made a very specific suggestion to you. He said, ``I
    encourage the Postmaster General to negotiate with our unions
    about cross-craft training. An agreement in this area would
    augment the skills of individual postal employees, and enable
    postmasters to more effectively utilize the talents of their
    employees.'' He argues that this would save you money, enhance
    skills. What have you done to implement that proposal?
        Mr. Potter. First of all, I 100 percent agree with him. We
    have our negotiations with our unions--two of our unions, the
    Rural Letter Carriers and the American Postal Worker's Union
    (APWU), begin this summer. The other two unions, the Mail
    Handler Union and the National Association of Letter Carriers,
    is the following year. And we intend to work on those issues
    during the course of those negotiations. They're a nonstarter,
    outside of negotiations.

                             EMPLOYEE-RELATED COSTS

        Senator Collins. And I guess that brings me to my final
    question. The GAO says that 80 percent of the Postal Service's
    costs are employee related. Is that accurate?
        Mr. Potter. Yes.
        Senator Collins. The GAO also says that the Postal Service
    pays a considerably higher percentage of the employees' health
    insurance and life insurance, compared to the average Federal
    agency. I realize you're not a Federal agency, but you're
    participating in the same programs. It's a--the exact same
    programs. I believe, in the case of health insurance, although
    it's declining by 1 percent, it's about 83 percent versus 72
    percent. In the case of life insurance, the Postal Service, I
    am told by the GAO, pays 100 percent of the premium, and I
    believe for Federal employees it's about one-third of the
    premium. Are--is your cost structure in line for what it should
    be, given where the money's being spent?
        Mr. Potter. Well, Senator, thank you for recognizing that
    we did negotiate, in the last round of negotiations, with all
    four of our unions. That--on an annual basis each year, the
    percentage that's paid by the employer would be reduced by 1
    percent.
        Senator Collins. For health insurance.
        Mr. Potter. For health insurance. And that, again, is
    recognition of the--of what you just described, the fact that
    we are out of line with what's paid for, in terms of the
    Federal Government--what they pay for an employee's healthcare.
    Our unions and management recognized this problem, and we
    negotiated the change into our contracts. What we agreed was
    fair was that we'd make this change over time, as opposed to
    doing it in one move. And so, that's why we went the 1 percent
    per year.
        Now, some people have said we should have been more
    aggressive and gone the 3 percent a year or 2 percent a year.
    Well, the fact of the matter is, we got that through collective
    bargaining. If we didn't reach agreement with the unions--and
    we were very happy that they worked with us to make that
    change--that issue would have gone to binding arbitration. And
    so, the decision wouldn't have been made by either party; it
    would have been made by an arbitrator.
        So, again, we recognize what you just described as a
    difference between the Federal Government and the Postal
    Service, and we're working to move in that direction. It will
    be the subject of negotiations once again this summer and the
    following summer.
        Senator Collins. Thank you, Mr. Chairman.
        Senator Durbin. Mr. Postmaster, if I can ask you just a
    series of quick questions.
        Have you considered doing pilot tests on 5-day delivery, to
    see what the reaction would be, what the impact would be on
    volume?
        Mr. Potter. We could, but by law, we can't.
        Senator Durbin. Well, we make laws.
        Mr. Potter. Okay. We would be willing to test it.
        Senator Durbin. Okay. I think that might be an interesting
    thing, to see if some of the surveys and opinion polls actually
    end up in consumer satisfaction, with the approach on 5-day
    service, and we'll talk about that possibility.
        In 6 months, the next annual statutory installment payment
    of $5.5 billion is due to the Postal Service retiree health
    benefit funds. Are you going to make that payment?
        Mr. Potter. We're going to ask for relief from that
    payment. Not because we don't have enough cash to pay it this
    year, but we're very concerned about cash flow in October and
    November of next year, because of payrolls and because of
    workers' comp costs. So, we are going to ask for an adjustment.
    We will have enough cash, if we had to pay it, but we'd run the
    risk, just similar to last year, of running out of cash in the
    fall 2010.

                           CIVIL SERVICE OVERPAYMENT

        Senator Durbin. Well, the inspector general says you've
    overpaid $75 billion into the Civil Service Retirement System.
    If this is accurate, could you use this as a source for retiree
    health benefits and some of the other economic issues you're
    facing?
        Mr. Potter. Yes, sir.
        Senator Durbin. Are you trying?
        Mr. Potter. Are we trying?
        Senator Durbin. Are you trying to recover the $75 billion?
        Mr. Potter. Well, back in 2000--now, I can't remember,
    Senator, whether it was 2003 or 2006--the Senator, in her
    legislation, provided an opportunity for us to appeal a
    decision--that was made by the Office of Personnel Management
    (OPM); and back then, the board of actuaries determined that
    the conclusion was that we would have $17 billion in
    overpayment, rather than the $92 billion outlined by the
    inspector general, was the right number. We are working, and
    have appealed to OPM and the Office of Management and Budget
    (OMB), to reopen this very matter. If it were to happen, it
    would literally, I think -- we would almost be in a fully
    funded mode on our Retiree Health Benefit Trust Fund, because
    the $75 billion that would--would be, probably, directed there.
    It would take a lot of pressure off. If that were to happen, we
    wouldn't have to go to 6- to 5-day delivery.
        Senator Durbin. What's the timeframe for that to be
    decided?
        Mr. Potter. It's beyond me. There's no schedule.
        Senator Durbin. But, you're saying if the $75 billion is
    found, you wouldn't have to cut the frequency of service?
        Mr. Potter. Right.
        Senator Durbin. We might look into that.
        Let me ask you about the way you market your products and
    services. Postal Service has 36,500 retail branches; more than
    McDonald's, Starbucks, Walgreens, and Wal-Mart combined. An
    average postal branch sees 600 customers each week; an average
    grocery store, 20,000 weekly customers. I know that more people
    are doing things over the Internet, in their homes and at
    desks, but I wonder if the Postal Service is providing its
    products and services where people are, and whether or not
    there's good reason for you to start building your facilities
    as part of other places that draw much larger crowds of people.
        Mr. Potter. Sir, that's our proposal. Today, we cannot
    close a post office for economic reasons. So, as other
    businesses--if you go into a large grocery store, you see
    banks, coffee shops, other things that are housed along with
    those grocery stores. That's where we would like to be. We
    would like people to have access 7 days a week. We would like
    them to have access 24 hours a day, in some cases. However,
    we're precluded from closing post offices.
        And let me just say this, that when it comes to post
    offices, part of the 600 folks who walk in on a weekly basis--
    part of the reason it's only 600 is because over 30 percent of
    people today buy what they had come to a post office for--they
    either buy it online or they buy it at grocery stores----
        Senator Durbin. Thirty percent?
        Mr. Potter [continuing]. Over 50,000 grocery stores sell
    stamps today. And our anticipation is, in the next decade, that
    that 30 percent will probably move to 60 percent, because we're
    working very hard to improve our Internet, our Web site.
        We have put up--just to show the interest in the Postal
    Service--we created a postal mobile app, and within 3 weeks, it
    went to the top of the charts, in terms of the most-used mobile
    app. That was to look up locations of post offices, ZIP Codes,
    and the like. So, we know there's a big interest in the Postal
    Service. We'd like to be where people are; online or in
    locations where they're already conducting their business.
        Senator Durbin. Taking the downtown Chicago Post Office out
    of this conversation--the old one--do you have excess property
    and real estate that is in a valuable location that you could
    consider selling to try to come up with some of the revenue the
    Postal Service needs?
        Mr. Potter. Yes, and we are aggressively pursuing that. In
    some cases, what we're doing--for example, in San Francisco,
    we're consolidating delivery units and selling our buildings
    and moving our retail into a location in a very proximate area
    to where our current location is. We have done that,
    historically. It's been a slow-moving process, for a whole host
    of reasons. As you know, in big cities, transactions tend to
    take a lot longer, even though they're much more lucrative--
    but, they do take a long time. We worked very close on that
    Chicago Main Post Office, as you know, but if opportunities----
        Senator Durbin. You offered me----
        Mr. Potter [continuing]. Exist, we do pursue them.
        Senator Durbin. I don't know if it was in jest, but you
    offered me the Chicago Main Post Office for a dollar once. I
    don't know----
        Mr. Potter. Only because it was costing us $14 million a
    year to maintain it, even though we no longer had a presence
    there.
        Senator Durbin. Thank you.
        Senator Collins.
        Senator Collins. Thank you, Mr. Chairman.
        Mr. Chairman, I want to follow up on the issue you raised
    about the inspector general's report, which indicates an
    overfunding to the Civil Service Retirement System, because it
    is such an important issue.
        Mr. Potter, it's my understanding that the OPM and the GAO
    both strenuously disagree with the inspector general's
    conclusion. Is there a change that's happened since those
    disagreements?
        Mr. Potter. To the best of my knowledge, no.
        Senator Collins. Okay. So, the administration has stuck to
    its belief that there is not the kind of overpayment that the
    inspector general has found.
        Mr. Potter. To the best of my knowledge, no. But, I would
    prefer that they respond----
        Senator Collins. Right.
        Mr. Potter [continuing]. Obviously. But----
        Senator Collins. I just wanted to bring that----
        Mr. Potter. Right.
        Senator Collins [continuing]. To the chairman's----
        Mr. Potter. Right.
        Senator Collins [continuing]. Attention.

                            RETIREE HEALTH BENEFITS

        I personally don't know who's right. This is a case where
    different actuaries have come to different conclusions. But, I
    do know that OPM considers itself to be expert in how you fund
    retirement programs.
        On that point, and switching to your retiree healthcare
    benefits, you talk about that the money that's currently in the
    fund--the $35 billion--is sufficient to pay the premiums for
    all of our roughly 500,000 currently participating retirees,
    through their expected lifetimes. Doesn't that ignore the fact
    that you're going to have a huge wave of retirees coming? I--
    the reason I know this is the chairman and I fly back and
    forth, and people sit next to us on the plane and take
    advantage of that opportunity to educate us on issues.
        And I sat next to the postal district manager, who I
    believe told me that something like one-half of your workforce
    is eligible to retire in the next decade.
        Mr. Potter. Right. No, what that was meant to say--that
    there's a sizable amount of money there. And so, when you're
    looking at funding obligations going forward, there's a thing,
    I learned about in the last couple years, called ``normal
    cost.'' In fact, I was educated by OPM on this, which is--
    basically, you begin to pay into the Retiree Health Benefit
    Trust Fund, based on how many employees you have, against what
    their anticipated cost is in the future, versus--as we both
    know, the payment schedule that we're on now, was more linked
    to a scoring issue than the normalization. And so, that's what
    that was meant to imply, that there was a way of looking at
    this a little differently.
        Senator Collins. I just don't want to lead what--leave what
    would be a misleading----
        Mr. Potter. Oh, no.
        Senator Collins [continuing]. Impression. The fact is,
    you've got billions of dollars of future liabilities that
    they----
        Mr. Potter. There's still a $50 billion gap. I'm not trying
    to----
        Senator Collins. That's correct----
        Mr. Potter. Okay. Yes.
        Senator Collins [continuing]. And I think that's a really--
    --
        Mr. Potter. Okay.
        Senator Collins [continuing]. Important point.
        Mr. Potter. I didn't mean to mislead anyone, but just to
    say that there is a sizable amount of money there.
        Senator Collins. Right.
        Mr. Potter. Because, when we started on this process, years
    ago, the concern was that, at some point in time, the Postal
    Service might not be an ongoing concern, and the liability
    would fall back on the Federal Government.
        Senator Collins. Correct.
        Mr. Potter. When you look at normalization, what you look
    at--in addition to just how many employees you have, you look
    at what would happen if the business were to go under. And the
    fact is, if it were, not all of our employees would be eligible
    for retiree health benefits. Only those who are eligible to
    retire could do that. And so, you know, again, it was just
    because I've become educated, in the last couple years, on
    other approaches that could be taken.
        Senator Collins. I just wanted to make sure that was very
    clear for the----
        Mr. Potter. Right.
        Senator Collins [continuing]. Record. I would also note
    that, back in 2006, when Senator Carper and I authored our
    bill, we initially had a 40-year amortization schedule. And it
    was only in the final negotiations with OMB where the
    amortization schedule was truncated considerably.
        What I don't want to see is another year like this past
    year--and I voted to allow you to do it--where the payment is
    significantly reduced. That is not a good situation. That is
    just wishing away liabilities. But, I do think that we should
    stretch out and smooth out the amortization schedule for this
    unfunded liability.
        I'm tempted to ask whether you'd agree with that, but I'm
    not sure what you would say.
        Mr. Potter. No----
        Senator Collins. I'll ask anyway.
        Mr. Potter. First of all, let me assure you that we're not
    walking away from the obligation for retiree health benefits
    for our employees. I hope to get that benefit in the future.
    So, I--we want to make sure that that's fully funded. I would
    agree that the timing, in terms of the pace at which you pay
    for that, obviously the current situation has to be taken into
    consideration. The amortization over a longer period of time
    does give us welcome relief. And we all know that, although we
    were in agreement about a 40-year amortization back in 2006,
    that option was taken off the table----
        Senator Collins. Correct.
        Mr. Potter [continuing]. Not by either party, but by a
    third party.
        Senator Collins. Right.
        Mr. Chairman, just one final comment for this witness, and
    that is, whatever plan we adopt, we have to make sure that it
    truly positions the Postal Service for the future and that
    we're not back here, 3 years from now, once again facing
    billions of dollars in annual losses, huge unfunded
    liabilities, declining volume, and being in no different a
    place. And that means that there needs to be a new business
    model and some very tough decisions made.
        I vowed, in 2006, that I would never do a major postal bill
    again, because it was so difficult to get all of the
    stakeholders. And we thought that we had put the Postal Service
    on track for viability. And that was your testimony. I read
    part of it at the time. GAO removed you from the high-risk
    list. And I just don't want to see this movie again.
        Thank you, Mr. Chairman.
        Senator Durbin. I'd say to my colleague that I agree with
    her completely.
        Mr. Potter. Well, I would, too.
        So, I'll second what she just said. But, the only thing----
        Senator Durbin. But, I'd just add----
        Mr. Potter. The only thing we didn't anticipate was this
    recession----
        Senator Durbin. I was going to say----
        Mr. Potter [continuing]. Of the magnitude that we had, and
    a tipping point that it affected--how it affected the mail.
        Senator Durbin. As a precautionary note, I don't think any
    of us could have predicted the depth and seriousness of the
    current recession on every aspect of our lives. And, second,
    you are in a field that is being affected by this galloping
    change in technology and the change in habits by the American
    people. Who would have guessed, 10 years ago, American
    newspapers would be flat on their back at this point and
    struggling to survive. And it's a reality. And so, there's this
    change in technology. You are right in the middle of this
    competition, and I understand that part. But, we're going to
    try to make some decisions, or help you make some decisions,
    which will give us a breather--maybe 4 years before we see you
    again.
        Mr. Potter. Let's hope it's a little longer than that.
        Senator Durbin. Then maybe even a little longer.
        Mr. Potter, very much for your testimony.
        Mr. Potter. Thank you.
        Senator Durbin. I'm going to welcome the second panel to
    take their place at the table.

                        ADDITIONAL SUBMITTED STATEMENTS

        And while they do, I note that the subcommittee has
    received prepared statements from a number of postal labor
    organizations: the National Association of Letter Carriers; the
    National Rural Letter Carriers Association; the National Postal
    Mail Handlers Union; the American Postal Workers Union; the
    National Association of Postmasters of the United States; and
    the National Association of Postal Supervisors. And, without
    objection, their statements will be made a part of this record
    and reviewed carefully by us and our staff.
        [The statements follow:]

       Prepared Statement of the National Association of Letter Carriers

        Thank you, Chairman Durbin, for holding this important hearing on
    the financial situation facing the United States Postal Service. On
    behalf of the 295,000 members of the National Association of Letter
    Carriers, I submit this statement for the subcommittee's consideration.
    Overview
        There is no doubt that the Postal Service faces the worst crisis
    since the Great Depression of the 1930s. The collapse of the housing
    bubble and the financial meltdown of 2008-2009 affected the most mail-
    intensive sectors of the economy. This occurred at a time when the
    impact of electronic diversion of traditional letter mail caused mail
    volume to stagnate after peaking in 2006. Yet the deep recession and
    the negative impact of the Internet on postal volumes are not the most
    important causes of the Postal Service's large deficits in recent
    years. Unfortunately, the main driver of the USPS's current financial
    distress stems from a policy decision, albeit well-intentioned, adopted
    by the U.S. Congress in 2006 to require the Postal Service to massively
    prefund decades of future retiree health benefit obligations in just 10
    years. This requirement has cost, and will continue to cost, the Postal
    Service some $5.6 billion per year until the year 2016.
        That's right. This immediate crisis was initiated in 2006 when
    Congress, in cooperation with the Bush administration, included the
    prefunding requirement in the Postal Accountability and Enhancement Act
    (PAEA). What appeared to be affordable in 2006 is clearly unaffordable
    today. Over the past 3 years, as the economy slipped into the worst
    recession in 80 years, the Postal Service has had to pony up $12.4
    billion to prefund future retiree health benefits--on top of some $6
    billion for current retiree health benefits.
        No other agency--including the United States Congress--or private
    company faces such a legal obligation to prefund. Indeed, such
    prefunding is not even required by the Financial Accounting Standards
    Board (FASB), which establishes accounting rules for both private and
    public organizations. And as an annual survey conducted by Watson Wyatt
    found in 2009, only about a third of Fortune 1000 companies voluntarily
    prefund retiree health obligations at all--and those that do have set
    aside much less than the Postal Service has already.\1\
    ---------------------------------------------------------------------------
        \1\ See Figures 29 and 30 in ``Accounting for Pensions and other
    Postretirement Benefits 2009, Reporting Under FAS 87 and FAS 106 Among
    the Fortune 1000, A Watson Wyatt Survey Report,'' pages 21-22.
    ---------------------------------------------------------------------------
        What makes this situation worse is that the size of the prefunding
    payments is grossly inflated due to actuarial methods adopted by the
    Office of Personnel Management (OPM). These methods, which have been
    exposed by a series of reports by the Office of Inspector General of
    the USPS, not only shortchanged the Postal Service Retiree Health
    Benefits Fund (PSRHBF) by tens of billions of dollars when it was
    established in 2007, but also greatly exaggerated the USPS's future
    liability for retiree health benefits--which prompted the Congress to
    establish a completely unrealistic schedule of prefunding payments in
    the PAEA.
        The USPS has responded with tremendous resilience to the challenges
    of the recession, which began in 2006 for our industry when the credit
    crunch hit. And my union, the NALC, has been a responsible and reliable
    partner in helping it react to the steep decline in mail volume.
    Working together at the bargaining table, we strove to negotiate
    flexible and fair means for adjusting all 160,000 city carrier routes
    to ensure 8-hour assignments, boosting efficiency and saving hundreds
    of millions of dollars. In fact, we adjusted every city carrier route
    in the country not once, not twice, but three times over the past 18
    months. Using the traditional method of route evaluation would have
    taken more than 5 years to adjust every route.
        In fact, the Postal Service has been so successful in cutting costs
    to align work hours with recession-level volumes that it would have
    earned a net surplus of $1.6 billion over the past 4 years in the
    absence of the onerous prefunding burden. This burden is directly
    responsible for the dramatic rise in the Postal Service's outstanding
    debt. See the chart below.

                           PREFUNDING PAYMENTS, NET INCOME AND DEBT OF THE U.S. POSTAL SERVICE
                                                [In billions of dollars]
    ----------------------------------------------------------------------------------------------------------------
                                                                        Payments to
                                                                        the Postal
                                  Year                                    Service       Net Income     Debt Increase
                                                                      Retiree Health
                                                                       Benefits Fund
    ----------------------------------------------------------------------------------------------------------------
    2006............................................................  ..............             0.9             2.1
    2007............................................................             5.4            -5.1             2.1
    2008............................................................             5.6            -2.8             3.0
    2009............................................................             1.4            -3.8             3.0
                                                                     -----------------------------------------------
          Totals....................................................            12.4           -10.8            10.2
    ----------------------------------------------------------------------------------------------------------------
    Notes: (1) A modified version of H.R. 22 was enacted in 2009, slashing the prepayment from $5.4 to $1.4 billion;
      (2) In 2005 the Postal Service had no debt at all.

    Congress Should Fix the Prefunding Policy First
        Today your subcommittee is going to hear a lot about 10 and 20-year
    predictions about future mail volume and the mega-sized postal deficits
    that will occur if we do nothing. You will no doubt also be asked to
    embrace draconian suggestions developed by the Postal Service's
    consultants and perhaps other witnesses. The 200,000 men and women who
    deliver the mail on city carrier routes today urge you exercise great
    caution and to stop and consider the real cause of the immediate
    crisis: The unworkable and unreasonable pre-funding policy adopted in
    2006.
        Congress should correct the retiree health prefunding policy
    first--it is the single most effective step you can take to stabilize
    the Postal Service's finances. We urge you to fully implement the
    recommendations contained in the two OIG reports on this issue.\2\ (See
    the attached fact sheets prepared by the NALC's Department of
    Legislative and Political Affairs.) While we appreciate the efforts
    undertaken last year by the Obama administration and other Senate
    leaders to offer limited relief from the pre-funding burden in S. 1507,
    that bill does not go far enough and its adoption by the Senate
    Committee on Homeland Security and Governmental Affairs was marred by
    an antiunion amendment that would permanently and unfairly tilt the
    interest arbitration process in favor of postal management. NALC urges
    the Senate to start over with a fresh approach suggested by the USPS
    OIG.
    ---------------------------------------------------------------------------
        \2\ USPS Office of Inspector General study: ``The Postal Service's
    Share of CSRS Pension Responsibility,'' January 22, 2010, see http://
    www.uspsoig.gov/foia_files/RARC-WP-10-001.pdf; and USPS Office of
    Inspector General report: ``Estimates of Postal Service Liability for
    Retiree Health Benefits (Report Number ESS-MA-09-001(R)), July 22,
    2009, see http://www.uspsoig.gov/foia_files/ESS-MA-09-001R.pdf.
    ---------------------------------------------------------------------------
    Congress Should Retain 6-Day Delivery
        The Postal Service is too important to the country to make rash
    decisions in an environment of financial distress. NALC believes it
    would be unwise to downsize to meet recessionary levels of demand
    before we know how soon and how well the economy and the postal market
    will recover. Specifically, we believe that eliminating Saturday
    collection and delivery services would be penny-wise and pound-foolish.
    No business has ever restored itself to health by offering slower
    service and turning customers away--too many businesses (including mail
    order merchants, online pharmacies, DVD and game rental companies and
    newsmagazines) rely on 6-day delivery to simply leave them in the
    lurch. Rather than saving the Postal Service money, 5-day delivery
    could worsen its bottom line over time as a result of further volume
    and revenue losses. And it would needlessly destroy 50,000 good jobs at
    a time of extremely high unemployment. (See the attached fact sheet on
    Saturday delivery prepared by the NALC's Department of Legislative and
    Political Affairs.)
        Eliminating Saturday collections and delivery should be a last
    resort policy, not a first resort policy. It certainly should not be
    considered until we see the impact on demand for postal services when
    the economy recovers--as well as the results of the next round of
    postal collective bargaining. Nor should it be considered before
    Congress corrects the deeply flawed prefunding policy adopted in 2006.
    In any event, the Postal Service has not yet presented its 5-day
    collection and delivery proposal to the PRC for review, as mandated by
    law. Congress and this subcommittee should await the results of that
    review and conduct extensive hearings to ensure it understands the full
    implications of eliminating Saturday delivery before debating changes
    to the annual appropriation legislation that mandates 6-day services.
    The data and assumptions in the Postal Service's plan yet to be
    scrutinized and special attention must be given to the impact of
    service cutbacks on tens of millions of small businesses, including
    those in rural communities and economically distressed neighborhoods.
    Conclusion
        We know that prefunding reform may not be enough to secure the
    long-term viability of the USPS. We know the Postal Service's business
    model deserves a serious and comprehensive debate. However, NALC and
    the other postal unions are prepared to deal with the lingering effects
    of the recession and the negative impact of the Internet at the
    negotiating table, just as we have adapted to varying business
    conditions for some 40 years of successful collective bargaining. And
    we believe that it is only in the context of financial stability that a
    serious and careful legislative debate can take place. That will
    require us to do our part at the bargaining table and for Congress to
    do its part on retiree health prefunding reform.
        NALC is committed to preserving a strong and viable Postal Service
    that can meet the evolving needs of the American people and American
    businesses. We look forward to working with this subcommittee and the
    entire United States Senate to find a sensible and realistic way
    forward. Thank you for inviting us to submit this statement.

     NALC FACT SHEET--STRENGTHENING THE POSTAL SERVICE: REFORM ITS RETIREE
                          HEALTH PRE-FUNDING SCHEDULE

        The Postal Service is facing a financial crisis in the midst of the
    worst recession in 80 years. Congress spent much of 2009 debating
    short-term financial relief for USPS in the form of reduced prefunding
    payments for future retiree health benefits. On September 30, 2009,
    Congress adopted a measure which reduced the level of USPS prefunding
    in 2009 from $5.4 billion to $1.4 billion and reduced the Postal
    Service's operating loss from $7.7 billion to $3.7 billion. While it
    was helpful last year, this type of last-minute relief will not
    adequately address the larger problems caused by the prefunding
    requirements. In 2010, Congress must reform the prefunding schedule
    adopted by Public Law 109-435 to provide for long-term financial
    stability. The current schedule is unaffordable and unfair:
      --The USPS is the only enterprise in the country required by law to
            prefund retiree health benefits while most Fortune 1000
            companies (two-thirds) don't prefund at all.
      --The annual payments required are extremely onerous, requiring the
            USPS to effectively prefund 80 percent of a 75-year liability
            in just 10 years, and are based on flawed calculations by the
            Office of Personnel Management (OPM).
      --The actuarial methods used to determine the retiree health benefit
            liability are deeply flawed and inequitably overstate the
            Postal Service's liability. Congress should mandate a new
            prefunding schedule based on fair and accurate actuarial
            calculations.
    Background on Prefunding
        The Postal Accountability and Enhancement Act of 2006 established
    the Postal Service Retirees Health Benefit Fund (PSRHBF) by calling on
    OPM to calculate the ``postal'' surplus in the Civil Service Retirement
    System and to transfer it to the PSRHBF in 2007. The law also dictated
    10 annual payments into the Fund averaging $5.5 billion each between
    2007 and 2016, also based on OPM calculations.
        In establishing the Fund and setting the payment schedule, Congress
    sought to minimize the ``budget score'' of the legislation and relied
    on the OPM estimates of the value of the CSRS surplus and the cost of
    future retiree health benefit liabilities. A study conducted by the
    USPS Office of Inspector General shows that OPM underestimated the size
    of the postal CSRS pension surplus by roughly $75 billion.\1\
    Furthermore, the Postal Regulatory Commission has found that OPM's
    healthcare inflation assumptions are overstated.\2\ As a result of
    these calculations, the Postal Service has been saddled with an
    unaffordable prefunding schedule that threatens its future viability.
    ---------------------------------------------------------------------------
        \1\ Postal OIG study, ``The Postal Service's Share of CSRS Pension
    Responsibility''. Jan. 20, 2010. http://www.uspsoig.gov/foia_files/
    RARC-WP-10-001.pdf.
        \2\ Postal Regulatory Commission study, July 30, 2009. http://
    www.prc.gov/Docs/63/63987/Retiree%20Health%20Fund%20Study_109.pdf.
    ---------------------------------------------------------------------------
    A Fair Calculation of the Postal CSRS Surplus
        In 2003, OPM made the initial determination of the postal pension
    surplus in order to implement a CSRS funding reform law (Public Law
    108-18). This process, which was repeated in 2007 under the PAEA (with
    the Treasury taking responsibility for CSRS military benefits),
    required the OPM to allocate the cost of CSRS benefits earned by postal
    employees between the Treasury (taxpayers) and the Postal Service
    (ratepayers) for all workers who performed service before and after
    July 1, 1971. That was the day the Post Office Department (POD) was
    reorganized and became the U.S. Postal Service, an independent agency
    of the government separate from other cabinet agencies. Unfortunately,
    OPM shifted much of the cost of CSRS benefits earned by POD employees
    to the Postal Service by making the USPS responsible for any and all
    increases in the value of benefits accrued for POD service due to wage
    increases after July 1, 1971. Any fair calculation of benefits accrued
    before postal reorganization in 1971 should have included some
    recognition of normal wage increases in the future, since CSRS benefits
    are based on end-of-career earnings. Instead, OPM froze the value of
    accrued benefits at July 1, 1971, pay levels--effectively shifting much
    of the cost of pre-reorganization service to the Postal Service. The
    OPM also failed to recognize that the CSRS benefit formula is
    backloaded and unfairly assigned the low-cost early years to the POD
    and the high cost later years to the Postal Service.
        By overstating the Postal Service's liability for CSRS benefits,
    the OPM understated the value of the postal surplus in the CSRS by as
    much as $75 billion, according to a review by the OIG. As a result, the
    Postal Service was short-changed when the surplus was transferred to
    the PSRHBF in 2007. Under OPM's method, the fund was credited $17
    billion. Using the more fair and accurate method advanced by the OIG,
    however, the postal surplus may have exceeded $80 billion, more than
    enough to cover all of the Postal Service's future retiree health
    liability.
    Adjusting the OPM's Health Inflation Rate
        The OPM has also inflated the cost of the Postal Service's
    prefunding payments by assuming an extremely high rate of long-term
    healthcare inflation--some 7 percent annually for 75 years. Most
    Fortune 1000 companies use a 5 percent long-term rate, while Medicare
    and Medicaid assume costs will rise by 6.25 percent annually. Both the
    Inspector General and the PRC have concluded that more accurate
    inflation assumptions could reduce or eliminate the Postal Service's
    PAEA-required payments. The OIG's report concluded that ``[t]he Postal
    Service could pay an average of $4 billion less each year from fiscal
    years 2009-2016 to prefund its retiree health benefits and still
    achieve the same level of prefunding [80 percent] anticipated under OPM
    assumptions.''
        The current long-term cost assumption is inaccurate and places an
    unfair burden on the Postal Service, its employees and ratepayers. It
    must be adjusted to more accurately reflect the reality of the Postal
    Service's future obligations.
    Eliminating Saturday Delivery Not the Answer
        Correcting OPM's actuarial calculations involving the CSRS postal
    surplus and the long-term cost inflation rate would significantly
    reduce the $5.5 billion prefunding payments mandated by the Postal
    Accountability and Enhancement Act of 2006. It would also strengthen
    the financial stability and future viability of the Postal Service.
        Adopting a more accurate and affordable prefunding schedule should
    be given the highest priority in any postal reform legislation
    considered during the remainder of the 111th Congress. This step should
    certainly be taken before Congress considers more radical measures such
    as the elimination of Saturday delivery.

       NALC FACT SHEET--SAVE THE POSTAL SERVICE: DEMAND FAIRNESS IN USPS
                       PENSION AND RETIREE HEALTH FUNDING

        As the economy struggles to recover from the worst recession in 80
    years, the Postal Service continues to face a financial crisis. The
    loss of revenue resulting from declining mail volume is compounded by a
    provision in the 2006 postal reform that requires the Postal Service to
    massively prefund its future retiree health benefits at a cost of $5.6
    billion annually. The requirement has resulted in mounting losses,
    rising debt and destructive job and service cuts.
        The unprecedented prefunding provision--no other agency or private
    enterprise is required to prefund by law or by widely accepted
    accounting standards--was made worse by how it was implemented by the
    Office of Personnel Management. The OPM's calculations to determine the
    initial balance in the Postal Service Retiree Health Benefit Fund
    (PSRHBF) and the size of the Postal Service's future retiree health
    liability were deeply flawed. Studies conducted by the Office of the
    Inspector General of the Postal Service (OIG) \1\ and the Postal
    Regulatory Commission \2\ have shown that the ``postal surplus'' in the
    CSRS pension fund, which was transferred to the retiree health fund in
    2007, was grossly undervalued by OPM. As a result, USPS was
    shortchanged by as much as $75 billion when the PSRHBF was created.
    ---------------------------------------------------------------------------
        \1\ USPS Office of Inspector General report: Estimates of Postal
    Service Liability for Retiree Health Benefits (Report Number ESS-MA-09-
    001(R)). See http://www.uspsoig.gov/foia_files/ESS-MA-09-001R.pdf.
        \2\ Postal Regulatory Commission Review of Retiree Health Benefit
    Fund Liability as Calculated by the Office of Personnel Management and
    the U.S. Postal Service Office of Inspector General, July 30, 2009. See
    www.prc.gov/Docs/63/63987/Retiree%20Health%20Fund%20Study_109.pdf.
    ---------------------------------------------------------------------------
        Returning these surplus funds to the postal retiree health fund
    would greatly alleviate the Postal Service's financial stress. In fact,
    doing so would fully fund the Postal Service's 75-year liability for
    future retiree health benefits and the current prefunding requirements
    would be unnecessary.
        In 2010, in order to rectify the unfair, inequitable and
    financially destructive impact of the prefunding policies resulting
    from the OPM's methods, Congress must:
      --Demand that OPM recalculate the postal pension surplus using
            actuarial methods that are fair to the Postal Service and its
            ratepayers, as proposed by the OIG;
      --Require that OPM transfer the corrected surplus fund to the Postal
            Service Retiree Health Benefits Fund; and
      --Repeal the prefunding requirement found in Section 8909a of Public
            Law 109-435.
        The long-term viability of the USPS will require all stakeholders
    to adapt and innovate and may require Congress to adopt further
    legislative changes to allow the Postal Service to provide new services
    and to generate new revenue. But reform of the prefunding provisions
    cannot wait until a consensus forms on a new business model. Congress
    must act this year.

        NALC FACT SHEET--ELIMINATING SATURDAY DELIVERY IS NOT THE ANSWER

        The U.S. Postal Service faces the worst crisis in its history. It
    expects to lose $6-$7 billion in 2009. Although the collapse of the
    housing and financial sectors in late 2008 is responsible for the
    largest decline in mail volume since the Great Depression in the 1930s,
    the main cause of the financial crisis is the decision advanced by the
    Bush administration in the postal reform law of 2006 to require the
    USPS to prefund its future retiree health benefits, a 75-year
    liability, in just 10 years. The cost of this unaffordable prefunding
    payment, $5.4 billion in 2009, accounts for most of the projected loss
    this year. The annual cost will rise to $5.8 billion by 2016. While the
    NALC is working with postal management to address the crisis with the
    Interim Route Adjustment Process, Congress must take action to relieve
    this prefunding burden to preserve affordable, universal service. See
    the NALC Fact Sheets on H.R. 22 and S. 1507.
    Postal management's proposal to deal with the crisis-eliminating
            Saturday mail delivery--is not a sensible solution to the
            USPS's financial crisis
        The Postal Service estimates that by eliminating one-sixth of its
    delivery service, it can cut operating expenses by $3.4 billion or 4.6
    percent--not the 16.6 percent you might expect. The model it used to
    estimate potential savings is based on many unproven assumptions and
    did not specifically study the elimination of Saturday delivery, the
    day most Americans are home to receive packages.
        To date, no study has been conducted to estimate how a reduction in
    delivery days would affect mail volume and delivery costs in the
    remaining 5 days or how different types of mailers would be affected.
        A study conducted on behalf of the Postal Regulatory Commission
    suggests that total cost savings by eliminating one of delivery could
    be as low as $1.9 billion or just 2.5 percent of total postal expenses.
    The Postal Service is rushing to judgment
        In letters to employee groups dated June 11, 2009, USPS management
    requested input on a study of the feasibility of weekday-only delivery
    with replies due back by June 19, 2009. In July it informed the unions
    that it planned to finish its review in 3 weeks. The USPS appeared to
    be recycling an old IBM study it used for the PRC Universal Service
    investigation. A more thoughtful and serious study is needed.
        The proposed reduction in delivery services would be the most
    radical change to postal operations in the 230-plus year history of the
    U.S. Mail. No such policy decision should be made after just a few
    weeks consideration, much less without a comprehensive study of its
    effects.
    Six-day delivery makes the Postal Service unique
        One of the defining characteristics of the U.S. Postal Service is
    its policy of nationwide uniform pricing with 6-day delivery.
    Competitors charge don't deliver or charge high premiums for Saturday
    delivery while the USPS provides affordable universal as mandated by
    the Constitution.
    American businesses value 6-day delivery
        Business in the United States is conducted 6 days--and in many
    sectors 7 days--per week. Small and large businesses alike, from
    individual entrepreneurs to large-scale financial firms, rely on the
    delivery of the mail 6 days per week to operate successfully. Saturday
    delivery is especially important to growing companies like eBay,
    Netflix and Caremark, and has long been vital for news magazines. The
    elimination of Saturday delivery will make the USPS less valuable to
    business and accelerate electronic substitution.
    American citizens value Saturday delivery too
        Billions of prescriptions are delivered through the mail each
    year--a 2-day delay in their delivery would seriously inconvenience
    senior citizens and others. Delayed delivery of payments, subscriptions
    and food products would adversely affect millions of households.
    Rural communities would be disproportionately affected
        Americans living in rural areas where the Postal Service's
    competitors do not deliver or where broadband connectivity is not
    available rely especially on 6-day USPS delivery and would be adversely
    affected by any service cuts. Farmers rely on the delivery of seeds and
    other products through the mail and citizens who live far from retail
    outlets need the USPS for mail-order delivery.
    Broad coalition of stakeholders favors 6-day delivery
        According to the PRC's 2008 study of universal service, parcel
    shippers, direct marketer, magazine publishers and other major mailers
    along with consumer advocacy groups and the seven postal employee
    groups agreed: The elimination of 6-day delivery would hurt business
    and consumer interests while costing thousands of jobs.

                                     ______

      Prepared Statement of the National Association of Postal Supervisors

        Chairman Durbin, Ranking Member Collins and Members of the
    Subcommittee: Thank you for holding this hearing on the financial
    crisis afflicting the United States Postal Service and the current
    proposal to eliminate 6-day mail delivery to American households and
    businesses. The current mandate upon the Postal Service to deliver 6-
    days-a-week, as you know, is contained in the annual appropriation law
    covering the Postal Service.
        The National Association of Postal Supervisors, which represents
    the interests of the 33,000 supervisors, managers and postmasters who
    are responsible for mail operations throughout the Postal Service,
    wants to express our deep concern about the merit of introducing 5-day
    delivery.
        I should note at the outset that our association represents Postal
    Service supervisors who are doing their share to help the Postal
    Service modernize and change. We support changes in the law,
    infrastructure and operations of the Postal Service that make sense and
    will modernize and sustain Postal Service operations, products and
    services.
        However, we believe that the elimination of 6-day delivery will be
    devastatingly counter-productive to the Postal Service and its
    customers. It will pose problems for thousands of business mailers who
    depend upon Saturday delivery, who likely will adopt alternative
    delivery measures that only accelerate the migration of business mail
    to the Internet. Elimination of Saturday delivery will be harmful to
    the millions of household customers of the Postal Service, including
    the elderly who rely upon the timely receipt of their Social Security
    checks and the sick who rely upon the timely receipt of medicine and
    other medical products.
        More fundamentally, elimination of 6-day delivery will damage the
    Postal Service brand, the competitive position of the Postal Service
    and cyclically draw down volume faster. Business competitors will fill
    the vacuum and offer Saturday delivery at premium prices, thereby
    gaining overall market share against the Postal Service.
        Congress should refrain from changing current law and granting
    approval to 5-day delivery, at least for the time being. Five-day
    delivery should be the last resort, not the first. Better options are
    available now to preserve the health and vitality of the nation's
    postal system.
        Foremost among them is Congressional passage of legislation that
    mandates the re-calculation of the Postal Service's pension obligation
    to the Civil Service Retirement System pension fund, using more
    equitable, reasonable and financially-stable calculation methods and
    assumptions; and credits to the Postal Service $75 billion for an
    overcharge in its payments into the CSRS pension fund and transfers
    that credit to satisfy the Postal Service's obligation to the Postal
    Retiree Health Benefit Fund, which will fully fund all mandated
    payments through 2016.
        In addition, Congress and the Postal Service should adopt new ways
    to increase revenues and cut costs. Congress should confer greater
    authority to the Postal Service to introduce and sell new products and
    services that expand the definition of ``mail,'' as well as provide
    wider pricing flexibility. This should involve re-examination of the
    Postal Service business model and its underlying legal and regulatory
    framework.
        The Postal Service also needs to continue to cut costs, reduce
    excess postal facility capacity, and eliminate wasteful programs--
    continuing the steps taken thus far that already have generated
    billions of dollars in savings.
        During the past several years, our organization has collaborated
    with the Postal Service on major organizational changes to cut costs
    and increase efficiencies. Some of these changes have eliminated
    management and supervisory jobs. In 2009 alone, nearly 3,600 management
    positions were eliminated in the Postal Service. These changes have
    dramatically impacted the lives of management employees represented by
    our organization. Nonetheless, we acknowledged the necessity for these
    changes because of their underlying merits.
        In contrast, the elimination of 6-day delivery lacks business sense
    and is counterproductive. Reducing delivery days now, when other steps
    are available, will only degrade the value of mail services for
    households and the mailing industry that use and rely upon the Postal
    Service.
        Thank you for your leadership and your consideration these
    comments.

                                     ______

     Prepared Statement of the National Association of Postmasters of the
                                 United States

        Chairman Durbin, Ranking Member Collins, and Subcommittee members,
    my name is Robert Rapoza. I am President of the National Association of
    Postmasters of the United States (NAPUS). My organization represents
    the managers-in-charge of Post Offices throughout the United States. I
    am pleased to share with you NAPUS' thoughts regarding the finances of
    the United States Postal Service, with specific attention to necessity
    of maintaining a universal Postal Service.
        Presently, there are about 27,000 Post Offices in the country; at
    the turn of the 20th century approximately 77,000 Post Offices dotted
    our cities and heartland. Although the numbers of surviving Post
    Offices are a mere fraction of their past magnitude, they continue to
    serve as the sole threshold to government services for millions of
    citizens and businesses situated in rural areas, small towns, and
    isolated communities. Simply stated, these treasured public facilities
    have been, currently are, and will continue to be an essential
    communications and commercial lifeline for America. Eight percent of
    this nation's Gross Domestic Product is postal-related, employing
    approximately 800 million Americans. The Post Office and its influence
    will reach far into the future, in spite of the digital juggernaut and
    the cataclysmic impact that the recent recession has had, and continues
    to have, on the U.S. Postal Service and its customers. As Postmasters,
    we interact on a daily basis with citizen mailers, destination point
    postal customers, and small businesses. While these customers may not
    be the so-called ``major mailers'', they are the foundation of the
    American postal system, and the reason why the Postal Service remains
    the most trusted, respected and valued governmental institution. It is
    important that Congress work to strengthen and not weaken the Postal
    Service's ability to continue to perform its historic and vital
    mission.
        NAPUS recognizes the financial challenge confronting the Postal
    Service, but closing Post Offices, as being suggested by the Postmaster
    General and others within the agency should be one of last options. In
    recent speeches and visits to editorial boards, the Postmaster General
    has advocated the deletion of the statutory prohibition against closing
    a Post Office ``solely for economic reasons.'' On behalf of the many
    communities for which a self-sustaining Post Office is beyond the means
    of a community, NAPUS strongly opposes the Postmaster General's pitch.
    There are reasons, other than financial, in which a Post Office may be
    closed. In fact, the Postal Regulatory Commission is presently
    reviewing a Postal pattern of circumventing the rules under which a
    Post Office may be ``temporarily suspended.'' Impacted communities are
    sharing their insight with the PRC, within the context of a case
    initiated by Hacker Valley, West Virginia.
        In the report accompanying the fiscal year 2010 Financial Service
    and General Government Appropriations Bill, this Subcommittee
    reaffirmed Congress' strong commitment to rural America in stating that
    ``none of the funds provided [in the Act] be used to consolidate or
    close small rural and other small post offices.'' The subcommittee went
    on to say ``These are services that must be maintained in fiscal year
    2010 and beyond.'' Postmasters and Americans fervently believe that
    Post Offices are key linchpins that bind our nation together. America
    agrees with this view. A June 2009 Gallup Poll illustrated that 55
    percent of Americans oppose the closing of Post Offices; that number
    escalates to 88 percent if the target is their Post Office.
        NAPUS believes that the Subcommittee should consider appropriating
    the statutorily authorized postal public service subsidy; it amounts to
    a modest $460 million. The authorization dates back to 1971, yet the
    Postal Service has not requested it since 1982. The motivation for the
    provision is obvious, and it highlights the value that Congress bestows
    on Post Offices. Section 2401(b)(1) of Title 39 states that the
    appropriation is to provide ``a maximum degree of effective and regular
    postal service nationwide, in communities where post offices may not be
    deemed self-sustaining . . .'' [Emphasis added] Congress cannot be more
    succinct in setting aside funds to assist small and rural Post Offices.
    The PRC estimated that closing all small and rural Post Offices would
    have shed only $549 million in postal operating costs, in fiscal year
    2008.
        One of the most vexing quandaries is how to accurately and fairly
    evaluate the Postal Service's retiree health and Federal annuity
    obligations. The Committee Report that accompanied the fiscal year 2010
    Financial Services and General Government Appropriations Bill
    acknowledged the problem. This Subcommittee documented that Office of
    Postal Inspector General projected the Postal Service to be on a
    schedule which would ``result in a 6 percent overpayment to the [Postal
    Retiree Health Benefits] Fund by the end of 2016.'' Consequently, the
    Report directed the Postal Service, in conjunction with the Office of
    Personnel Management and Office of Management and Budget, to develop
    legislation to address the prefunding issue. It does not appear that
    there was a meeting of minds between the Postal Service and the
    Administration. We urge the Committee to direct the Office of Personnel
    Management to calculate the FEHBP inflation rate consistent with the
    methodology used by other large employers and by Medicare. This would
    reduce the FEHBP index by 2 percent and provide much-needed breathing
    room for the Postal Service.
        Compounding the healthcare pre-funding inequity suffered by the
    Postal Service is the Postal IG conclusion that the Postal Service has
    overpaid $75 billion into the Civil Service Retirement and Disability
    Trust Fund. This is the result of not correctly allocating the pension
    costs of pre-1971 postal employees. Ironically, if this pension
    overpayment were to be applied to pre-funding the Postal Retiree Health
    Fund, the health liability would be wiped away.
        NAPUS understands that remedial legislation may have budget
    implications. This byproduct of postal relief impact stems from
    entanglement of postal operations, the unified budget and budget score-
    keeping. We believe that it should be made clear, through legislation
    and through credible representations, that postal funds paid into the
    Retiree Health Fund and the CSRS Fund are not taxpayer-generated, and,
    as a consequence, should not impact the Federal budget. The only reason
    the transactions ``score'' is because the Postal Fund is an ``off-
    budget'' account, while the health and retirement funds are ``on-
    budget'', and CBO incorrectly asserts that relief increases postal
    spending. We believe that congressional budget rules should not
    penalize the Postal Service for overpaying into the funds, and should
    not exploit the Postal Service as a cash-cow for the government--
    particularly since the agency has no milk to give.
        Thank you.

                                     ______

     Prepared Statement of the National Rural Letter Carriers' Association

        Chairman Durbin, and members of the Senate Appropriations
    Subcommittee on Financial Services and General Government, my name is
    Don Cantriel, and I am President of the National Rural Letter Carriers'
    Association (NRLCA), which represents 123,000 bargaining unit rural
    letter carriers. Our members work in rural, suburban, and urban areas
    throughout the United States and function as a ``post office on
    wheels'' because rural letter carriers offer Postal customers all of
    the services performed over the counter at a post office. We sell
    stamps and money orders, accept express and priority mail, offer
    signature and delivery confirmation, registered and certified mail,
    and, of course, collect our customers' parcels.
        Mr. Chairman, first and foremost, I would like to thank you for
    allowing me to submit a written statement for the record. Our country
    is experiencing a myriad of economic challenges, and the Postal Service
    has not been immune to these difficult financial times. The typical
    mailers who represent a large portion of the mailing business--the
    financial, mortgage, and credit card industries--have all scaled back
    their mailings as a direct result in cost cutting measures by
    businesses and the American consumer, resulting in unusually low mail
    volumes. This unusually low mail volume has caused the Postal Service
    to take drastic steps to change its business model and its operations.
        One drastic step the Postal Service proposes is to eliminate
    Saturday mail delivery. Mr. Chairman and members of the Financial
    Services and General Government Subcommittee, I urge you in the
    strongest and most forceful way not to eliminate the congressionally-
    mandated 6-day delivery language provision. The provision stating
    ``That 6-day delivery and rural delivery of mail shall continue at not
    less than the 1983 level'' must be included once again in the 2011
    Financial Services and General Government Appropriations bill.
        The Administration's Budget Proposal recommends the inclusion of
    the mandated 6-day delivery provision. The Administration recognizes
    that the Postal Service, through no fault of its own, is facing real
    financial challenges. The Administration has pledged to work with the
    Postal Service, the employee unions, Congress, and other stakeholders
    to make sure that the Postal Service remains viable and a pillar of the
    economy. I encourage you to follow the Administration's lead by
    including the mandated 6-day delivery language in the 2011 bill and
    allow the Postal Service to do what it does best--serve the American
    public.
        The Postal Service cannot expect that by working less it will
    achieve more. There is a dispute between the Postal Service and the
    Postal Regulatory Commission (PRC), which has regulatory oversight of
    the Postal Service, over how much money may actually be saved by
    eliminating a day of delivery. The Postal Service claims it will save
    $3.5 billion if it were to eliminate Saturday delivery. The PRC
    disagrees, reporting the savings will be only $1.9-$2.1 billion. Either
    number represents a very small savings compared to the amount of
    revenue the Postal Service will lose as businesses or consumers find
    other methods of delivery to have their mail, packages, and products
    delivered. Recent history supports my contention that there will be a
    major loss of revenue if the Postal Service is given the green light to
    stop Saturday delivery. After passage of the Postal Reorganization Act
    of 1970, the Postmaster General essentially gave away the parcel
    business, because the Postal Service believed that its future was going
    to be in the collection and delivery of letters--not parcels. The
    Postal Service thereafter created an Express Mail product, only to give
    that business away--once again--to private delivery companies. The
    Postal Service has been fighting ever since to regain a share of each
    of those markets.
        The point I am trying to make Mr. Chairman, is that consumers and
    businesses will not use a Postal Service that reduces service by 1 day
    a week or 17 percent. Once consumers and businesses find an
    alternative--and they surely will--they likely will stay away from the
    Postal Service for good. The vacuum that would be left by shutting down
    delivery operations on Saturdays is sure to be filled by a competitor
    and once we lose that business, we will forever be fighting--at even
    greater expense--to get it back. This is why I urge you to include the
    mandated 6-day delivery provision in the 2011 Financial Services and
    General Government Appropriations bill.
        There is an easier way to put the Postal Service on firm financial
    footing that does not involve eliminating Saturday delivery. First,
    something must be done about the pre-funding of the Future Retirees
    Health Benefits Fund (FRHBF). When the 2006 Postal Accountability and
    Enhancement Act (PAEA) was passed, the Postal Service was experiencing
    high mail volumes and record revenues. Much has changed since then.
    Under the PAEA, the Postal Service's statutorily-required payment
    schedule is too much to bear and is patently unfair during these trying
    times. No other government agency or corporation is required to pre-
    fund their retiree health benefits--let alone required to almost fully
    pre-fund them at an accelerated pace. Reducing the amount of money the
    Postal Service is required to pay into the FRHBF has the potential to
    save the Postal Service billions of dollars and still not put employee
    pensions at risk.
        Moreover, the Inspector General reported that the Postal Service
    has been overcharged $75 billion on its CSRS Pension Fund
    responsibility. According to the OIG report, this overcharge has been
    used to pay the retirement costs of Federal employees, not just postal
    employees. The report continues to say that if the overcharge was used
    to prepay the FRHBF; it would fully meet the retiree healthcare
    liabilities and eliminate the need to continue for the Postal Service
    to continue paying $5 billion annually as mandated by the PAEA. The
    Postal Service should be permitted to have the monies it was
    overcharged returned.
        Finally Mr. Chairman, I ask that the Postal Service receive its
    limited appropriation reimbursement as mandated by the Revenue Forgone
    Reform Act of 1993. Revenue is considered forgone when Congress
    mandates the Postal Service provides mail services for designated
    mailers at free or reduced rates; such as free mail for the blind and
    overseas absentee balloting materials. Congress typically then
    appropriates money to reimburse the Postal Service for that revenue.
    While this amount will vary from year to year depending on actual
    usage, the Postal Service is still owed this revenue and I ask that
    Congress appropriate the proper amount the Postal Service is owed in
    forgone revenue.
        Once again, I thank you for allowing me to submit a statement for
    today's Subcommittee hearing. If you have any questions, please do not
    hesitate to contact me at your convenience.

                                     ______

         Prepared Statement of the National Postal Mail Handlers Union

        Thank you, Chairman Durbin, for holding this timely oversight
    hearing. The Postal Service's financial situation has been garnering
    lots of headlines and editorials recently, but not all of them have
    been accurate or fair. These hearings certainly are an important part
    of gathering the facts, and starting the process necessary to provide
    financial and other relief to the nation's postal system.
        The National Postal Mail Handlers Union (NPMHU) represents 50,000
    mail handlers. Our members are located in all of the major mail
    processing facilities. Mail handlers load and unload the trucks;
    cancel, prepare, sort, and dispatch the mail; and perform most of the
    allied duties necessary to the processing of mail. It is difficult and
    sometimes dangerous work.
        In recent years, the NPMHU has worked diligently with Postal
    Service management on a variety of cost-saving initiatives. We have
    been meeting on a regular basis, at every level where results can be
    achieved, from the workroom floor to USPS headquarters at L'Enfant
    Plaza. We have adopted voluntary programs to improve safety, prevent
    accidents, and cut ergonomic injuries; we have produced joint
    interpretation manuals to reduce labor-management disputes and the
    overall number of grievances and arbitrations; we have agreed to early
    retirement programs, both with and without incentives; and we have
    cooperated with USPS efforts to automate and save costs while
    processing the mail more quickly. Mail handlers also have experienced
    substantial decreases in the number of career employees, as well as
    cuts in hours and overtime; and we have had thousands of our members
    involuntarily reassigned or excessed into other hours, onto other tours
    or days of work, or into other facilities, sometimes in far off
    locations.
        The NPMHU recognizes that the current economic environment may
    require additional responses. We do not believe, however, that
    eliminating Saturday delivery is change for the better. Saturday
    delivery anywhere in the United States is a hallmark of the Postal
    Service, and weekend processing and delivery of mail is vital to
    maintaining the postal network.
        The Postal Service acknowledges, as it must, that the elimination
    of Saturday delivery will adversely affect some of its current
    business. There are numerous examples: Netflix is one of the Postal
    Service's largest customers. Many of your constituents look forward to
    that Saturday delivery of a DVD, as it provides entertainment for the
    weekend. What about the delivery of VA or Social Security checks,
    particularly if there is a Monday holiday? Businesses, particularly
    small businesses, often rely on Saturday delivery and weekend
    processing for their financial well-being. There are just too many ways
    that this proposal is wrong for the Postal Service to allow it to go
    forward. The NPMHU simply cannot agree that artificially accelerating
    the loss of volume is a good idea.
        Thus, eliminating Saturday delivery is a last resort that should
    not be seriously considered when there are better solutions available
    that will not degrade the Postal Service. Several alternatives are
    obvious, and require action by Congress:
        First and foremost, Congress must fix the wholly unrealistic, but
    statutorily required, schedule for the pre-payment of retiree
    healthcare benefits. The provisions of the 2006 Postal Accountability
    and Enhancement Act (PAEA) that established the Retiree Health Benefit
    Fund (RHBF) may have made sense in 2006 when the economy was healthy
    and the USPS was growing, but today they need to be modified. Congress
    and the White House need to step up to the plate and make changes to
    the RHBF. No Federal agency or significant private entity has any
    yearly liability remotely resembling the $5 billion burden now imposed
    on the Postal Service. Those who want the Postal Service to run more
    like a private business should allow the USPS to do what businesses are
    allowed to do: let the Service postpone and adjust its payments to
    reflect the economic realities currently presented.
        Furthermore, the size of the future liability for retiree health
    was calculated improperly. Gross errors were made on the number of
    retirees and the annual rate of inflation for healthcare, to name the
    two most prominent examples. These should be fixed, as the adjustments
    will provide an important lifeline to the Postal Service.
        In short, protestations to the contrary, whether in the halls of
    Congress or publicly, do not change the actual facts: the calculations
    underlying the Retiree Health Benefit Fund, and the repayment schedules
    established by the PAEA, are to blame for a large part of the Postal
    Service's current financial woes.
        Second, the USPS portion of the CSRS pension fund also was
    improperly calculated. The Office of Personnel Management must be
    directed to recalculate the USPS liabilities using actuarial methods
    that are accurate and fair, and then must initiate an inter-
    governmental transfer of the resulting surplus to the USPS and its
    ratepayers.
        The NPMHU also urges support for the ``vote-by-mail'' legislation
    currently before the Senate.
        We also urge Congress to grant the Postal Service more flexibility
    in developing new, innovative ways of conducting its business and
    increasing its customer base.
        With regard to specific legislation, the NPMHU supported the
    original version of S. 1507, which had a realistic approach to the RHBF
    funding schedule. Had that legislation passed as introduced, this
    entire proceeding would have a different character to it. The original
    version of S. 1507 was legislation that most parties agreed was
    acceptable. However, the bill was amended into a vehicle to tilt the
    collective bargaining process in favor of management, despite the fact
    that the process for four decades has functioned as it was intended,
    without any labor stoppages, lock-outs, or similar labor-management
    strife since its inception. The changes added to S. 1507 about the
    financial condition of the Postal Service were an unnecessary block to
    constructive resolution of these serious funding issues.
        As noted, the financial situation facing the Postal Service calls
    for immediate resolution, and that resolution rests with Congress and
    the Executive Branch. Congress must act to ensure that changes to the
    Retiree Health Benefit Fund and the calculation of the CSRS
    overpayments are made, so that the Postal Service is able to follow
    rational accounting methods and commonsense budgeting while it
    struggles to remain solvent during these tough economic times.
        Thank you, again, for holding this oversight hearing.

                                     ______

        Prepared Statement of the American Postal Workers Union, AFL-CIO

        Mr. Chairman and members of the Subcommittee, my name is William
    Burrus, President of the American Postal Workers Union, AFL-CIO. On
    behalf of the 260,000 members of my union, I thank you for holding this
    hearing today to examine the financial condition of the United States
    Postal Service (USPS), and for providing the APWU an opportunity to
    submit testimony.
        Since 1775, the Postal Service has sorted, transported and
    delivered mail throughout the nation. The Service began as a conduit
    for communication between the Continental Congress and our armies
    during the Revolutionary War. In 1863, pursuant to statute, the USPS
    began delivering mail to certain addresses if postage was enough to
    ``pay for all expenses of the service.'' By 1896, the Postal Service
    was making deliveries to certain rural and urban homes 6 days a week.
    In some cities, in fact, delivery occurred more than once per day until
    1950. In other more remote rural areas, deliveries continued to occur
    fewer than 6 days per week. Today, the USPS delivers to 146 million
    homes and businesses, 6 days a week. Throughout the Service's history,
    however, there have been discussions about reducing the number of
    delivery days to conserve fuel and reduce costs.\1\
    ---------------------------------------------------------------------------
        \1\ Congressional Research Service, The U.S. Postal Service and
    Six-Day Delivery: Issue for Congress, July 29, 2009, p. 1.
    ---------------------------------------------------------------------------
        The Postal Service's mission is to provide the nation with
    affordable and universal mail service. However, the USPS' authority was
    revised on December 20, 2006, with the enactment of the Postal
    Accountability and Enhancement Act (PAEA). Through this legislation,
    Congress sought to provide the USPS with tools and mechanisms to help
    ensure that the USPS is efficient, flexible, and financially sound, but
    the law has had the opposite effect.
    USPS Financial Condition
        The PAEA has forced the Postal Service virtually into insolvency.
    It imposed on the Postal Service a $75 billion obligation to pre-fund
    retiree health benefits, a liability that is not borne by any other
    Federal agency.
        This requirement, more than any other single factor, has created a
    USPS deficit of alarming size. A 2008 GAO report found the USPS's $5.3
    billion shortfall in fiscal year 2007 was caused primarily by this
    provision of the PAEA.\2\
    ---------------------------------------------------------------------------
        \2\ U.S. Government Accountability Office, U.S. Postal Service:
    Mail-Related Recycling Initiatives and Possible Opportunities for
    Improvement, GAO Report GAO-08-599, June 2008, p.1.
    ---------------------------------------------------------------------------
        If the USPS were to release financial records showing liabilities
    minus this obligation, such documents would clearly demonstrate the
    disastrous effect the legislation has had. Absent this pre-funding
    burden, the Postal Service would have experienced a cumulative surplus
    of $3.7 billion over the last 3 fiscal years, despite declining mail
    volume, an economy in chaos, and electronic diversion.
        The APWU is compelled to ask: If funding future healthcare
    liabilities meets sound accounting standards, why isn't this
    requirement applied to all Federal and private enterprises? Why doesn't
    every branch of government, including Congress, pre-fund future
    healthcare liabilities?
        The PAEA was a mistake, a gross miscalculation, which provided no
    new revenue stream for the Postal Service while imposing massive,
    artificial new costs. The pre-funding provision is the central cause of
    USPS financial difficulties, and we urge Congress to correct it. If
    this single requirement were rescinded, the elimination of Saturday
    mail delivery would be unnecessary.
    USPS Share of CSRS Pension Responsibility
        We also strongly urge Congress to give serious consideration to the
    USPS Office of Inspector General's findings that the methodology for
    determining the Postal Service's contribution to the Civil Service
    Retirement and Disability Trust Fund is flawed.
        For employees who began their career before the Postal
    Reorganization Act of 1970, pension responsibility is shared between
    the Federal government and the USPS. The Office of Personnel Management
    (OPM) established the methodology to be used in determining the
    contribution of both entities. The USPS OIG commissioned the Hay Group,
    a well-known actuarial firm, to review the allocation of liabilities
    for postal pensions between the Federal government and the USPS. The
    Hay Group's findings, ``Evaluation of the USPS Postal CSRS Fund for
    Employees Enrolled in the Civil Service Retirement System,'' describes
    the results of its analysis.
        Among the findings in the report is that if ``the more equitable
    years-of-service allocation methodology had been used to determine the
    value of the Postal CSRS Fund, the OIG estimates its value on September
    30, 2009, would have been approximately $273 billion rather than $198
    billion--a difference of $75 billion.'' The $75 billion overpayment
    would allow the Postal Service to pay a $10 billion unfunded liability,
    pay off its remaining debt, and add approximately $55 billion into the
    Retiree Health Benefits Fund, which already has an approximately $35
    billion balance. With $90 billion, the Postal Service would be
    positioned to fully fund the PAEA obligation.
        There is no dispute that the USPS faces a serious financial
    challenge as a result of the requirement to pre-fund retiree healthcare
    liabilities and the flawed pension allocation methodology. A more
    equitable allocation of pension liabilities would offer the USPS
    stability, which could delay any reduction in the number of mail
    delivery days and other policies that would undermine its ability to
    provide universal service at uniform rates to American citizens.
        The APWU urges Congress to develop a legislative solution to
    correct the formula which so unfairly requires postal customers to
    subsidize pension obligations that should be covered by the Federal
    government.
        Recently, Postal Service announcements have included projections of
    a $238 billion deficit over the next 10 years. Frankly, these
    predictions are outlandish and unsupported. The USPS has offered no
    justification for these wild claims, and, unfortunately, the media has
    failed to challenge them.
    Six-Day Delivery
        Following the USPS briefing on March 2, 2010, I was critical of
    USPS proposals to reduce mail delivery to 5 days per week, writing to
    APWU members, ``It would be the beginning of the demise of the Postal
    Service.''
        In 2008, both the PRC and the USPS conducted studies of mail
    delivery. The USPS study concluded that the elimination of one delivery
    day could save the Service $3.5 billion per year, while the PRC finding
    was savings of $1.93 billion.
        Congress considered the reduction in service delivery days more
    than 30 years ago in response to an earlier study by the USPS. After
    holding a dozen hearings with hundreds of witnesses, the House of
    Representatives approved a resolution opposing the service reduction by
    a vote of 377-9.
        Then, as now, the key question was: Is the USPS a profit-driven
    organization, or a public service?
        In 1980, Postmaster General William F. Bolger appeared before
    Congress insisting that reducing the number of delivery days was
    necessary to ensure the Postal Service's economic stability. He
    estimated that the switch to 5-day delivery would result in the loss of
    15,000 to 20,000 Postal Service jobs. Based on statements reported by
    participants in a 2010 meeting of the Mailers Technical Advisory
    Council, the 2010 version could result in the loss of as many as
    199,000 good-paying, middle-class USPS jobs.
        However, the APWU's opposition to eliminating Saturday delivery is
    not based on a concern about losing jobs. (Approximately 2,500 jobs in
    positions represented by the APWU would be affected.) We are concerned
    about protecting the vitality of the USPS for the future, and we
    support the right of every citizen--including those without Internet
    access and the disabled--to receive high-quality mail service.
        Former Postal Regulatory Commission Chairman Dan G. Blair addressed
    some of the dangers of the proposal in testimony before the Senate
    Subcommittee on Federal Financial Management, Government Information,
    Federal Services, and International Security on January 28, 2009.
    Senator Susan Collins stated that the decision to further reduce postal
    services would cause ``an even bigger drop'' in mail volume that could
    lead to a ``death spiral'' for the USPS.
    New Services
        It is easy to suggest that the Postal Service should offer new
    services in order to remain financially sound while ignoring free-
    market obstacles. However, it is unlikely that a single new service or
    product would be accepted without challenge by private-sector
    competitors; furthermore, it is unlikely that such services would
    result in short-term profits for the USPS.
        In testimony before the House Subcommittee on Federal Workforce,
    Postal Service, and the District of Columbia on November 5, 2009, GAO
    officials said, ``Allowing USPS to compete more broadly with the
    private sector would raise risks and concerns. As with USPS's non-
    postal ventures before PAEA was enacted, new non-postal ventures could
    lose money; and even if they were to make money, issues related to
    unfair competition would need to be considered.''
        How can the USPS be expected to fund new enterprises that would
    require significant start-up costs while it is saddled with a $75
    billion debt? The reality is that requiring a payment averaging $5.6
    billion annually for 10 years would bankrupt any American corporation.
    Savings and Collective Bargaining
        In recent years, the USPS has achieved unprecedented savings
    through productivity increases, a series of cost-cutting initiatives,
    and sacrifices by workers. More than 100,000 jobs have been eliminated
    through attrition over the last 2\1/2\ years, and workers have begun
    paying an increased share of health insurance premiums.
        In addition to 5-day mail delivery, the USPS has proposed numerous
    changes that relate directly to workers' rights and benefits and are
    governed by collective bargaining. We reject any effort to influence
    the process with threats of severe work-rule changes. Contract
    negotiations for both the American Postal Workers Union and the
    National Rural Letter Carriers Association begin in the fall.
        We believe it is unreasonable to single out a handful of provisions
    achieved through bargaining that benefit workers (such as protection
    against layoffs) from the host of negotiated stipulations that are
    contrary to workers' objectives.
    Conclusion
        Mr. Chairman, we believe the rush to 5-day mail delivery is an ill-
    conceived reaction to declining mail volume during an economic
    slowdown. While volume may never return to 2006 levels, even a modest
    return, coupled with repeal of the requirement to pre-fund retiree
    health benefits, would go a long way toward sustaining the Postal
    Service for many years into the future.

    STATEMENT OF HON. RUTH Y. GOLDWAY, CHAIRMAN, POSTAL
                REGULATORY COMMISSION
        Senator Durbin. I might also say to those in attendance
    that our next panel includes Ruth Goldway, Chairman of the
    Postal Regulatory Commission.
        We're glad you're here.
        She's the longest-serving full-time Senate-confirmed
    Presidential appointee within the executive branch of the
    United States Government.
        Congratulations.
        Also appearing is David Williams, independent inspector
    general for the U.S. Postal Service since 2003. He's served as
    inspector general for a number of agencies: the Nuclear
    Regulatory Commission, Social Security Administration,
    Department of the Treasury, and the Department of Housing and
    Urban Development, held top posts at Labor and Transportation
    Security agencies, former special agent with the Secret
    Service, and a decorated veteran, and, I'm proud to note, a
    native of Illinois, graduate of Southern Illinois University in
    Edwardsville, where my wife attended, and holds a master's in
    education as a graduate of the University of Illinois,
    Champaign.
        Phillip Herr joins us from the U.S. Government
    Accountability Office. He's Director in the Physical
    Infrastructure Team of the GAO. Since joining GAO in 1989, he's
    managed reviews of a broad range of domestic and international
    programs. His current portfolio focuses on programs at the U.S.
    Postal Service and the Department of Transportation. And prior
    to joining the GAO, he worked in management consulting, and
    holds a Ph.D. from Columbia University.
        Thanks, to each of you, for being here.
        I'm going to allow each of you an opportunity to make an
    opening statement. Your entire statement will be made part of
    the record.
        Ms. Goldway, why don't you proceed.

                   SUMMARY STATEMENT OF HON. RUTH Y. GOLDWAY

        Ms. Goldway. Thank you. Thank you, Chairman Durbin and
    Ranking Member Collins. Thank you for the opportunity to
    testify today.
        I'm pleased to represent the Postal Regulatory Commission
    and to explain our role in whether or not the Postal Service
    should reduce mail delivery to 5 days.
        Under the Postal Accountability and Enhancement Act,
    whenever the Postal Service considers a nationwide change in
    the nature of postal services, it must submit a proposal to the
    Commission requesting an advisory opinion on the change. Under
    Commission rules, such a request must be filed no fewer than 90
    days before the date the Postal Service proposes to make the
    change effective.
        The Commission provides a public, on-the-record hearing
    process so that mail users and the public can test the Postal
    Service's proposals and offer supporting or opposing views.
    Then the Commission issues an opinion that balances all
    applicable public policies, especially the need to maintain
    adequate and effective universal service and the need to
    provide services in an economic and efficient manner.
        In this specific instance involving a plan to eliminate
    Saturday delivery, the Postal Service must also seek
    congressional approval, because, for over 25 years, since 1983,
    the delivery levels of that year have been specified as the
    minimum annual appropriations legislation.
        For comparison, just last week the Commission issued and
    distributed another advisory committee--commission--another
    advisory opinion in which we reviewed a proposal regarding the
    process for closing the more than 4,000 retail facilities it
    denominates as classified stations and branches. There was an
    overwhelming public support for the maintenance of post offices
    from all of our participants in the hearing process. The
    Commission advised the Service to make significant improvements
    in the process, which would result in a more accurate,
    comprehensive, and balanced financial projection and would
    ensure the rights of affected customers who should have a
    meaningful opportunity to provide input before a decision to
    cut service is made. Congressional review in this matter could
    be helpful, but is not required.
        When the Postal Service requests our opinion on elimination
    of Saturday delivery, it will have to provide comprehensive
    evidence to justify this change. The Commission will follow
    well-established administrative procedures to analyze the
    evidence. This includes an opportunity for us to question the
    Postal Service and an opportunity for the public to provide its
    views. The Postal Service and participants will have the
    opportunity to file briefs and issue briefs and submit reply
    briefs.
        The Commission expects to hear from a wide variety of
    businesses and associations that are dependent on, or make
    significant use of, the Postal Service. We will build a
    comprehensive record on the potential cost savings, on volume
    declines, and on impacts on maintenance of timely and reliable
    service.
        On this important matter, the Commission will also expand
    participation to include both individuals and groups
    representing average citizens. As we have done before, we will
    hold field hearings in cities around the country to learn about
    specific experience that give meaning to the broad national
    trend data that we generally rely on.
        The Postmaster General's testimony, filed here today,
    describes a complex plan for 5-day delivery. It is difficult to
    say precisely how much time will be necessary to develop a
    thorough advisory opinion. Depending on the completeness of the
    information presented by the Postal Service, and the issues and
    the motions raised by individual business participants, a rough
    estimate would be 6 to 9 months.
        The Commission studied the cost savings associated with 5-
    day mail delivery in 2008 as a part of our ``Universal Postal
    Service and Postal Monopoly'' report to Congress. In that
    report, the Commission presented an estimate that cutting
    Saturday delivery would have saved the Postal Service $1.9
    billion in 2007, about $1.6 billion less than the Postal
    Service calculation at that time. About one-third of the
    difference was because the Postal Service didn't figure in any
    volume losses. We estimated a 2-percent reduction in volume,
    caused by a reduction in service. The Service also didn't
    account for the added costs of delivering pieces that otherwise
    would have been delivered on Saturday.
        But, neither the Postal Service nor the Commission was
    quantifying a fully developed change of the type outlined
    today. We will carefully analyze the Postal Service's filing
    that should include, when it's filed, a sophisticated and
    comprehensive presentation of potential cost, volume, and
    revenue changes to support its estimates of net savings.
    Hopefully, it will also explore the impacts of 5-day delivery
    on the Postal Service and on the economic and social interests
    of its customers. I believe our conclusions will be of help to
    you and inform your deliberations on legislation.
        Today, you also asked witnesses to comment on the current
    financial situation facing the Postal Service. We hope to
    discuss our Commission's annual compliance determination with
    you when it is issued late this month. It will provide a solid
    analysis of the Postal Service's precarious finances, and in
    the context of the rate and service performance of fiscal 2009.
    Suffice it to say that the situation is serious and we are
    unanimous on the--in the Commission in our hope that Congress
    will address the retiree healthcare benefit issue promptly.

                               PREPARED STATEMENT

        Thank you again for providing me the opportunity to
    testify. I would be pleased to respond to any questions that
    you have today.
        Senator Durbin. Thanks, Ms. Goldway.
        [The statement follows:]

                     Prepared Statement of Ruth Y. Goldway

        Chairman Durbin, Ranking Member Collins and members of the
    Subcommittee, thank you for the opportunity to testify. I am pleased to
    represent the Commission today, and to explain its role in the process
    of reviewing the coming Postal Service proposal for a reduction in the
    mandated mail delivery frequency. This proposal impacts virtually every
    citizen in the Nation, and this Subcommittee is wise to turn its
    attention so quickly to this issue. Today, I hope to provide you with a
    clear understanding of the Postal Regulatory Commission's statutory
    obligation and how we intend to fulfill it.
        When the Postal Service determines that there should be a change in
    the nature of postal services which will generally affect service on a
    nationwide, or substantially nationwide basis, it must submit a
    proposal to the Commission requesting an advisory opinion on the
    change. This requirement was established by the Postal Reorganization
    Act of 1970, and was retained by the Postal Accountability and
    Enhancement Act of 2006. Our rules provide that such a request must be
    filed with the Commission no less than 90 days in advance of the date
    on which the Postal Service proposes to make the change effective.
        The Commission is responsible for providing a public, on-the-
    record, hearing process so that mail users and other interested members
    of the public can test the Postal Service's proposal and offer
    supporting or opposing views. The Commission will then provide an
    opinion that takes into account all applicable public policies, such as
    the need to maintain adequate and effective universal service, and the
    need to provide services in an economic and efficient manner.
        While we have not yet received a formal proposal from the Postal
    Service to eliminate Saturday delivery, we have been told to expect one
    this month. In this specific instance, the Postal Service must also
    seek approval from Congress, since for over 25 years, 1983 delivery
    levels have been specified as a minimum in annual appropriations
    legislation, thereby requiring maintenance of 6-days-a-week city and
    rural delivery.
        Last week, on March 10, the Commission submitted an advisory
    opinion on another service change proposal. The Postal Service
    requested a review of its process for closing the more than 4,000
    retail facilities it denominates as classified stations and branches.
    The Commission found that significant improvements should be made to
    this process. These improvements would result in more accurate,
    comprehensive, and balanced financial projections as a basis for Postal
    Service decisions, and would ensure the rights of affected customers
    who should have a meaningful opportunity to provide input before a
    decision to cut service is made. Copies of that opinion have been
    provided to members of this Committee. I believe this case is
    representative of the thorough review and constructive advice the
    Commission provides in response to Postal Service requests.
        When the Postal Service submits the request for an advisory opinion
    on elimination of Saturday delivery, it will provide evidence
    explaining why it believes this change is justified. The Commission
    will follow established procedures and create a schedule to analyze
    that evidence. The schedule will include an opportunity to question the
    Postal Service, and an opportunity for the public to provide its views,
    both informally and as part of more formal, technical presentations.
    The Postal Service and interested members of the public will have the
    opportunity to brief issues and submit reply briefs.
        Based on recent experience, I expect the Commission will receive
    detailed and thoughtful comments from a wide variety of businesses and
    associations that are dependent upon, or make significant use of, the
    Postal Service. To the extent necessary, the Commission will issue
    information requests so that a comprehensive record exists to support
    conclusions on potential cost savings, volume declines, and impacts on
    the maintenance of timely and reliable service.
        Additionally, the Commission will expand its outreach efforts to
    encourage participation by both individuals and groups representing
    businesses and average citizens affected by the proposal. In recent
    cases, the Commission has found that going outside of Washington, DC,
    and holding field hearings in such places as The Bronx, New York,
    Independence, Ohio, St. Paul, Minnesota and Flagstaff, Arizona has
    proven extremely helpful. During these hearings, we learn about
    specific experiences that give meaning to the broad national trend data
    we generally rely on.
        As we have not yet seen the actual Postal Service proposal, it is
    difficult to estimate precisely the amount of time that will be
    necessary to develop a thorough advisory opinion. Depending on the
    complexity of the issues raised both by the Postal Service and by
    individual and business participants, a rough estimate would be 6 to 9
    months.
        The invitation to testify today also sought witness comments on the
    current financial situation facing the Postal Service. Suffice it to
    say that we are all well aware of the seriousness of the Postal
    Service's current situation, and hopeful that Congress may see fit to
    address the retiree healthcare benefit issue promptly. The Commission
    will issue its Annual Compliance Determination later this month that
    will provide a full analysis of the Postal Service finances in the
    context of its rate and service performance in fiscal year 2009. I will
    make certain that each member of this Committee is immediately provided
    with a copy of the Annual Compliance Determination.
        As a point of reference, the Commission recently had occasion to
    approximate the cost savings associated with 5-days-a-week mail
    delivery. In December 2008, the Commission submitted a report to
    Congress entitled ``Universal Postal Service and the Postal Monopoly'',
    as required by the Postal Accountability and Enhancement Act of 2006.
    Specifically, the Act required the Commission to estimate the costs of
    the Universal Service Obligation and the value of the existing
    monopoly.
        The Commission accepted as reasonable an estimate developed by a
    team of outside consultants that reducing the frequency of delivery
    from 6 to 5 days would have increased the Postal Service's fiscal year
    2007 profits by $1.9 billion. This was about $1.6 billion less than a
    Postal Service calculation at that time. About one-third of the
    difference was due to the fact that the Postal Service assumed no mail
    volume would be lost as a result of the reduction in service. The
    consultants' estimates reflected a 2 percent reduction in volume due to
    the reduction in service. The other major difference related to the
    costs of delivering pieces that otherwise would be delivered on
    Saturday.
        However, neither the Postal Service nor the Commission were
    quantifying a fully developed change proposal of the type the Postal
    Service has said it will be providing later this month. I look forward
    to carefully analyzing a Postal Service proposal that includes a
    sophisticated presentation of potential cost and revenue changes to
    support its estimates of the impact of elimination of Saturday delivery
    both on the Postal Service and on the economic and social interests of
    its customers.
        Thank you again for providing me the opportunity to testify today.
    I would be pleased to respond to any questions Subcommittee members may
    have.

        Senator Durbin. Mr. Williams.

    STATEMENT OF HON. DAVID C. WILLIAMS, INSPECTOR GENERAL,
                OFFICE OF INSPECTOR GENERAL, UNITED STATES
                POSTAL SERVICE
        Mr. Williams. Thank you, Mr. Chairman and Senator Collins.
    I appreciate the opportunity to discuss the Postal Service's
    current financial condition.
        The Postal Accountability and Enhancement Act of 2006 set
    the Postal Service on a visionary, imaginative course to behave
    with the agility and customer responsiveness found in the
    private sector. However, the act's incentives and pressures
    served to illuminate chronic business-model problems that
    required rapid correction. Also, the recent economic downturn
    hit the postal community very hard. Last, the Digital Age has
    entered a creative-destructive phase, disrupting numerous
    industries, including the Postal Service.
        The Postal Service is moving in the right direction, but
    its velocity is insufficient to avoid an economic catastrophe
    that will severely challenge its viability. Actions are needed
    now in several key areas.
        Each year, the Postal Service pays $7 billion more than is
    warranted for its benefit funds. This overcharge is the result
    of exaggerated healthcare inflation percentages, a transfer of
    Federal pension responsibilities to the Postal Service, and
    excessive prefunding targets for retiree healthcare and pension
    funds. Addressing this overcharge could allow needed time to
    plan and integrate large-scale cost-reduction initiatives. The
    large network of post offices, plants, and administrative
    apparatus is financially burdensome. To its credit, the Postal
    Service has streamlined some of its network, reducing over
    130,000 employee positions since 2003 and cutting $6 billion in
    costs for 2009 alone.
        The Postal Service must accelerate its infrastructure
    optimization plan while balancing its commitment to service.
    The Postal Service's complex workforce rules do not always
    match mission requirements. The ebb and flow of mail in the
    processing plants suggest the need for a more flexible staff
    willing to perform a wider range of duties. The current method
    of paying carriers by the hour requires closer management than
    is possible and disincentivizes optimal performance.
        We, along with the Postal Service, have recognized the need
    for a simplified, modernized pricing structure. The Postal
    Service has three primary product lines: letters, flat
    mailings, such as magazines, and packages. Yet, it has
    thousands of price variations for them. Additionally, 24 of the
    135 work-share discounts exceed costs avoided, and other
    discounts may no longer be of value. A simple pricing structure
    could be easier to use and allow more accurate charges to
    customers.
        A recent poll indicated that reducing 6-day delivery to 5
    days has the support of mail recipients, though mailers have
    expressed concerns. Mail pieces per mailbox have declined
    significantly, from six pieces per day to four. And reducing
    delivery days would seem to balance cost by restoring the
    number of pieces being delivered. Additionally, with the
    Nation's 40-hour workweek--managing resources for a 5-day
    business cycle is much simpler than for 6 days. The Postal
    Service needs to weigh potential savings against possible
    decreases in revenue and loss of its competitive advantage,
    since other companies charge premiums for Saturday delivery.
        Last, my office is concerned that the Postal Service
    builddown could be so rapid that the dynamics within and among
    the large initiatives are not fully understood. Adding 5-day
    delivery changes to infrastructure optimization, management of
    the FSS investment, and intelligent mail barcode implementation
    is daunting. Perhaps a test, beginning in the quieter summer
    months, would provide a great deal of useful information.
        To conclude, I'm not aware of a business in the world that
    could forfeit $7 billion annually before its doors open, and
    survive. Benefit prefunding overcharges should be fixed.
    Additionally, the Postal Service should aggressively right-size
    it's infrastructure without delay. The clock is ticking, and
    this may be their last shot. Work rules should be better
    aligned with mission requirements. A simplified pricing
    structure should be implemented to bring in new business and
    enable accurate calculation of revenues due.
        The world is in the midst of a digital revolution, and it's
    a wild ride for the Nation's entire communications
    infrastructure. Globalization and the Digital Age are providing
    exciting opportunities, but only for some. Tech centers in
    India and China are tightly surrounded by people pulling
    ploughs with water buffalo, people who have been completely
    left behind.
        America has taken many actions in the past, such as land-
    grant universities, TVA, rural mail delivery, and interstate
    highways, to ensure that people are not left behind. The
    powerful and unpredictable events facing the communications
    industry may require such action, to assure that all Americans
    have universal access and the opportunity to take part in this
    exciting new world.
        Our communications infrastructures have to recover from the
    shock and trauma of a changed world to assure their readiness
    to play both traditional and emerging roles in support of our
    citizens.
        Thank you.
        Senator Durbin. Thanks a lot.
        Mr. Herr, your turn.

    STATEMENT OF PHILLIP HERR, DIRECTOR, PHYSICAL
                INFRASTRUCTURE ISSUES, GOVERNMENT
                ACCOUNTABILITY OFFICE
        Mr. Herr. Thank you, Chairman.
        Chairman Durbin and Ranking Member Collins, I'm pleased to
    participate in this hearing on the U.S. Postal Service.
        Today, I will briefly discuss its financial condition and
    forecast. I will also provide GAO's perspective on the Postal
    Service's need for restructuring, as well as highlight
    questions for Congress to consider regarding changing delivery
    from 6 to 5 days.
        Turning first to the Postal Service's financial condition.
    As mail volume declined by 35 billion pieces in fiscal years
    2007 through 2009, the Postal Service's financial viability has
    deteriorated, leading to $12 billion in losses. Current
    forecasts, discussed earlier, are that mail volume will decline
    to 167 billion pieces this fiscal year, the lowest levels since
    1992. The Postal Service projects a record loss of over $7
    billion this fiscal year, while taking on $3 billion in debt.
    Its outstanding debt will increase to $13.2 billion, close to
    its $15 billion statutory limit.
        The Postal Service does not expect total mail volume to
    return to its former levels when the economy recovers. Simply
    put, the economic downturn and continuing shift to electronic
    communications and payments has changed how mail is used. By
    fiscal year 2020, the Postal Service projects further volume
    declines of about 16 percent, to 150 billion pieces, the lowest
    level since 1986. First-class mail volume is projected to
    decline by another 37 percent over the next decade, as seen in
    figure 3 of my written statement. And less-profitable standard
    mail, primarily advertising that's subject to economic
    fluctuations, is projected to remain roughly flat over the next
    decade.
        Turning to restructuring and 5-day delivery. As Senator
    Collins noted, in July 2009 GAO added the Postal Service's
    financial condition to our high-risk list again and reported
    that action is urgently needed in multiple areas so that the
    Postal Service can achieve financial viability. Such actions
    should include restructuring its operations, networks, and
    workforce to reflect changes in mail volume and revenue. The
    longer it takes for the Postal Service and Congress to address
    these challenges, the more difficult they will be to overcome.
        We believe that no single change will be sufficient to
    address the Postal Service's pressing challenges, and have
    identified key actions the Postal Service and/or Congress could
    take. Compensation and benefits costs represent 80 percent of
    the Postal Service's costs, as Senator Durbin mentioned
    earlier. Cost-savings opportunities are possible with regard to
    personnel and benefits.
        In terms of retirements, annually through 2020, about 5
    percent of Postal Service employees will be eligible and are
    expected to retire. That represents approximately 300,000
    employees, about one-half the current workforce. In terms of
    benefit costs, postal employees have 80 percent of their health
    benefit premiums covered, 8 percent more than most Federal
    employees.
        Consolidating processing and retail networks is also
    needed, given mail volume declines. Removing excess capacity is
    necessary in the 600 processing facilities, where first-class
    mail processing capacity exceeds needs by 50 percent.
        In the retail area, approximately 30 percent of revenue
    currently comes from purchases at nonpostal locations, such as
    grocery stores, indicating that consumers have begun shifting
    to alternatives. The network of 36,500 retail facilities can
    also be reduced. Maintenance has been underfunded for years,
    resulting in deteriorating facilities and a backlog.
        Another opportunity for savings is consolidating the postal
    field administrative structure by reviewing the need for 74
    district offices and eight area offices. And because cost-
    cutting alone will not ensure a viable Postal Service,
    generating revenue through new or enhanced products is needed
    to maximize profitable mail volume.
        Two additional options that would require congressional
    approval involve, first, the funding requirements of retiree
    health benefits. As mentioned today, last-minute congressional
    action was needed this past September to reduce the Postal
    Service's required payments from $5.4 billion to $1.4 billion.
    And, second, reducing delivery from 6 to 5 days.
        Questions we have raised that Congress might wish to
    consider regarding changing delivery from 6 to 5 days include:
    How would eliminating Saturday delivery affect efforts to
    increase volume? How would delivery service standards be
    affected? How will consumers and business customers be affected
    in their operations? And how much leadtime would be needed to
    modify postal operations and financial systems for this
    actually to take place?
        Such issues must be addressed so that stakeholders fully
    understand the potential ramifications of these changes. GAO
    also expects to analyze this proposal when it becomes
    available.
        Mr. Chairman, in conclusion, the longer it takes for the
    Postal Service and Congress to realign the Postal Service to
    the changing use of the mail, the more difficult change will
    be. Toward that end, GAO has an ongoing review to evaluate
    options for long-term structural and operational reforms and we
    plan to issue our report in April.

                               PREPARED STATEMENT

        This concludes my prepared statement, and I'm pleased to
    answer any questions.
        Thank you.
        [The statement follows:]

                       Prepared Statement of Phillip Herr

                                   HIGHLIGHTS

    Why GAO Did this Study
        The U.S. Postal Service's (USPS) financial condition and outlook
    deteriorated significantly during fiscal year 2009. USPS was not able
    to cut costs fast enough to offset declining mail volume and revenues
    resulting from the economic recession and changes in the use of mail,
    such as electronic bill payment.
        In July 2009, GAO added USPS's financial condition and outlook to
    its High-Risk List and reported that USPS urgently needed to
    restructure to improve its financial viability. Declines in mail volume
    and revenue, large financial losses, increasing debt, and financial
    obligations will continue to challenge USPS.
        This testimony provides (1) information on USPS's financial
    condition and forecast and (2) GAO's perspective on the need for USPS
    restructuring. In addition, questions and issues are included for
    Congress to consider regarding USPS's proposal to reduce delivery from
    6 to 5 days. This testimony is based on GAO's past and ongoing work,
    including its work on postal reform issues, its report adding USPS's
    financial condition and outlook to its High-Risk List, and updated
    information on USPS's financial condition and outlook.

                   FINANCIAL CRISIS DEMANDS AGGRESSIVE ACTION

    What GAO Found
        As mail volume declined by 35 billion pieces (about 17 percent) in
    fiscal years 2007 through 2009, USPS's financial viability
    deteriorated, with close to $12 billion in losses, and it does not
    expect total mail volume to return to its former level when the economy
    recovers. USPS forecasts that total mail volume will decline to 167
    billion pieces in fiscal year 2010--the lowest level since fiscal year
    1992, and 22 percent less than its fiscal year 2006 peak. It also
    projects a record loss of over $7 billion. Further, USPS has halted
    construction of most new facilities and expects to borrow $3 billion in
    fiscal year 2010, which would bring its total outstanding debt to $13.2
    billion, close to its $15 billion statutory limit. Looking forward,
    USPS projects that by fiscal year 2020, total mail volume will further
    decline by 16 percent, to the lowest level since 1986. Absent
    additional actions to cut costs and increase revenues, USPS expects
    financial losses will escalate over the next decade.

        Action is urgently needed in multiple areas by USPS and Congress to
    address USPS's pressing challenges so that it can achieve financial
    viability, including restructuring USPS operations, networks, and
    workforce to reflect changes in mail volume, revenue, and use of mail.
    The longer it takes for USPS and Congress to address USPS's challenges,
    the more difficult they will be to overcome. When GAO placed USPS's
    financial condition and outlook on its High-Risk List, it identified
    the following key actions USPS and/or Congress could take: reduce
    employee compensation and benefits; consolidate retail and processing
    networks; consolidate administrative field structure; generate revenue
    through new or enhanced products; change funding requirements for
    retiree health benefits; and realign delivery services. GAO will
    analyze USPS's proposal to reduce delivery from 6 to 5 days when it
    becomes available. Included in this testimony are questions and issues
    for Congress to consider regarding delivery changes. GAO will also be
    issuing its report later this spring that provides its perspective on
    USPS's financial crisis, as well as additional options for
    restructuring.
        Mr. Chairman and Members of the Subcommittee: I am pleased to
    participate in this hearing on the U.S. Postal Service's (USPS)
    financial condition, a topic we have been continually monitoring given
    USPS's deteriorating financial condition during fiscal year 2009. My
    statement will provide (1) information on USPS's financial condition
    and forecast and (2) our perspective on the need for USPS
    restructuring. In addition, we provide questions and issues for
    Congress to consider regarding USPS's proposal to reduce delivery from
    6 to 5 days.
        My statement is based upon our past and ongoing work, including our
    work on postal reform issues, our report adding USPS's financial
    condition and outlook to our High-Risk List, and updated information on
    USPS's financial condition and outlook. We conducted this performance
    audit in accordance with generally accepted government auditing
    standards. Those standards require that we plan and perform the audit
    to obtain sufficient, appropriate evidence to provide a reasonable
    basis for our findings and conclusions based on our audit objectives.
    We believe that the evidence obtained provides a reasonable basis for
    our findings and conclusions based on our audit objectives.
      usps's financial condition has deteriorated and its outlook is poor
        As mail volume declined by 35 billion pieces (about 17 percent) in
    fiscal years 2007 through 2009, USPS's financial condition
    deteriorated, with close to $12 billion in losses, and it does not
    expect total mail volume to return to its former level when the economy
    recovers. This volume decline was largely due to the economic downturn
    and changing use of the mail, with mail continuing to shift to
    electronic communications and payments. In July 2009, we added USPS's
    financial condition and outlook to our High-Risk List and reported that
    USPS urgently needed to restructure to address its financial
    viability.\1\ Despite $6.1 billion in cost savings in fiscal year 2009
    as well as congressional action that relieved USPS of $4 billion in
    mandated payments to prefund postal retiree health benefits,\2\ USPS
    still reported a loss of $3.8 billion for the year. Also, USPS debt
    increased by the annual statutory limit of $3 billion, bringing
    outstanding debt to $10.2 billion at the end of fiscal year 2009.
    ---------------------------------------------------------------------------
        \1\ GAO, High-Risk Series, Restructuring the U.S. Postal Service to
    Achieve Sustainable Financial Viability, GAO-09-937SP (Washington,
    D.C.: July 28, 2009).
        \2\ A looming cash shortfall in 2009 necessitated last-minute
    congressional action to reduce USPS's mandated payments to prefund
    retiree health benefits from $5.4 billion to $1.4 billion. Pub. L. No.
    111-68, Sec. 164, 123 Stat. 2023 (Oct. 1, 2009).
    ---------------------------------------------------------------------------
        These declines along with large financial losses, increasing debt
    and financial obligations, are projected to continue to challenge USPS.
    Most recently, total mail volume for the first quarter of fiscal year
    2010 was down almost 4.5 billion pieces, a decrease of almost 9 percent
    over last year. For fiscal years 2010 and 2011, USPS is projecting
    annual deficits exceeding $7 billion and additional pressures to
    generate sufficient cash to meet its obligations. Further, USPS has
    halted construction of most new facilities and has budgeted $1.5
    billion in capital cash outlays (mostly for prior commitments), which
    is down from the average of $2.2 billion in the previous 5 fiscal
    years. USPS also expects to borrow $3 billion in fiscal year 2010,
    which would bring its total outstanding debt to $13.2 billion, close to
    its $15 billion statutory limit, which it could reach as early as
    fiscal year 2011. USPS projects that financial losses will escalate
    over the next decade, with cumulative losses of over $230 billion by
    fiscal year 2020 if its planned cost reduction and revenue generation
    initiatives are not implemented. (see fig.1).

        Further, USPS does not expect total mail volume to return to its
    former levels when the economy recovers. It projects that total mail
    volume will decline to 167 billion pieces in fiscal year 2010--a level
    not seen since fiscal year 1992, and 22 percent less than its fiscal
    year 2006 peak. By fiscal year 2020, USPS projects, at best, further
    volume declines of about 16 percent, to about 150 billion pieces, the
    lowest level since 1986 (see fig. 2).

      --First-Class Mail volume has declined 19 percent since it peaked in
            fiscal year 2001 and USPS projects that it will decline by
            another 37 percent over the next decade. (see fig. 3). This
            mail is highly profitable and generates over 70 percent of the
            revenues used to cover USPS overhead costs.
      --Standard Mail (primarily advertising) volume has declined 20
            percent since it peaked in fiscal year 2007, and is projected
            to remain roughly flat over the next decade. This class of mail
            is profitable overall but lower priced, so it takes 2.5 pieces
            of Standard Mail, on average, to equal the profit from the
            average piece of First-Class Mail. Standard Mail volume was
            affected by large rate increases in 2007 for flat-sized mail,
            such as catalogs, and the recession that affected advertising
            such as mortgage, home equity, and credit card solicitations.
            These solicitations appear unlikely to return to former levels.
            Standard Mail also faces growing competition from electronic
            alternatives, increasing the possibility that its volume may
            decline in the long-term.

        In addition to the projected losses caused by declining mail
    volume, USPS believes that stagnant revenue, costs of providing
    universal service, and rising workforce costs will also lead to losses.
     usps and congress need to act aggressively to address financial crisis
        USPS urgently needs to restructure to improve its current and long-
    term financial viability. On March 2, 2010, USPS addressed these issues
    in its plan, entitled ``Ensuring a Viable Postal Service for America:
    An Action Plan for the Future,'' \3\ which identified seven key areas
    where-in it would need legislative changes or congressional support.
    Improving its financial viability is critical because USPS plays a
    vital role in the U.S. economy, and is at the core of a mailing
    industry valued at about a trillion dollars, according to USPS.
    Moreover, it is the largest civilian Federal agency, employing
    approximately 599,000 career employees as of December 31, 2009 and
    operating a total of about 38,000 facilities nationwide as of September
    30, 2009.
    ---------------------------------------------------------------------------
        \3\ USPS's plan and related material are available at http://
    www.usps.com/strategicplanning/futurepostalservice.htm.
    ---------------------------------------------------------------------------
        We have previously concluded that restructuring is needed in
    multiple areas, including action and support by Congress, since no
    single change will be sufficient to address USPS's pressing challenges.
    According to USPS, even if it took all of the actions it could under
    existing law, it would still face unsustainable losses of at least $115
    billion by 2020. A major challenge for USPS is to cut costs and
    restructure quickly enough to offset unprecedented volume and revenue
    declines--particularly costs related to its workforce, retail and
    processing networks, and delivery services--so that it can cover its
    operating expenses. We have an ongoing review, as mandated by the
    Postal Accountability and Enhancement Act of 2006,\4\ to evaluate
    options and actions for the long-term structural and operational
    reforms of USPS. Due to the urgency of the USPS financial crisis, we
    plan to issue our study in April 2010, ahead of the December 2011
    statutory deadline.
    ---------------------------------------------------------------------------
        \4\ Pub. L. No. 109-435, Sec. 710 (Dec. 20, 2006).
    ---------------------------------------------------------------------------
        When we placed USPS's financial condition and outlook on our High-
    Risk List, we identified the following key actions USPS and/or Congress
    could take: \5\
    ---------------------------------------------------------------------------
        \5\ GAO-09-937SP.
    ---------------------------------------------------------------------------
      --Reduce compensation and benefit costs through
        --retirements: Annually through 2020, about 5 percent of USPS
                employees will be eligible and expected to retire,
                according to USPS. That represents approximately 300,000
                employees, about half of the workforce as of March 2, 2010.
        --lower benefit costs: USPS pays a higher percentage of employee
                health benefit premiums than other Federal agencies (80
                percent versus 72 percent, respectively). In addition, USPS
                pays 100 percent of employee life insurance premiums, while
                other Federal agencies pay about 33 percent.
      --Consolidate retail and processing networks
        --Remove excess capacity in the 600 mail processing facilities
                nationwide, where processing capacity for First-Class Mail
                exceeds processing needs by 50 percent.
        --Maximize use of lower-cost retail alternatives: Approximately 30
                percent of USPS retail revenue currently comes through
                alternate channels, such as stamps bought by mail, on the
                Internet, and at grocery stores, indicating that customers
                have begun shifting to such alternatives.
        --Reduce the network of 36,500 retail facilities, where maintenance
                has been underfunded for years, resulting in deteriorating
                facilities and a maintenance backlog. USPS recently
                reported that it has more retail facilities than McDonalds,
                Starbucks, and Walgreens combined. Further, it stated that
                its post offices average about 600 visits per week,
                representing only 10 percent of average weekly visits to
                Walgreens.
      --Consolidate field administrative structure: Review the need for 74
            district offices and 8 area offices.
      --Generate revenue through new or enhanced products: Use its pricing
            and product flexibility to maximize profitable mail volume.
        In the past, we have also discussed, and the Postal Service has
    recently proposed, additional options for restructuring that would
    require congressional approval:
      --Change funding requirements for retiree health benefits.--USPS
            asked Congress to revise the funding requirements for its
            retiree health benefit obligation. USPS had difficulty making
            its required payment to prefund retiree health benefits in
            fiscal year 2009 and has warned that it may have similar
            difficulty for fiscal year 2010. As noted, in fiscal year 2009,
            a looming cash shortfall led to last-minute congressional
            action to reduce USPS's required payments to prefund retiree
            health benefits from $5.4 billion to $1.4 billion.
      --Realign delivery services with changing use of mail.--USPS has
            asked Congress to allow it to reduce delivery from 6 days to 5
            days per week, stating that eliminating Saturday delivery would
            provide annual savings of about $3 billion.\6\ The Postal
            Regulatory Commission (PRC) estimated in 2008 that eliminating
            Saturday delivery would result in savings of about $1.9
            billion, based on somewhat different assumptions regarding the
            likely effects on mail volume and costs.
    ---------------------------------------------------------------------------
        \6\ USPS plans call for continuing providing window retail service
    and delivery to post office boxes on Saturday, as well as remittance
    mail service for business mailers.
    ---------------------------------------------------------------------------
        The Postmaster General stated in March 2010 that USPS plans to
    request a PRC advisory opinion on this change, which would lead to a
    public proceeding that would include input by interested parties.
    Before this plan could be implemented, Congress would need to stop
    including statutory restrictions contained in USPS annual
    appropriations that mandate 6-day delivery. Congress might wish to
    consider several questions regarding such a change:
      --How would eliminating Saturday delivery impact USPS's efforts to
            grow mail volume and encourage commercial mailers to continue
            using the mail?
      --How would eliminating Saturday delivery affect mail processing
            costs? Salary and benefits for mail processing employees and
            carriers?
      --What will be the expected effects on delivery service standards?
      --How will consumers and business customers be affected by a move to
            5-day delivery? How does USPS plan to mitigate these effects?
      --How does USPS plan to communicate eliminating Saturday delivery and
            other related changes to mailers and the public?
      --Will there be sufficient P.O. boxes to handle a potential spike in
            demand for those customers wishing to pick up mail on
            Saturdays?
      --How much lead time would be needed for USPS to modify its
            operations and financial systems before eliminating Saturday
            delivery?
      --What other options has USPS considered that could significantly
            reduce costs without reducing delivery service?
        These issues need to be addressed in the expected USPS 5-day
    delivery proposal so that stakeholders fully understand the potential
    ramifications of these changes. More broadly, USPS faces larger issues
    with regard to restructuring and its financial viability. The longer it
    takes for USPS and Congress to address USPS's challenges, the more
    difficult they will be to overcome.
        Mr. Chairman, this concludes my prepared statement. I would be
    pleased to answer any questions that you or other Members of the
    Subcommittee may have.

        Senator Durbin. Thanks a lot, to the panel.
        Now, we all understand what's happened to the Postal
    Service--the loss of volume, the loss of revenue and such--but,
    Mr. Williams thinks he's found a winning lottery ticket here,
    for $75 billion. And before we start talking about the pain of
    cutting, I've got to ask Ms. Goldway what the Postal Regulatory
    Commission is doing about this opinion of Mr. Williams and the
    $75 billion.
        Ms. Goldway. The Postal Service has asked, under a
    provision in the Postal Accountability Act, to--asked the
    Commission to hire an independent actuarial firm to review this
    issue and to provide a report to the Commission and to the
    public on the reliability of the inspector general's estimate.
    And we have issued a statement of work and expect to get a
    contract with an independent actuary in place in a little more
    than 30 days, perhaps 45 days, and we'll determine, then, just
    how long it takes, but we certainly want to be part of the
    discussion about the financial reliability of that proposal
    before it moves forward.
        I should also mention that, as part of a request that was
    made by Chairman Lynch of the House subcommittee last year, we
    were asked to look at the Healthcare Retiree Benefit Fund, and
    our actuarial review of that issue pointed to a position where
    the Postal Service, under assumptions that were somewhat
    different from the OPM's assumptions, but more in line with
    general actuarial assumptions, could be paying at least $2
    billion less each year, and still have the same amount of
    funding for the retiree health payments at the end of the 10-
    year period that was required under the law. So, I think that,
    in both cases, the research that we provide can give you
    options in the decisions that you might make about how to
    proceed.
        Senator Durbin. So, can you tell me the timetable there on
    the $75 billion issue?
        Ms. Goldway. Well, unfortunately, we don't have a response
    from the actuarial yet as to how much time it will take. We
    think we can do it within 45 days. We're certainly going to
    work with our bidders to see who can provide us that
    information as quickly as possible.
        Senator Durbin. And what is the next step after PRC has
    made its judgment on this estimate?
        Ms. Goldway. We report the--our findings to the Postal
    Service and share it with the public. And then, it's really up
    to the other players, the--in the administration or in
    Congress, to determine what information they feel is most
    reliable to act on.
        Senator Durbin. So, let's assume, for the sake of
    discussion, that you find it's true, they've overpaid----
        Ms. Goldway. Right.
        Senator Durbin [continuing]. $75 billion. Can the Postal
    Service recapture that money?
        Ms. Goldway. I think if we find that, we will certainly
    present an argument that it would be fair for the Postal
    Service to recapture that money. Just how it's done, in terms
    of transferring funds from year to year or all at once, would
    be something that I think the Congress and OPM and OMB would
    have to participate in.
        Senator Durbin. Mr. Williams, you didn't mention the $75
    billion in your testimony. Are you having second thoughts?
        Mr. Williams. We are not having second thoughts, sir. The--
    I--actually, I did try to allude to it, but I was trying to
    cover as much ground as the hearing title suggested.
        Senator Durbin. And so, I won't go into a great deal of
    detail on that, but I assume that that is what's being debated
    currently, with the independent actuaries and such, at the
    Postal Regulatory Commission.
        Mr. Williams. It is. After our finding on the healthcare
    overpayment, Congress asked that OPM and OMB and the Postal
    Service get together to try to come up with a fiscally
    responsive--responsible proposal for legislation. I believe
    this issue has been added to that issue so that there'll be a
    comprehensive solution that's to be developed by the three of
    them and presented to Congress.
        Senator Durbin. One of the things you talked about is a--
    and I underlined it--``exaggerated healthcare inflation
    percentage.'' It was--which Senator Collins is more aware of
    than I am.
        Mr. Williams. Yes.
        Senator Durbin. But, are you suggesting that the
    anticipated cost of the healthcare system of the Postal Service
    should be lower, that they have anticipated more expenses than
    you believe are warranted?
        Mr. Williams. OPM has set a growth rate for the--for future
    costs, of 7 percent a year. We benchmarked that against the
    private sector, and we discovered that it was the general
    consensus--the overwhelming general consensus--that 5 percent
    was a more realistic growth rate. That's also what the
    Department of Health and Human Services (HHS) uses for Medicare
    growth rate. That--the delta there was $13.2 billion. OPM set
    about downgrading its estimates much more closely to that
    growth rate, and then they've gone into these three-party talks
    to try to understand what to do.
        Senator Durbin. And if it is decided to take a lower growth
    rate, then, of course, the annual payment is going to be
    reduced accordingly.
        Mr. Williams. Yes, sir.
        Senator Durbin. And what's the timetable on that decision?
        Mr. Williams. There was not a timetable set. I believe the
    meetings have begun. There have been one involving the
    principals, and I believe there'll be some followup meetings--
    --
        Senator Durbin. Well, it sounds to me like we have two or
    three major issues outstanding here that will determine whether
    or not we have to make this decision about reducing service.
        Mr. Williams. These are very large, very serious----
        Senator Durbin. Seventy-five billion dollars overpayment--
    question mark--Postal Regulatory Commission. Two billion
    dollars that you mentioned, Ms. Goldway, that may be an
    overpayment. Perhaps an exaggeration on the anticipated
    healthcare benefits down the line. So, it seems to me that
    before we start making dramatic changes in the Postal Service,
    some of these questions need to be answered. I would think that
    would be reasonable.
        But, Mr. Herr, I think what you're saying is, ``But, if you
    look at the economics of Postal Service''----
        Mr. Herr. Right.
        Senator Durbin [continuing]. ``Let's get real.''
        Mr. Herr. Well, I think part of it, looking at the long-
    term analysis--that was part of the study the Postal Service
    just released in March, they had some consulting firms make a
    projection out to 2020, and one of the things that we noted
    there is that they're expecting a long-term decline, in terms
    of the more profitable mail and how mail is used. So, as we
    stand back and look at it, we think that it's a good
    opportunity to take that footprint into consideration, in terms
    of the network and workforce.
        Senator Durbin. I'm going to violate every law--or every
    rule that I learned in law school and ask you a question
    anyway. How big a problem is Congress, when it comes to this
    issue about the future of the Postal Service?
        Mr. Herr. Well, as you know, there's often instances where
    there are prohibitions put in place, in terms of closures and
    things of that nature.
        Senator Durbin. Guilty, as charged.
        And it's a tough issue. And we realize that it's a
    difficult issue, but it's also one that--I think, as you look
    at these broader, longer-term trends, it's important to look at
    the Postal Service and then think about what the Service is,
    and how that could be realigned with the demand for mail.
        I tried to pose this question to the Postmaster General,
    about the business model for the Postal Service in this
    changing world. And I know that's a challenge. I don't know
    that many executives with his responsibility could really
    envision how to reinvent, to keep up with it. And you kind of
    see some elements here that are obvious, in terms of
    infrastructure and the future.
        Mr. Herr. Well, and I think--in the hearing today, there's
    been some good discussion about retail alternatives, in terms
    of moving some of those into places like supermarkets or
    pharmacies, where people are already going, that would be an
    opportunity to save. Also, on the processing side, just looking
    at what's needed to handle the mail volumes now, and then
    what's projected.
        Senator Durbin. Thanks a lot.
        Senator Collins, we have two votes starting at 4:15, so----
        Senator Collins. I'll be fast.
        Senator Durbin [continuing]. Proceed.
        Senator Collins. The witnesses will be happy about that.
        Ms. Goldway, just for clarification, the process that you
    go through, which may take as long as 6 months or 9 months--
    assuming Congress changed the law to allow the Postal Service
    to make its own decision on delivery, would the Postal Service
    be precluded from going ahead with that decision until the PRC
    has given its judgment?
        Ms. Goldway. It's my understanding that the Postal Service
    has to seek our advisory opinion. It doesn't have to follow
    that opinion, but it has to seek our opinion. And the process
    of public input becomes really valuable.
        So, for instance, in this recent case, where the Postal
    Service wanted to close what they call ``stations'' and
    ``branches,'' the level of public participation and concern
    that was raised about the fact that customers weren't getting
    the input that they wanted, and that they wanted postal
    services maintained in the offices, slowed down the Postal
    Service's decisionmaking, and they began to rethink just how
    they were going to realign their postal network, and the public
    process was helpful.
        We believe the public process will be helpful regardless of
    what the Congress does. But, we do think that the public
    process will probably help you, because this is a very serious
    issue. And as you had said earlier, the brand of the Postal
    Service, its commitment to having people on the street 6 days a
    week, its notion of what it is in the future, is really
    threatened by the reduction from 6 to 5 day.
        One of the interesting figures we heard was that young
    people value 6--the 6th day more than older people, even though
    they don't use the mail as much, that's the day they want it.
    So, if you want young people to keep going into the mail, this
    process may not be the right business model.
        Those of the kinds of issues we are going to explore when
    we have our hearings.
        Senator Collins. Thank you.
        Mr. Williams, I am troubled, obviously, by the prospect of
    the Postal Service laying off 13,000 people in this terrible
    economy, letter carriers all across the United States. And I'm
    particularly troubled by that because there are reports--and
    you have done, I believe, one of the reports--concluding that
    what is out of whack in the personnel costs of the Postal
    Service are the benefit levels for health insurance and life
    insurance. I mentioned the 100-percent payment for premiums for
    life insurance, versus 3--33 percent for the Federal employees.
        Has there been any analysis done of relative savings? For
    example, if you cap the 6-day delivery and didn't have to lay
    off 13,000 people who are going to have a hard time finding
    work, but instead, you brought the benefit structure into line
    with the benefits that Federal employees receive who are
    participating in the same kinds of programs. Has there been any
    sort of relative analysis?
        Mr. Williams. To my knowledge, there has not been. We're--
    the actual proposal is 2 months away, and it may contain
    something like that. We're unaware of its contents that will go
    to the PRC.
        We did do that body of work, and that was our finding. We
    would be pleased to work with your staff to try to make a--that
    sort of determination. That would certainly be an interesting
    discovery.
        Now, those agreements are contained in the labor----
        Senator Collins. Yes.
        Mr. Williams [continuing]. Agreements, and would have to be
    shifted. But, at this point, I know that the leadership of the
    unions is certainly looking out for the well-being of their
    people, and they might well be interested in that, as well,
    and--when they go into negotiations.
        Senator Collins. I think that would be helpful information
    for us to have.
        Mr. Herr, have you looked at that issue, by chance? The----
        Mr. Herr. We have not looked at it. I remember at the
    Senate hearing last January, you and Senator Carper were
    there--I think the Postmaster General offered an estimate of a
    $700 million annual savings if something like that were to be
    adjusted. But, we've not done any specific analysis on that.
        Senator Collins. Okay. Thank you.

                                  OVERPAYMENT

        I want to clarify two issues, just to make sure that I
    personally understand the issues before us. Mr. Williams, when
    you came up with your $75 billion estimate of an overpayment,
    is that an overpayment for the pensions of retired postal
    workers, not to be confused with the money that goes into the
    Retiree Health Benefits Fund?
        Mr. Williams. It is, Senator; that regards--there was an
    earlier report that had to do with the inflationary growth and
    the overpayment into the Healthcare Fund. This most recent
    report, regarding the $75 billion, regards the Pension Fund.
        Senator Collins. I think that's very important for us----
        Mr. Williams. Yes.
        Senator Collins [continuing]. To understand, that we're
    talking about two different pots of money here.
        And, Mr. Herr, what is your analysis on both of these
    issues, on whether or not there is an overpayment of such a
    staggering amount to the Pension Fund for retirees? Let's deal
    with that issue first.
        Mr. Herr. On that particular issue, I've asked our
    financial folks and our chief actuary to look at this, and they
    noted--and it's also noted in the back of the inspector
    general's report--that the board of actuaries reviewed that,
    and we believe that their assessment is correct, that OPM's
    methodology was valid and was consistent with the law.
        Senator Collins. And so, you would disagree with OPM's
    assessment, in----
        Mr. Herr. No, we believe that OPM's assessment is correct.
        Senator Collins. I'm sorry. So, you agree with OPM, and you
    do not agree with Mr. Williams' assessment, that his study--I'm
    not trying to create conflict here, I'm just trying to get an
    understanding. I'm really not.
        Mr. Herr. Yes.
        Senator Collins. Is that accurate? Okay.
        And it's my understanding, though--we'll go back to OPM--
    that OPM has stuck to that decision, as has OMB.
        I would note, Mr. Chairman, that in our conference report
    last year, we asked the Postal Service to work with OPM and OMB
    to come to us with a proposal and an answer to this, and I
    think we need to push them and follow up on that.
        Mr. Herr, the second issue is the payment to the Retiree
    Health Benefits Fund----
        Mr. Herr. Right.
        Senator Collins [continuing]. And that is the stream of
    payments established by the 2006----
        Mr. Herr. Yes.
        Senator Collins [continuing]. Act. And I would like your
    best judgment on, what should we do about that issue? I won't
    go on with my opinion, but I'd like your best judgment.
        Mr. Herr. Yes.
        Senator Collins. What's the best way for us to handle that
    issue?
        Mr. Herr. Senator Collins, we have a report--I mentioned
    our business model report--that we're expecting to release in
    about 3 weeks, that has a discussion of that. We talk about
    several approaches for Congress to consider. One, we take a
    look at what the Postal Service has proposed, which is a pay-
    as-you-go model. We also looked at a reamortization and we lay
    out in a table what that would mean, in terms of the costs. We
    provide, I think, a clear explanation, so Congress has a sense
    of what's involved here, what the magnitude of the funding is,
    to help you make some really tough policy decisions about where
    things are now, where they stand, and then where you might want
    to go, going forward.
        Senator Collins. And we'll get that study shortly, then?
        Mr. Herr. Yes, you will.
        Senator Collins. Great. I think that's going to be very
    helpful.
        My final question, since I know our time is short. Mr.
    Herr, isn't it a problem if we come up with an amortization
    schedule that suspends payments for several years and then
    ramps them up? Is there any reason to believe that the Postal
    Service, given what you've described about the projections for
    its volume and the pressure, would be able to better afford a
    greater payment, say, beginning 4 or 5 years from now, than
    would be the case under the current law?
        Mr. Herr. Everything we've seen suggests that they're going
    to have difficulty, now or in the future, with some of these
    payments. They're large numbers, but they're also very large
    obligations--500,000 current retirees; we talked about 300,000
    people going into retirement in the next 10 years. So, it's
    really important to assess what they're able to do and then try
    to find the amount that will be a reasonable payment toward
    those obligations.
        Senator Collins. Thank you very much.
        Thank you very much, Mr. Chairman.
        Senator Durbin. So, Ms. Goldway, as I understand it, the
    Postal Service asked the Postal Regulatory Commission to study
    the 5-day service model.
        Ms. Goldway. Yes.
        Senator Durbin. And I think you concluded by saying, ``But,
    they don't have to pay much attention to what you conclude.''
        Ms. Goldway. The Postal Regulatory Act--the Postal
    Regulatory Commission, under the act, gives us some very clear,
    specific responsibilities and some advisory responsibilities.
    And in this case, with regard to the nature of service, we have
    an advisory responsibility.
        On the other hand, every year we have to make a report on
    whether the Postal Service has complied with the law, and that
    means whether it's met its obligations to provide an efficient
    and fair level of universal service.
        So, if they don't take our advice on this, and, at the end
    of the year, they've entered into an activity that we deem
    has--is less than universal service, we could find them out of
    compliance and require them to start up some new activity
    again. But, we could not tell them, at the time of our advisory
    opinion, what to do.
        So, it's--our--we--just as the Postal Service is trying to
    learn how to operate under this new law, which has given them
    price flexibility and product flexibility, but at the time of
    the--of a recession, we are learning, as well, how to regulate
    the Postal Service with both new law--new responsibilities and
    power, but less power than we had in certain areas with regard
    to rates, before. It's a balancing act that we will have to
    implement.
        Senator Durbin. I'd ask who wrote the law, but I know. So,
    if the Postal Service ignores your advice, they may have a day
    of reckoning ahead of them, when you make your annual report
    and have the power to order them to do certain things.
        Ms. Goldway. That's right.
        Senator Durbin. And I guess I'd have to say, bluntly, that
    Congress can ignore both of you. And for 27 years, we've been
    including a sentence, which no one has noticed, in this
    appropriation bill, which is, ``Maintain 6-day service and
    rural service across America at 1983 standards.'' I don't think
    it was ever brought to my attention until a few weeks ago,
    because it became so routine. But, it is within the power of
    Congress in general, perhaps this subcommittee, to make that
    decision, regardless of what the PRC, Postal Regulatory
    Commission, or the Postal Service decides. I don't want to
    speak for----
        Ms. Goldway. Right.
        Senator Durbin [continuing]. Anyone else on the
    subcommittee. I certainly would like to hear an evaluation of
    this proposal from those who look at it seriously. You talked
    about facing this in the past and asking some hard questions
    about what it meant and whether it saved as much money as
    proposed, and so forth. That is all reasonable, and I think
    we're dutybound to try to reach that.
        Now, what about this idea--and I think Mr. Herr referred to
    it, about the quiet summer months--what about this idea of a
    pilot project on 5-day delivery. Can this be done? Does the
    Postal Regulatory Commission have to be part of that decision?
        Ms. Goldway. I would venture to say, if the pilot program
    is envisioned as something that would potentially be
    implemented nationwide, then it would be something that would
    have to come to us for prior approval, as well. If----
        Senator Durbin. Well, it's the nature of----
        Ms. Goldway [continuing]. It's just an experiment----
        Senator Durbin. It's the nature of a pilot----
        Ms. Goldway [continuing]. Under the law, there's a certain
    level of experiment that they can undertake without our direct
    review.
        Senator Durbin. That's the nature of a pilot program, or a
    demonstration project, is to see what the impact will be in the
    real world. I don't know if it's even realistic to decide that,
    you know, a few counties in the----
        Ms. Goldway. I'm reluctant----
        Senator Durbin [continuing]. United States will try this.
        Ms. Goldway. Yeah. I'm reluctant, without advice of
    counsel, to be specific, but it does seem, to me, smaller,
    discrete experiments with service certainly would be possible.
    After all, while the Postal Service does provide 6-day delivery
    pretty much uniformly across the country, there are areas where
    it does not now provide 6-day delivery--either it's a business
    area, or it's an extremely rural area--so that its opportunity
    to provide 5-day delivery in some experimental fashion, I
    think, would be possible without the kind of comprehensive
    review that we require, or that you would require.
        Senator Durbin. Well, here's the way I'd see it, at this
    point. And I defer to my colleague to close here, as we hustle
    off to vote.
        As I see it, there are two or three big questions out there
    about the current economic status of the Postal Service: the
    $75 billion question, the $2 billion question, which you've
    raised, questions about healthcare benefits that could have a
    direct impact on the immediacy of this decision.
        Long term, I think Mr. Herr is right, we have to look at
    the Postal Service evolving into a different agency as it faces
    new challenges that cost money and create more competition.
        I'd like to know what the Postal Regulatory Commission
    concludes, on the issue of 5-day service, before making a final
    decision. I am not against the idea of a pilot project, if that
    appears to be feasible or necessary, to see what the actual
    reaction of postal consumers would be if you tried it in a
    given area, and to try to measure from that whether this makes
    good public policy.
        We're kind of stuck. It's kind of go or no-go, when it
    comes to the appropriation bill, in whether we include the
    language or we don't include it. And, thank goodness, I have
    the wise counsel of the Senator from Maine to help me reach
    that conclusion.
        And I'll let her have the last word.
        Senator Collins. Thank you, Mr. Chairman. Those are my last
    words.

                              SUBCOMMITTEE RECESS

        Senator Durbin. Thanks, everybody. Appreciate your
    attending this hearing.
        [Whereupon, at 4:25 p.m., Thursday, March 18, the
    subcommittee was recessed, to reconvene subject to the call of
    the Chair.]

      FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR FISCAL
                                   YEAR 2011

                                  ----------

                           WEDNESDAY, MARCH 24, 2010

                                           U.S. Senate,
               Subcommittee of the Committee on Appropriations,
                                                        Washington, DC.
        The subcommittee met at 2:32 p.m., in room SD-192, Dirksen
    Senate Office Building, Hon. Richard J. Durbin (chairman)
    presiding.
        Present: Senators Durbin and Collins.

                         OFFICE OF PERSONNEL MANAGEMENT

    STATEMENT OF HON. JOHN BERRY, DIRECTOR

                 OPENING STATEMENT OF SENATOR RICHARD J. DURBIN

        Senator Durbin. Good afternoon. I am pleased to convene
    this hearing before the Senate Appropriations Subcommittee on
    Financial Services and General Government.
        Our focus is on fiscal year 2011 budget request of the
    Office of Personnel Management (OPM). OPM has not appeared
    before our subcommittee since 1997. So we have been waiting a
    long time to see you.
        I welcome my ranking member, Senator Susan Collins of
    Maine.
        The Office of Personnel Management serves as the principal
    adviser to the President on personnel management issues for the
    country's 2 million Federal civilian employees. It designs,
    develops, and oversees compliance with workforce policies and
    sets the guidance in areas of recruiting, selection,
    development, and compensation. To facilitate the Federal
    employment application process at a single location, OPM
    manages the USAJOBS Web site, which: posts 30,000 job vacancies
    a day; maintains 15.4 million resumes on file; and sends more
    than 500,000 e-mails daily to job seekers.
        OPM manages the world's largest single employer-sponsored
    health insurance plan with 8 million insured individuals, which
    also insures Members of Congress. The agency also administers
    retirement benefits for the Federal Government with more than
    2.5 million retirees.
        In addition, OPM conducts 90 percent of Federal background
    investigations each year and provides observers to monitor the
    election process as assigned by the Attorney General.
        OPM's newly unveiled strategic plan presents goals that
    will help prepare our Federal civil service for the 21st
    century.
        OPM's priority, and one I hope is shared by every Federal
    agency, is to recruit and retain the best and the brightest.
    Our Nation's civil servants are called on to defend our Nation,
    restore confidence in our financial system, administer a
    historical economic recovery effort, ensure adequate healthcare
    for veterans and others, and search for cures to the most
    vexing diseases. So we depend on these men and women who are
    dedicating their lives to public service.
        I am pleased to note that the 15.4 million resumes I
    mentioned OPM has on file are up from 1.9 million just a few
    years ago. With the surge of interest in public service, it is
    important that appropriate OPM policies and procedures be
    reformed to attract the best candidates.
        For fiscal year 2011, OPM is requesting $240 million in
    discretionary funds, the same as the enacted amount for fiscal
    year 2010, of which $95.7 million is for basic operating
    expenses. They are requesting an additional 40 full-time
    equivalents (FTEs) in the area of retirement processing.
        Mr. Berry, since you assumed the directorship last April,
    you have undertaken changes and improvements in hiring,
    including veterans hiring. And I know that disability hiring
    policy changes are a high priority for you.
        In addition, you have overseen new efforts in the area of
    wellness with funding we provided last year, which we will talk
    to you about. I know you intend to recommend changes to the
    Federal pay system, increasing telework eligibility, improving
    the security clearance process, and getting the retirement
    system modernization project on track.
        According to an article from a recent Government Executive
    magazine--whose cover you graced--with the title ``High
    Hopes,'' you have been referred to as a ``change agent,'' ``the
    quintessential Energizer bunny,'' and ``shot out of a cannon.''
    Given what you hope to accomplish during your tenure, that is
    good because it looks like you have your work cut out for you.
        I would like to turn now to Senator Susan Collins, the
    ranking member.

                       STATEMENT OF SENATOR SUSAN COLLINS

        Senator Collins. Thank you, Mr. Chairman.
        Director Berry, welcome. It is good to see you before us
    here today.
        I appreciate your leadership at OPM and your efforts to
    fulfill the agency's mission to recruit, retain, and honor a
    world-class Federal workforce to serve the American people.
        I have always been a strong advocate for our Federal
    workforce. Because of the good work of our Federal employees,
    the United States Government is able to protect our Nation and
    provide crucial services to our citizens each and every day.
    Without their dedication, this vital work could not be done,
    and their commitment to public service makes for a stronger
    America.
        Many Federal employees place their very lives at risk on a
    daily basis. They knowingly put themselves in harm's way. The
    very nature of their work--whether it is military personnel, as
    Federal law enforcement or intelligence officers, or in other
    dangerous callings--puts them on the front lines of an often
    challenging or even life-threatening missions. But as the
    recent attack on the building in Austin, Texas, and other past
    assaults directed at Federal buildings and personnel have
    demonstrated, Federal employees can become the target of
    terrorists and criminals.
        Over the next decade, the Federal Government is facing a
    retirement wave, and with it, the loss of leadership and
    institutional knowledge at all levels. On average, retirements
    from the Federal workforce have exceeded 50,000 a year for a
    decade. Those numbers will certainly rise in the near future.
        The Office of Personnel Management calculates that 60
    percent of the current Federal workforce will be eligible to
    retire during the coming years. Federal agencies, which must
    already hire more than one-quarter of 1 million new employees
    each year, will need to work hard to replace these retirees, as
    the private sector and State and local governments will be
    competing for the same qualified applicants.
        To meet this challenge, agencies must use the recruitment
    and retention tools they already have, such as student loan
    repayment, recruitment and retention bonuses, and the ability
    to rehire Federal annuitants to fill critical needs. That has
    been a particular concern of mine. Last year I authored a bill
    to allow just that.
        OPM also needs to develop an effective and fair pay-for-
    performance system that rewards the very best Federal
    employees.
        Director Berry, you have some very significant
    responsibilities that you work to accomplish those goals. And
    given fiscal constraints, I will be interested to hear how you
    will ensure that OPM will provide employees, agencies, and
    retirees with the important service they need but, most of all,
    ensure that the public has the qualified workforce we all need.
        So, Mr. Chairman, I look forward to working with you on
    this issue.
        Senator Durbin. Thanks a lot.
        Director Berry has quite a background, worked as
    legislative director for Congressman Steny Hoyer for 10 years,
    Assistant Secretary of Treasury, and the Interior Department's
    Director of both the National Fish and Wildlife Foundation and
    the National Zoo, which means he will be comfortable here in
    Congress.
        We will ask questions about the panda later.
        I now invite you to present your testimony, and your
    written testimony will be part of the record.
        Director Berry.

                      SUMMARY STATEMENT OF HON. JOHN BERRY

        Mr. Berry. Chairman Durbin and Senator Collins, thank you
    so much for this opportunity to appear before you today.
        I also want to personally thank both of you for your
    incredible leadership over so many years for our Federal
    employees and for retirees. On behalf of all of them, let me
    just say thank you. I know that if they could be here today,
    they would want to express thanks for your constant and
    stalwart leadership.
        With your indulgence, I would also like to introduce my
    Deputy Director, Christine Griffin, who is with me today. Mr.
    Chairman, as you mentioned in your opening statement there are
    concerns with both diversity and people with disabilities.
    Christine is one of the highest-ranking people in the Federal
    Government with a disability, and she is doing a phenomenal
    job. As I tell people, she is not really disabled, she is
    abled-squared. She is amazing and could do anything plus, and
    it is just an honor to be with her.
        I appreciate the opportunity to appear before you to defend
    the President's budget request for the Office of Personnel
    Management for fiscal year 2011. I know that I am preaching to
    the choir, but I can't overstate the importance of our mission
    to recruit, retain, and honor a world-class workforce to serve
    America. We are developing plans to achieve these goals, and I
    look forward to sharing some of those details with you today.
        For fiscal year 2011, OPM has requested $240 million in
    discretionary resources. With this money, we will serve the
    taxpayers by establishing, implementing, and overseeing all
    Federal human resource policies, completing background security
    investigations for over 90 percent of the Federal agencies,
    ensuring compliance with merit system principles, and
    administering of benefits for over 2 million Federal employees,
    2.5 million retirees, and their families, totaling over 8
    million lives.
        Even as we innovate and try to do more, this request stays
    level with the funds appropriated to OPM in fiscal year 2010.
        The President has asked me to make Government ``cool''
    again. And so, we have developed several initiatives to make
    the Federal Government the model employer for the 21st century.
    Both of you are supporting many of these initiatives, letting
    job seekers know that the Federal Government is already a great
    employer with the best workforce in the Nation.
        In the past year, we have worked hard to expand the
    recruitment and hiring of veterans throughout the Government.
    Through an Executive order, the President established the
    Veterans Employment Initiative, creating a partnership between
    OPM, Departments of Labor, Veterans Affairs, and Defense.
        OPM is requesting $2.4 million, an increase of $800,000
    from fiscal year 2010, for this initiative in 2011. We plan to
    use those resources to increase our support and access for
    veterans seeking employment with the Federal Government. With
    your leadership, we have also provided benefits to support our
    soldiers and their families.
        I am particularly proud of our efforts to create a new
    special hiring authority for agencies that allow them to hire
    the spouses of members of our armed forces, who, as you know,
    have to move on a regular basis burdening them with a unique
    disadvantage. Consequently, we are trying to help them gain
    access to Federal employment not in violation of our veterans
    hiring program, but rather in addition to it.
        OPM also issued guidance in December to expand the paid
    leave benefits of members of the National Guard and reservists
    to help their families when they are called to active duty. Mr.
    Chairman, I want to specifically thank you for your leadership.
    This essentially enacts the legislation that you personally
    introduced, and for the first time ever, employees from the
    civil service sector who serve in the Reserve aren't
    disadvantaged by having their pay cut. This legislation has
    allowed us to restore their pay and maintain that pay while
    they are serving in the military. So God bless you and thank
    you for your leadership. We have worked to implement this
    legislation so that these reservists are not penalized in any
    way with regard to their pay.
        Another initiative is our effort to work with agencies to
    streamline the Federal hiring process. We are in the final
    clearance process with the Office of Management and Budget now
    and are ready, once we finish the agency clearance process, to
    send to the President a major hiring reform proposal that will
    essentially bring the Federal Government into the 21st century,
    or I should say the 20th century, where we will just start
    using resumes like everybody else.
        I think that if we do nothing else, this will be a landmark
    shift that will allow us to greatly benefit from progress that
    has been made long ago in the private sector.
        We requested $4 million for the next year to build
    additional and improved assessments that will develop more
    shared, registered, and enhanced Government-wide recruitment,
    and we can talk about that more in the questions. We are
    reforming the Federal security clearance process and are
    seeking your authority to meet those demands by increasing our
    Investigative Services Division by an additional 160 employees.
        In addition, we are taking a measured approach to updating
    our retirement systems and will be focused on improving overall
    electronic data collection. We must ensure that benefits are
    processed quickly and accurately and that our reform measures
    are deliberate and don't waste any more of the taxpayers'
    money.
        I know you all have been very diligent in overseeing this
    throughout the years. There have been multiple failures. We
    want to make sure that we can guarantee success with regard to
    any steps we take on this issue.
        In fiscal year 2011, OPM has requested $1.5 million to
    develop a better calculator for our retirement processing. This
    will allow our caseworkers to process claims more expeditiously
    and to meet current needs. Basically, right now we don't have
    an automated system. As you know, RSM was disbanded and that
    effort closed down. We had started to actually decrease our
    staff under the expectation there was going to be a new system.
        We are not going to have that system. Consequently, we do
    need to increase some staff. I am asking for 40 more employees
    so that we can just keep pace with the growth in demand that we
    are seeing. We are receiving, just this year, from the Postal
    Service alone an additional 18,000 retirements that we will
    have to process.
        We are looking for additional resources to conduct the
    employee viewpoint survey on an annual basis rather than every
    other year. We believe that this can be a very effective
    management tool.
        For the first time ever--and this really surprised me when
    I got there. We should have the best health database in the
    country. We have the largest single plan, covering 8 to 9
    million lives and yet we have never collected any data from it.
    And so, we miss, quite frankly, enormous opportunities for
    improving cost efficiencies, evaluating which programs are
    working better, and determining what the needs of our current
    population are.
        We want to make sure we can do that well. Thus, we are
    asking you for the necessary resources. It is a substantial
    investment, but it will allow us to begin collecting data for
    the first time ever about our employees' health benefit
    program, not at an individual level, but at the level where we
    can learn where our weaknesses are and where there are possible
    cost savings that could help us control costs in the future.
        These priorities and the priorities in our budget reflect
    the strategic goals that you have discussed in our strategic
    plan: to hire the best, respect the workforce, expect the best
    of our workforce, and honor their service. If we want enhanced
    performance and superior results from our Federal Government,
    we must invest in our employees and attract, hire, and retain
    the best workforce.
        To do this we must give our people the tools that they need
    to succeed and the incentive to perform at their maximum
    potential. We must assure employees that their services are and
    will continue to be respected and honored. I thank you on
    behalf of all Federal employees and retirees for both of your
    roles in doing that throughout your careers.

                               PREPARED STATEMENT

        Thank you for this opportunity to be with you today, and I
    look forward to answering any questions that you might have.
        [The statement follows:]

                        Prepared Statement of John Berry

        Chairman Durbin, Ranking Member Collins, and Members of the
    Subcommittee: As Director of the Office of Personnel Management, I
    appreciate the opportunity to testify before you today on the
    President's fiscal year 2011 budget request for the Office of Personnel
    Management (OPM). This budget will help us meet our responsibilities
    for establishing, implementing, and overseeing the Federal Government's
    human resources policies, background security investigations, merit
    system compliance, and administration of a broad range of benefits for
    the 2 million strong Federal civilian workforce, 2.5 million retirees,
    their families and survivors. I look forward to sharing with you the
    Administration's vision to recruit, retain, and honor a world-class
    workforce to serve America.
        Included in the fiscal year 2011 budget request are my strategic
    goals for the agency: Hire the Best, Respect the Workforce, Expect the
    Best, and Honor Service. These guiding principles have framed my
    initiatives of the past year and will continue to guide our activities
    and priorities in the next fiscal year.
        The President has asked me to make Government ``cool'' again, and
    to that end, we have several initiatives to reinforce the Federal
    Government to be the best workplace with the best workforce in the
    Nation. In the past year, with this subcommittee and Congress' support,
    we have worked hard to expand the recruitment and hiring of veterans
    throughout the Government; provide benefits to support the war fighter
    and his or her family; foster collaboration between labor and
    management in order to improve delivery of Government services; reform
    the Federal security clearance process, and propose initiatives to
    streamline the Federal hiring process. However, many challenges still
    remain. Nonetheless, OPM is well-prepared to meet these challenges, and
    the priorities outlined in this budget request are critical toward the
    success of these efforts.

                        HIGH PRIORITY PERFORMANCE GOALS

        The following High Priority Performance goals are measurable
    commitments to the American people. They represent high priorities for
    both the Administration and the Office of Personnel Management and are
    expected to achieve significant results over the next 12 to 24 months.
    Each of the four goals is related to OPM's major performance
    improvement initiatives reflected in our budget. The High Priority
    Performance Goals include:
        Hiring Reform.--80 percent of Departments and major agencies will
    meet agreed upon targeted improvements to: Improve hiring manager
    satisfaction with applicant quality, improve applicant satisfaction,
    and reduce the time it takes to hire.
        Telework.--Increase by 50 percent the number of eligible Federal
    employees who telework by fiscal year 2011, increase by 50 percent the
    number of eligible Federal employees who telework over the fiscal year
    2009 baseline of 102,900.
        Security Clearance Reform.--Maintain or exceed OPM-related goals of
    the Intelligence Reform and Terrorism Prevention Act of 2004 and
    provide the OPM deliverables necessary to ensure that security
    clearance reforms are substantially operational across the Federal
    government by the end of CY 2010.
        Retirement Claims Processing.--Reduce the number of retirement
    records OPM receives that are incomplete and require development to
    less than 38 percent by the end of fiscal year 2010, 35 percent by the
    end of fiscal year 2011, and 30 percent by the end of fiscal year 2012.
        Wellness.--By the end of 2011, every agency has established and
    begun to implement a plan for a comprehensive health and wellness
    program which will achieve a 75 percent participation rate.

                               OPM REORGANIZATION

        Shortly after becoming OPM Director in April 2009, I tasked the
    agency's senior leadership with developing a simplified model for
    restructuring the agency's executive offices and program divisions. The
    agency and its employee unions were partners throughout this process
    with a shared commitment to ensure employees are treated fairly, and to
    ultimately make OPM a better and more effective agency.
        The foremost reason for reorganizing OPM was to enable our
    customers, as well as OPM employees, to see in clear, plain English,
    the functions that we perform and the organizations responsible for
    implementing them. The five main functional organizations within OPM
    now are:
      --Employee Services, which provides policy direction and leadership
            in designing, developing and promulgating Government-wide human
            resources systems and programs;
      --Retirement and Benefits, which administers retirement, health, and
            life insurance benefit programs for Federal employees,
            retirees, their families and survivors;
      --Merit System Audit and Compliance, which ensures that Federal
            agency human resources programs are effective and meet merit
            system principles and related civil service requirements;
      --Federal Investigative Services, which ensures the Federal
            Government has a suitable workforce that protects National
            Security and is worthy of Public Trust; and
      --Human Resources Solutions, which provides effective human resources
            solutions to assist Federal agencies in achieving their
            missions.
        There are three newly created offices that I believe will help
    improve the agency's operations. First, I created an independent
    Ombudsman that will address issues raised by OPM employees and some
    customers of OPM. I have also created an Internal Oversight and
    Compliance Office that will undertake reviews and assessments of OPM
    operations, as well as assist program offices with responses to and
    follow up on audits conducted by the OPM Inspector General and
    Government Accountability Office. Through these offices we will have an
    internal check on OPM's operations that will allow us to better
    identify and improve problem areas.
        Also, I created an Office of Planning and Policy Analysis. Included
    in the OPM budget request is $7 million to start a data warehouse to
    analyze the claims experience of participants in the Federal Employees
    Health Benefits Program (FEHBP). Through this effort we hope to
    identify trends in employee health issues and potentially drive down
    costs through a better understanding of the Federal employee and
    retiree population's most common healthcare needs.
        Under this reorganization, OPM is more streamlined. Our customers--
    both internal and external--are better able to understand the services
    and products that we provide. The execution of the reorganization has
    also made OPM more effective in making the Federal Government the model
    employer for the 21st century through successful achievement of
    critical priorities.

                        FISCAL YEAR 2011 BUDGET REQUEST

        The budget request presented to you today continues the path we
    began to chart last year in an effort to bring civil service into a new
    era. For fiscal year 2011, OPM is requesting $240,071,000 in
    discretionary appropriations, the same as enacted for fiscal year 2010.
    The total includes appropriations from general funds as well as
    limitations on transfers from the earned benefit Civil Service
    Retirement and Disability Fund, Federal Employees Health Benefits Fund,
    and the Federal Employees Group Life Insurance Fund, all of which are
    under OPM's management.
        For basic operating expenses of the agency, our request includes
    $95,770,000 in general funds for Office of Personnel Management
    Salaries and Expenses, $22,564,000 of general funds and trust fund
    transfers for Office of the Inspector General Salaries and Expenses.
    Also, we are requesting a total of $121,737,000 in transfers from the
    Trust Funds for the administration of the civil service retirement and
    insurance programs. This funding will provide the resources necessary
    to aid in carrying out several major initiatives.
    Hiring Reform
        The Administration believes that reforming the Federal hiring
    process is an urgent priority to attract the best and brightest talent
    into the workforce. The current hiring process is cumbersome and slow,
    frustrating managers and discouraging many talented individuals from
    considering Federal jobs and opportunities. In order to address this
    problem, OPM's fiscal year 2011 budget requests $4,000,000 in order to
    promote innovative and coordinated approaches to help agencies
    streamline their end-to-end hiring process. This synchronization will
    better enable agencies to recruit and hire qualified students, mid-
    career professionals, and retirees. As part of the Administration's
    effort to create a more positive experience for Federal job applicants,
    OPM will continue efforts to overhaul the USAJOBS website. The effort
    will build on improvements that have already been made to make the site
    more user-friendly.
        OPM is also committed to increasing employment outreach to
    veterans, in accordance with President Obama's Executive Order,
    ``Employment of Veterans in the Federal Government'' signed on November
    9, 2009. This order established the Veterans Employment Initiative,
    with the goal of transforming the Federal Government into a model of
    veterans' employment. OPM, in collaboration with the Departments of
    Defense, Labor and Veterans Affairs, is leading the development and
    implementation of a Government-wide Veterans Recruitment and Employment
    Strategic Plan to address barriers to entry for Veterans and
    transitioning service members pursuing careers in the Federal civil
    service. We are requesting $2,400,000 in fiscal year 2011 to advance
    this effort.
        Finally, this year OPM launched a Federal Diversity Office to make
    creation of a diverse workforce a greater priority in the Government.
    The Diversity Office is looking at the development of a Government-wide
    diversity strategy to support Federal agencies in improving outreach to
    and hiring of diverse groups of candidates. In fiscal year 2011, budget
    resources will be used to fully staff the Diversity Office and deploy
    new policies, processes and procedures for improving diversity and
    promoting inclusion across the Federal Government.
    Wellness and Work-Life
        Availability of health, wellness, and work-life options for Federal
    employees is a critical tool for improving the ability of the
    Government to recruit and retain a high-performing workforce. In 2010,
    OPM received an appropriation of $2,654,000 to develop and operate a
    comprehensive worksite wellness pilot program for the downtown
    Washington campus including GSA, Interior, and OPM. The development of
    Government-wide health and wellness policies and programs to provide
    employees with a meaningful balance of work and life will continue to
    be a top priority at OPM in fiscal year 2011.
        Telework is another essential part of OPM's overall effort to
    improve work-life flexibilities for Federal employees. Increased use of
    telework in Federal offices across the country, particularly in major
    metropolitan areas with large concentrations of employees, would enable
    the uninterrupted delivery of Government services if employees were
    instructed to work from home due to extreme weather conditions, natural
    disasters, or other threats to health, including concerns regarding the
    spread of influenza. In fiscal year 2010 and 2011, OPM will continue
    its initiative on telework and provide support to agencies, managers,
    and employees about how to effectively implement telework programs.
    Employee Viewpoint Survey
        Since 2002, OPM has conducted a biennial survey of Federal
    employees to assist Congress and OPM in determining the overall
    direction and needed changes for future HR policy. The survey is also a
    valuable tool for agencies to improve employee engagement and
    satisfaction as well as to address areas in need of improvement
    identified in the survey. Beginning this year, OPM will be conducting
    surveys annually and our budget request includes $2,500,000 for this
    effort in fiscal year 2011. The improved annual surveys will provide
    the data necessary to chart the course for making the Federal workplace
    a model for the nation.
    Security Clearance Reform
        In 2004, Congress passed the Intelligence Reform and Terrorism
    Prevention Act of 2004 (IRPTA) which included provisions to address
    ongoing concerns regarding the timeliness and quality of personnel
    background investigations and employment suitability services. Since
    the enactment of IRPTA, OPM has significantly shortened the amount of
    time needed to complete initial clearance investigations and has
    eliminated the backlog of pending background investigation cases. In
    fiscal year 2011, continued efforts will ensure Federal customer
    agencies have the information they need to make timely decisions on the
    credibility and suitability of Federal employees, contractors, and
    military members.
        OPM conducts investigations for Federal agencies on a reimbursable
    basis through the Revolving Fund. The fiscal year 2011 budget includes
    an estimated $970,127,000 in new budget authority for Federal
    Investigative Services. This funding will be used to continue the
    transformation effort underway for the core FIS technology systems; to
    continue making improvements to security questionnaires used to collect
    investigative information; for implementation of a training program to
    standardize the investigative and suitability adjudicative process for
    all background investigations; and to cover fiscal year 2011 core FIS
    operational costs necessary to produce a quality and timely background
    investigation.
    Retirement Systems Modernization
        OPM has initiated the Retirement Systems Modernization (RSM)
    program to modernize and automate retirement processes to ensure
    Federal retirees and annuitants are paid accurately, timely, and
    receive high-quality customer service. The Federal Government's
    retirement systems face significant challenges and are at high risk of
    failure due to technology gaps. These challenges have been identified
    in numerous OPM and GAO reports, and congressional staff members have
    been briefed on the ongoing response to these challenges. Because of
    the strategic importance of this issue, I have asked OPM's Deputy
    Director, Christine Griffin, to take the lead on RSM and make this her
    top priority. Our budget requests $1,500,000 to stabilize the
    retirement systems in fiscal year 2011.
        During this fiscal year, our primary focus for modernization
    efforts is to lay the foundation for upgrading the retirement
    calculator, and to transition from a paper-based operation to an
    automated retirement process. OPM is also focused on implementation of
    an online retirement application tool that will utilize data gathered
    through the Enterprise Human Resources Integration (EHRI) program,
    allowing us to gather initial retirement information electronically for
    the first time. This capability will help improve the accuracy of
    retirement calculations by eliminating the potential for manual data
    entry errors and permitting real-time validation of the data provided.
    These initiatives will help to ensure that OPM and agency benefits
    officers have access to information necessary to perform their duties
    of processing claims and providing customer service to employees and
    annuitants. However, enhanced efficiencies will not happen overnight.
    The transition will require incremental and deliberate change in order
    to ensure that past mistakes do not occur again, and that taxpayer
    dollars are not wasted on an ineffective effort. In the interim, OPM
    must increase staffing levels in order to fulfill its responsibility to
    process its anticipated workload in a timely manner.
        For fiscal year 2011, we are requesting 40 FTE and an additional
    $2,800,000 to increase retirement claims processing staffing levels.
    The 40 FTE will permit OPM to process an additional 24,000 claims and
    reduce claims processing time from 45 days to 40 days in fiscal year
    2011. In 2012, as staff is fully trained and seasoned, they will be
    able to process an additional 32,000 claims. The increase in FTE will
    assist in reducing the claims processing times to 38 days.
    Acquisition Improvement
        Finally, the Administration is seeking to strengthen the
    acquisition process Government-wide. As a result, they requested a
    general provision that provides for $670,210 to increase OPM's
    acquisition workforce in order to improve contract oversight. OPM's
    Contracting Group has assumed a dramatic increase in contracting
    responsibilities over the past several years as a result of the
    increased scope of OPM's Government-wide support functions. OPM will
    use these requested funds to recruit, hire, and train five additional
    Contracting Officers, plus one additional Contracting Officer to
    increase staff devoted to small and disadvantaged business utilization.
        The agenda I have presented to you reflects a commitment toward a
    new day for civil service. If superior results are what we want from
    our Federal Government, then we must attract, hire and retain a
    talented workforce. We must give them the tools that they need to
    succeed, and the incentive to perform to their maximum potential,
    including our assurance that their services are and will continue to be
    respected and honored.
        Mr. Chairman, this concludes my formal testimony on the Office of
    Personnel Management's fiscal year 2011 budget request. I look forward
    to addressing any questions or concerns that you and the Members of the
    Subcommittee may have.
        Thank you.

                    NEW ADMINISTRATION WELLNESS INITIATIVES

        Senator Durbin. So, Director Berry, the President asked us
    to give you $5 million for wellness, for pilot programs to deal
    with smoking cessation, disease management, and the like. Tell
    me how that is going.
        Mr. Berry. Mr. Chairman, the President's budget for fiscal
    year 2011 has actually consolidated these funds in the Health
    and Human Services (HHS) budget. And so, you will see a
    decreased request from that in the 2011 budget. You were very
    generous in allowing us to stand this up this year, and so the
    first, we are looking at creating demonstration projects where
    we can promote wellness in the workplace for Federal employees.
        The first one that we are setting up is in our own
    headquarters, which will also serve our little campus. Right
    across the street from us is the General Services
    Administration (GSA) and the Department of the Interior. The
    three of us are going to share a new health unit.
        Thanks to your support for this fiscal year, we have just
    issued a request for proposals from the health carriers that
    will come in and provide complete screening--free of charge--
    for employees at the workplace, during work hours on a
    comprehensive basis, so that people can get their blood sugar
    and their cholesterol levels checked and also receive pre-
    cancer screenings.
        Our belief is that this program is going to produce
    enormous savings. Companies that have done this in the private
    sector have produced productivity increases of 40 to 50 percent
    in the first couple of years alone.
        Senator Durbin. Did you consult with those companies when
    you were thinking about how to approach this?
        Mr. Berry. Absolutely, and a number of our staff have been
    going around the country and meeting with some of the more
    innovative companies that do this in the workplace well. And
    so, I am very excited by this.
        We just finished the renovation of our health unit. If you
    are ever down in our neighborhood, we welcome you to stop in
    and see it. It is now once again a place that you would not
    mind getting healthcare. I have to tell you that when I arrived
    at OPM, I would not have had a band-aid put on in our health
    unit. But we have made extreme advances in this.
        We are going to be doing other demonstration projects. In
    addition to the one in the District of Columbia, there will be
    others conducted around the country. We are going to try to
    select units in the Midwest and on the west coast so that we
    can get a good sample and bring you back strong data as to the
    impact that this will make in the Federal employee community.

       NURSING SHORTAGE AND INTERGOVERNMENTAL PERSONNEL MOBILITY PROGRAM

        Senator Durbin. I am going to give you a little bit of a
    challenge here on a different issue, and it relates to a
    national problem, which I think the Federal Government can help
    to address.
        We anticipate a nursing shortage in America that will grow
    to 260,000 registered nurses, which we will need and not have,
    by the year 2025, twice as large as this country has seen since
    the 1960s, reflects the baby boomers and more healthcare and
    more primary care and the critical role that nurses play.
        And so, when I looked at this nursing shortage in my State
    and across the country, it turned out that one of the major
    reasons was the lack of nursing faculty. In other words,
    registered nurses (RNs) or those with master's degrees or could
    obtain master's degrees coming in to teach.
        Now it turns out the Federal Government currently employs
    about 53,000 nurses that have the educational background and
    expertise to teach the next generation of nurses. Now I
    appreciate that you are struggling to find the nurses we need
    in the Federal Government. I am hoping that I can talk to you
    about some possibilities here because if nurses out of the
    Federal workforce teach in nursing schools, they are, in fact,
    not only teaching, they are recruiting.
        They are telling stories about their careers and why they
    chose the Federal Government, which I think may increase the
    likelihood that you will have an available nursing pool in the
    future. We talked to you--I know that you began to address the
    problem through the Intergovernmental Personnel Act Mobility
    Program, which allows temporary assignment of personnel between
    the Federal Government, State and local governments, colleges,
    and universities. But my staff feels there is some hesitation
    at your agency.
        I would be interested in your perspectives on the potential
    benefit of rotating qualified federally employed nurses through
    nursing schools, what authorities the OPM has to improve
    recruitment of Government nurses in a future pipeline, and
    whether you have given any thought to the possibility of
    extending the Intergovernmental Personnel Mobility Program to
    retired Government nurses. Have you thought about this issue
    and how we might address it?
        Mr. Berry. Mr. Chairman, thank you, first, for your
    leadership in helping to create the opportunity for a program
    like this to exist. I think that the IPA Program, the
    Intergovernmental Personnel Act Program, that you were
    instrumental in creating, is a very powerful tool to achieve
    the objectives, just as you have identified. And I am in lock
    step with you on this.
        You are right to identify that we have a huge nursing
    shortage in the Federal Government, especially with regard to
    staffing our veterans hospitals. And so, for example, to meet
    those needs, we have allowed direct hire authority to the
    Veterans Affairs Department, as well as throughout the
    Government in that regard.
        At the same time, recognizing that shortage, it is a huge
    opportunity for us to have some of our more experienced
    registered nurses--and, I think yours and Senator Collins idea,
    to bring people back and out of retirement who aren't ready to
    sit, or play golf full time, and to reengage them to allow us
    to outreach, be the recruiters and tell their story, not only
    passing on their knowledge to the shortage which exists
    throughout our State and local government operations, but in
    the Federal Government. I think it is a powerful thing.
        The Federal Government should always be in a leadership
    role. I really believe we have that responsibility. And so,
    prior administrations had somewhat deemphasized this program.
    They had even stopped reporting on it to you. So, we didn't
    know for a while how many people were doing this, and whether
    this program was having an effect or whether agencies were
    stepping up to play this role.
        We have reinstituted reporting to you on this matter.
    Therefore, we are going to start tracking again how many people
    are doing this. So we will be able to tell you from year to
    year whether we are achieving the goal that you want, which is
    making sure that we are stepping up not only in the nursing
    program, but in many programs.
        I think that you have identified and put your finger on a
    critical place that we have got to pay careful attention to,
    and that is the nursing shortage throughout the country. And
    the IPA Program can allow the Federal Government to play a
    leadership role.
        If there is any back stepping or slow stepping on my
    staff's part, my commitment to you is that I will goose them
    along very aggressively. We would be very happy and honored to
    work with you and Senator Collins' staff to make sure that we
    are aggressively pursuing this program, and that you are proud
    of its results.
        Senator Durbin. If Senator Collins will spare me one little
    vignette here? About 4 or 5 weeks ago, I was in Africa with
    Senator Sherrod Brown, and we visited with the president of
    Ethiopia, and I discussed with him, among other things, the
    fact that so many Ethiopian medical professionals now practice
    in the United States. In the Washington, DC, area there are
    about 2,500 Ethiopian-trained doctors.
        And I said I know your country desperately needs medical
    professionals, and we are stealing them away, and I would like
    to know your reaction to it. He said, well, we have a plan. And
    our plan is called flooding and retention. You want Ethiopian
    doctors? We are going to produce more than you could possibly
    dream of, and they are going to go to your country and work and
    send money back to Ethiopia, and we will keep enough here to
    meet our needs.
        It is interesting that they have decided rather than to
    fight us, to basically say if you want our people, we will
    train more of them. And the United States seems to be slow to
    get to that point. We just don't seem to be ready to make a
    commitment. We know this is looming, and it is going to cause a
    lot of problems.
        So I hope the Federal Government can inspire and lead in
    this area and show some innovation.
        Mr. Berry. Mr. Chairman, if I could? I would just like to
    give an extra shout out to the Department of Veterans Affairs.
    The leadership there, Secretary Shinseki and their Deputy
    Secretary Scott Gould, their human resources Assistant
    Secretary John Sepulveda, have been phenomenal to work with. On
    this issue, I think they take the philosophy that the way to
    beat this is not to try to outcompete State and local
    government. It is to try to grow the pool together.
        They are investing significant resources this year to help
    move up not only as we--to get LPNs move to the RN level. We
    have all of these pools that with the right accredited
    training, we can increase these pipelines. It is an advantage
    for us to retain. It is also an attraction for recruitment.
        Through the multiple training we can jointly work with
    State and local governments so that both benefit from this
    program. They are putting real resources on this, millions of
    dollars. I think we are going to be able to move the needle on
    this this year for the first time in a long time.
        Senator Durbin. Well, let us try to work together.
        Mr. Berry. Absolutely. Be honored to, sir.
        Senator Durbin. Senator Collins.
        Senator Collins. Thank you, Mr. Chairman.

               POSTAL SERVICE OBLIGATION TO RETIREMENT TRUST FUND

        Mr. Berry, we held a hearing last week about the Postal
    Service's financial crisis, and there are two major issues that
    have come up with which the Postal Service is working closely
    with OPM. And I want to ask your opinion on both.
        First of all, we had testimony from the inspector general
    of the Postal Service, who discussed a report that his office
    issued, which concluded that the current system of funding the
    Postal Service's obligation to the Civil Service Retirement
    System has resulted in the Postal Service overpaying by $75
    billion, a truly astonishing find.
        Now it is my understanding that the OPM determined this
    payment amount and explained its rationale in a 2004 letter to
    the Postmaster General, and I have read that letter that says
    the Board of Actuaries approved it and reviewed it. But this is
    a huge difference, and the reason this is important is if, in
    fact, there is an overpayment of $75 billion, it would help
    solve a lot of the Postal Service's problems.
        Getting a handle on this, however, has been extremely
    difficult.
        Can you tell us whether OPM still stands by the analysis
    and payment levels that were established in 2004?
        Mr. Berry. Senator, this is a very tough issue, as you have
    identified it. I am keenly aware of the challenges the Postal
    Service is facing right now and have met with the Postmaster
    General as well as the Postal Service inspector general on this
    very issue.
        Let me answer your question directly. Yes. For the time
    being, we do stand by the initial assessment. That assessment,
    as you mentioned, was upheld by the Board of Actuaries and the
    Government Accountability Office (GAO), not just the Board of
    Actuaries.
        Now, the Postal Service inspector general has a new
    argument that they are advancing. I am very happy to go back
    and have that reconsidered. We will reevaluate our position,
    reconsidered with GAO and the Board of Actuaries to see if we
    are wrong. If so, we will adjust.
        My responsibility to you as trustee of the retirement funds
    is to make sure that whatever we do, the fund is whole and that
    we can retain solvency and pay the claims as they come due.
        That being said, I recognize the complexity and the
    challenges that are before us, and have made very clear that I
    am very willing to sit down with the Treasury Department, OMB,
    the Postal Service, and GAO and be a constructive partner in
    crafting a solution that guarantees that we can meet the Postal
    Service's concern and protect the solvency of the fund. I think
    I have made very clear that, in other words, we are very open
    minded to try to help however we can.
        If, at the end of the day--because, like you, I am not an
    actuary, the lawyers and the actuaries say, John, your trustee
    responsibilities prohibit you from doing what these other folks
    want to do, I will be very happy to come back and tell you that
    this might require this change in legislation to do what you
    would like to do. This is how I could advise you on how best to
    move forward.
        Right now, you are exactly right. We need to get everybody
    around one table and have people work together to try to crack
    this and resolve this once and for all.
        Senator Collins. And while you are doing that, you also
    need to look at the payments to the retiree health benefits
    fund.
        Mr. Berry. Yes.
        Senator Collins. It is a different issue, but another
    issue, and I know that you have been having some meetings on
    that as well, but that there is not yet a consensus.
        We are just trying--well, let me speak for myself. I am
    just trying to get a handle on what is the appropriate payment.
    I just left a meeting where a person told me that the inspector
    general is wrong and is at one end of the spectrum, and OPM is
    wrong and at the other end of the spectrum, and the truth is
    somewhere in the middle. I don't know. I am not an actuary.
    There are obviously budget implications to shifting from the
    Postal Service the obligation to the Treasury, and I understand
    that. But it would be nice to know what the answer is in terms
    of just doing a factual analysis when we are hearing such
    diverse things.

                           DOMESTIC PARTNER BENEFITS

        I will go back to that. I apologize for cutting you off,
    but just so in this first round, I could quickly get one more
    question in, and that is on the domestic partners benefit bill.
        As you know, last October, our Homeland Security and
    Governmental Affairs Committee held a hearing on the domestic
    partners benefits and obligations bill, which I introduced with
    Senator Lieberman. This bill would provide the Federal
    workforce with the same kinds of benefits that are very
    prevalent in the Fortune 500 benefit structure, and those are
    the people we are competing with, by the way.
        At the conclusion of the hearing--not to give you a hard
    time, but at the conclusion of the hearing, you did indicate to
    Senator Lieberman and me that ``the cost of the bill is of such
    a level that I think we will be able to identify efficiencies
    to fully offset the cost over the term of the administration.
    If you need a commitment or a promise to that effect, I am
    happy to deliver it.''
        It has been 5 months since that hearing, and we are still
    waiting for those offsets, which, you should understand as a
    strong supporter of the bill, is preventing the bill from being
    taken up on the Senate floor until we identify those offsets.
    And so, where are we on that issue?
        Mr. Berry. Senator, first, thank you again for your
    leadership on this issue. The administration strongly supports
    the legislation that you, Senator Lieberman, Senator Durbin and
    many others are supporting. I don't want this to be a catch 22.
    Let me make this ironclad promise to you.
        Currently, we have an offset that is going through the
    clearance process with Office of Management and Budget. We are
    waiting for the committee to wrap up its report so that we can
    get Congressional Budget Office (CBO) scoring so we can
    guarantee that the offset we will give you equals the CBO cost
    estimate. Once we know that for sure, then I can meet our word
    to you. We have identified, I think, a very good offset.
        Now, the chairman mentioned that my last job was Director
    of the National Zoo. As you know, especially in these times,
    offsets have become a very precious commodity. I feel like
    having a good offset is like going into the lion and tiger
    house with a plateful of meat. You get a lot of attention.
        So, I am sort of loathe to reveal the offset for fear,
    quite frankly, that a larger tiger might take it away for
    another purpose.
        My promise to you would be as soon as the subcommittee is
    ready to go to the floor and we have that CBO scoring, we will
    have an offset to cover the entire cost of the amendment for
    you so that you can move expeditiously to the floor without any
    delay.
        I don't offer that as trying to be cute, but that is
    essentially where we are right now.
        Senator Collins. Thank you.

                   GUARD AND RESERVIST DIFFERENTIAL PAYMENTS

        Senator Durbin. You talked a little bit in your opening
    about an effort I had underway for years to try to make sure
    that those Federal employees who were activated to serve,
    deployed as members of the Guard and Reserve would not suffer
    any pay loss. State, local governments, private companies have
    all stepped forward, and we used to honor them with a special
    Web site at the Pentagon, thanking them for their patriotism.
    And yet the largest employer of Guard and Reserve in America,
    the Federal Government, failed to do the same thing.
        So I had one Senator who was an obstacle. I never convinced
    him, but I outlasted him and eventually passed in fiscal year
    2009 the language necessary for this. Can you give me any
    idea--we talked at the time how it was important that those who
    qualified be paid on a timely basis. Give me an idea of the
    process that a Federal employee who is notified that his or her
    unit had been activated, about to be deployed, would follow to
    make sure that if they do qualify, they would receive these
    payments.
        Mr. Berry. Mr. Chairman, again, let me commend you on your
    leadership on this issue for so many years. Thank you on behalf
    of all of our reservists for delivering this great success.
        I apologize for the delay in issuing guidance to the
    agencies about this. We got that guidance out in December. The
    reason, we found, wasn't that the civilian pay was complicated.
    It was the military pay side that was very complicated, trying
    to figure out do you include the housing payment? Do you
    include the hazard allocation? What is included in terms of
    military pay to define what the gap would be to ensure that we
    were treating them very fairly.
        We finally reached a consensus with the Defense Department
    and the Office of Management and Budget on this and were able
    to issue that guidance.
        The first thing I want to assure you about is the law you
    enacted took effect in 2009, March 11, 2009. We didn't get
    around to issuing the guidance until last December. Reservists
    are eligible for that pay back to the date of enactment. Even
    though we have made that clear in the guidance, and we will
    make sure that everyone is made whole back to the date of
    enactment. I want to promise you that we will ensure that no
    one is shortchanged because of our delay in getting that
    guidance out because of the complexity.
        There are essentially four finance centers that pay
    employees on the civilian Department of Defense (DOD) side and
    throughout the Federal Government. The GSA runs one; the
    Department of Defense has the DFAS center; the Interior
    Department has what is called the National Business Center; and
    the U.S. Department of Agriculture (USDA) has the National
    Finance Center. We have been working with them to implement
    adjustments to their pay systems so that these calculations can
    now be made, and the reservists can be made whole.
        And so, that is underway. I don't know if we have an exact
    date. If I could supply it to you for the record----
        Senator Durbin. Of course, you can.
        Mr. Berry [continuing]. The exact date we will be able to
    do that?
        Senator Durbin. And if you could, and if you don't know at
    this moment, the number of Federal employees who are in the
    Guard and Reserve. I don't know if you have that. If you don't,
    you can provide that to me as well.
        Mr. Berry. We estimate that the number could range,
    depending on the year, somewhere between 5,000 and 15,000
    Federal employees at any one time that are on active military
    duty in the Reserve. That is the total number of the estimate
    that we gave this morning, 150,000?
        We believe that several thousand or so will be eligible for
    direct payment under this proposal have been paid less than
    what they would have been paid in their civilian job and that
    this bill will allow us to make up for that. So it will be
    significant, and we will make sure it gets implemented quickly.
        [The information follows:]

                   Status of Reservist Differential Payments

        The status of making reservist differential payments varies among
    payroll providers. The most recent information we have from the four
    major providers is as follows:
    General Services Administration (GSA)
        On June 1, 2010, GSA reported that it had implemented automated
    capability for processing reservist differential during pay period
    ending May 8, 2010. GSA made its first reservist differential payments
    during pay period ending May 22, 2010.
    National Business Center (NBC, Department of the Interior)
        On June 2, 2010, NBC reported that since February 2010 it had
    manually processed several reservist differential payments. NBC
    reported that it continues to remain on schedule to automate the
    reservist differential in its Federal personnel/payroll system August
    2010 release.
    National Finance Center (NFC, Department of Agriculture)
        On June 4, 2010, NFC reported that effective April 19, 2010, client
    agencies of NFC were able to enter reservist differential payments into
    its Special Payment Processing System (SPPS). NFC published processing
    instructions on its website via an NFC bulletin dated April 16, 2010.
    NFC reported that it had processed a total of 30 payments as of June 4
    thru its SPPS system.
        NFC also reported that effective May 9, 2010, the programming
    modifications for OPM's Update 52 to the Guide to Processing Personnel
    Actions (GPPA) related to reservist differential were completed and
    available for clients to begin their processing. NFC has published
    processing instructions related to these changes on its website via an
    NFC bulletin dated May 18, 2010.
         NFC reported that it continues to perform the necessary analysis
    and research to address the system changes needed for the new Pay
    Status/USERRA codes related to the Nature of Action Code (NOAC) changes
    for reservist differential as per OPM's Update 61, Update 02, of the
    OPM Guide to Data Standards, issued April 1, 2010. Once this task has
    been completed, NFC will establish a target implementation date for
    this final phase of the project.
    Defense Finance and Accounting Service (DFAS, Department of Defense)
        On June 9, 2010, DFAS reported that it had a manual workaround in
    place to make reservist differential payments. As of pay period ending
    May 22, 2010, 331 payments have been made for a total of approximately
    $800,000. All of these payments were made to DOD civilians.
        On August 17, 2010, DOD reported it had identified approximately
    5,558 appropriated-fund DOD employees so far as being eligible for
    reservist differential (i.e., had qualifying active duty service).
    Approximately 532 of these employees were due retroactive differential
    payments. For those 532 employees, the consolidated amount of reservist
    differential owed is approximately $1.3 million. The total amounts
    covering anywhere from 1 pay period to 24 pay periods ranged from
    $10.75 to $26,665.02. The median total figure was $1,518.71. The
    average amount (before taxes) is approximately $2,500. DOD is in the
    final stages of analyzing a second group of employees that may be
    eligible for retroactive reservist differential payments. Payments will
    be effected starting September 17, 2010.
        On June 24, 2010, DFAS provided non-DOD client agencies procedures
    to follow for authorizing reservist differential payments and followed
    up with a discussion during a quarterly customer meeting in July 2010.
    As of September 2010, DFAS has processed payments for the Departments
    of Veterans Affairs and Energy and the Environmental Protection Agency.

                      HIRING INDIVIDUALS WITH DISABILITIES

        Senator Durbin. If I could ask one other question, and it
    relates to disability policy in hiring. I talked to my staff
    because I think Congress is slow to meet the needs when it
    comes to the disability community. And I talked to my staff
    about our office and said, ``What can we do here?''
        I meet a lot of disabled veterans out at Walter Reed and a
    lot of folks who have served, come back needing a job, as an
    example, disabled veterans and others in the disability
    community. It has been hard. It has been more difficult than I
    thought it would be.
        Sometimes it is matching up our job description with their
    talents, and our schedule, as crazy as it is from time to time,
    with their personal and family needs. And I am wondering what
    you are doing, as you look at the Federal Government, to
    address this, whether our problem is unique or we just didn't
    go to the right place for information and guidance.
        What can we do, should we do as Congress or as the Federal
    Government to give talented disabled people a chance to serve
    their Government?
        Mr. Berry. Mr. Chairman, thank you for your leadership on
    the Americans with Disabilities Act, with the amendments. You
    have been a stalwart leader over the decades on this issue. I
    know you and Tony Coelho and Mr. Hoyer have been partners in
    advancing this effort and this initiative, and your leadership
    is deeply appreciated.
        When you look at the diversity equation in the Federal
    Government, the only group that has gone backward have been
    people with disabilities. We used to be over 1 percent. We are
    now under 1 percent, around 0.5 percent. It is embarrassing.
        This is after the passage of the Americans with
    Disabilities Act, after the passage of the amendments that you
    all secured. We need to do better. And so, one of the reasons
    that I sought and recruited Christine Griffin from the Equal
    Employment Opportunity Commission (EEOC) is whenever you deal
    with diversity and Federal law, it is a very complicated area,
    as you all know, relative from Supreme Court cases on down.
        Chris is both an attorney as well as someone who is skilled
    on this issue through her practice in the EEOC, where she was a
    Commissioner just before becoming Deputy Director of OPM. I
    have asked her to lead our effort on behalf of the President of
    an initiative that will focus not only on disability, but also
    on a diversity initiative that we could present to the
    President this summer that is going to try a new approach,
    within the scope of the law, that will allow us to better
    provide access to all communities in the country, including
    people with disabilities.
        Now especially for people with disabilities, to focus
    specifically on your question, Chris has worked with agencies
    across the Government to organize the largest-ever hiring
    event, which we are holding at the Washington Convention Center
    in April.
        What is the date, Chris?
        Ms. Griffin. April 26.
        Mr. Berry. April 26. And we welcome, if you have time to be
    able to join us at some point during that day.
        What we have done is, rather than make this just another
    job fair, we have conducted outreach through the disability
    community and advocacy groups across the country, we have
    worked with Federal agencies to identify jobs that are
    currently available, and then we have had people apply in
    advance of this event so that we can try to do exactly what you
    said, Mr. Chairman, match their skills and ability with the
    positions that are now available and open in the Federal
    Government. And then, using Schedule A authority, what we are
    going to do at this hiring event is actually set up interviews
    between the agencies where we think those matches are in the
    ballpark so that they can interview those candidates at the
    Washington Convention Center and, if it works, hire them on the
    spot. So we will have OPM staff there to advise agencies and
    applicants, and get them started immediately.
        We have very powerful tools that you and Congress have
    given us with Schedule A authority. They just haven't been used
    very effectively. And so, Chris and I are going to work very
    hard on this. The goal is to achieve forward momentum and
    progress on all fronts on the diversity level. But the place
    where we just have to move this needle, because it is the only
    one we have fallen backwards on, is with people with
    disabilities. They do deserve special attention, and we do have
    the ability to do it.
        Last, but not least, if I could just thank you all for the
    appropriation that you give the Department of Defense to fund
    the Technology Support Center because what you have done
    through that is essentially take advantage of our market
    strength. Now the Federal Government can buy all of the
    technical equipment that is needed to accommodate people's
    disability in one place and get lower prices because they can
    buy them in bulk rather than an agency buying one specialized
    piece of equipment. You have centralized that in the Department
    of Defense, and then they do it on behalf of all Federal
    agencies. And so, for any Federal agency that wants to hire a
    person with a disability, if there is a special high-cost
    technology accommodation that needs to be made, it is covered
    thanks to the program.
        The Department of Defense has been working in lock step
    with us on this program and they are going to be there with us
    on the 26th to help us in case anybody says, well, you know,
    ``I have the skills to do this job, but I need a special
    computer,'' or ``I need this special phone line.''
        So, Mr. Chairman, we are committed to this issue. I am with
    you 110 percent, and I hope to God by next year, we are going
    to be able to move the needle for you.
        Senator Durbin. I will ask you.
        Senator Collins.
        Senator Collins. Thank you, Mr. Chairman.

                              FEDERAL EMPLOYEE PAY

        Mr. Berry, I want to ask you about an allegation that I am
    hearing with increasing frequency, and that is the average pay
    for a Federal employee is almost double the average pay
    overall. And because I am hearing this repeated by my
    colleagues, by my constituents, by commentators on television
    so often, I would like to ask you to address that issue in a
    factual way, to help us better understand this charge.
        Mr. Berry. Senator, I really appreciate that. There is a
    lot of misinformation out there right now.
        Many of these jobs that you hear about compare Federal
    salaries, sort of the average Federal salary to the average
    private sector salary. However, they are not really comparing
    apples to apples.
        The Federal Government 50 years ago used to be a largely
    blue collar operation. Today, it is a significantly white
    collar operation, with very high-skilled positions, including
    everything from financial regulation and derivative monitoring
    to National Institutes of Health (NIH) research, to law
    enforcement and cybersecurity. The skill sets that are required
    for the Federal Government to meet its responsibilities in the
    21st century continue to increase in complexity. The average
    Federal salary includes those high-ranking positions. On the
    other hand the private sector includes a large number of
    service jobs that we do not have in the Federal Government--
    restaurant workers, kitchen staff, things like that for which
    there are very few counterparts left in the Federal Government
    in these areas. And yet that is a significant portion of the
    average private sector salary.
        And so, you see how if you are going to put in a lot of
    lower-paid workers into the average private sector salary, it
    is going to be lower than the average Federal salary. However,
    you are not comparing like jobs with like jobs.
        And so, whenever you do that, whenever you try to compare
    like jobs with like jobs and put the level of responsibility
    with it and the level of education that is required, Federal
    jobs are behind the private sector. So, and I don't want to say
    in each and every case because there will be outliers, and
    where there are outliers, quite frankly, we need to adjust the
    pay system to make sure we are not ahead of the private in
    those areas by any significant amount.
        But a good case is nurses, Mr. Chairman, to go back to an
    earlier example. Only one-third of nurses in the private sector
    have a bachelor's degree. Over one-half of the nurses in the
    Federal sector have a bachelor's degree.
        So, for example, in the USA Today story, they compared
    nurses in the private sector to nurses in the public sector,
    and the nurses in the public sector were paid, I think,
    something like $5,000 more. Well, when you accounted for the
    bachelor's degree and the percentage increase, then
    immediately, that number evaporates.
        Senator Collins. Let me just say that I think you need to
    respond to that because that is gaining currency, and it would
    be helpful to have in writing your analysis and response to
    that. You have raised a number of excellent points, but I don't
    think those points are getting out there, and I am starting to
    hear this more and more often.
        What I hear is a comparison that the private sector, it is
    $41,000, and for the average Federal employee, it is like
    $70,000 something. And I think that needs to be addressed, and
    I would encourage you to do that.
        Mr. Berry. And quite frankly, one of the things we are
    looking at, Senator Collins, on this issue and what I found was
    interesting was that the formula we used was based on Bureau of
    Labor Statistics data. Well, over the years, they have stopped
    collecting the data at the level that we can really make
    careful analysis and comparisons. And so, there may be
    requirements needed to change this formula.
        And so, I have appointed a task force to wrestle with this
    formula so that we can come forward and actually defend with
    ironclad validity for you and for the American public exactly
    what the facts are based on the data. And so, we are working on
    that right now, and as soon as I get that, I will bring that up
    and make sure we carefully brief you and the chairman on this
    issue.
        Senator Collins. That would be very helpful because,
    obviously, if there is an imbalance, that is a problem at this
    time of great budget strain. But if there isn't, we need to
    better make that case and explain why.

                    FEDERAL LONG-TERM CARE INSURANCE PROGRAM

        Let me switch to another issue. You will recall that there
    have been a lot of problems in the Federal long-term care
    insurance program, and we have talked a lot today about making
    the Federal Government the model employer. And believe me, it
    has not been a model employer when it comes to that program.
        So many people signed up for that program with these false
    assurances based on very misleading brochures from the
    provider, the insurance provider that indicated there would
    never be an increase in premiums if they paid this higher rate
    at a particular time. And I have those brochures. Literally, I
    personally have those brochures.
        So I was so sympathetic to the witnesses who came before us
    and now were all faced with a 25 percent premium increase.
    Well, adding insult to injury, when the provider sent out the
    new forms for us to make our choices, they made further errors
    in describing it. That is just so unacceptable, and I think OPM
    needs to do a far better job of overseeing that program.
        I have a point of personal pride here because I was a
    coauthor of the law that created this program because we wanted
    to encourage Federal employees to plan for long-term care and
    because so many people are under the misimpression that
    Medicare covers long-term care, which it doesn't. So--and this
    isn't an argument for the CLASS Act, in case my chairman is
    about to make that comment. He has a smile on his face. So I
    see that coming my way.
        But the administration of this program has been far too
    lax, and it is not protecting retirees, participants, and
    future participants. So participants and beneficiaries are not
    getting the protection that they have a right to look to OPM to
    provide.
        Mr. Berry. Senator Collins, I want to apologize to our
    retirees who especially did not have full access to that
    information and who were essentially misled and are now put in
    this awkward position. This is obviously a program that I have
    inherited and am trying to do the best we can, and we will have
    recommendations for how we can hopefully prevent this from
    happening again.
        What I have tried to do to, at least, to ease the blow, if
    you will, is to create alternatives so that not every employee
    or every member who is in that program would suffer that same
    increase. That would only be if they had the highest level of
    inflation protection over the long term.
        And so, we have tried to create options for the employees
    so that they can understand the cost of that inflation
    protection in the long term, obviously, it is not the same
    level of protection. It is lower inflation protection, but it
    would--it lowers, obviously, the cost of the increase as you
    create these alternatives.
        And so, we worked with the insurer to try to create as many
    of those alternatives as we could, and then allow the retirees
    who were in the program plenty of time to try to make their
    decision as to what level they wanted to pay for. And so, we
    have extended that through March to give them the time to
    wrestle with this. I know it is a tough decision, and I am very
    empathetic to the pain that this is causing them, and I hope we
    have given them sufficient choices that they can adjust to the
    budget that they find themselves in, as I appreciate many of
    these people are on fixed incomes now.
        That being said, one of the biggest weaknesses, in my
    opinion, as the new person coming into this program here at the
    end here, is that when the law was created, because this was an
    emerging market, Congress told us that we needed to recompete
    this program entirely every 7 years. And so, there are no--
    there hasn't been an increase in rate in 7 years because we
    were able to enforce that.
        But what happens is when you recompete to ensure that you
    have people applying and actually stepping up to offer the
    service, the market has matured. And so, every 7 years, we will
    find ourselves in this exact same position where whoever bids
    on the new contract 7 years from now could do the exact same
    thing and increase rates all over again.
        And so, I think what I would like to--we have got a team
    working on this and to work with your staffs. Because the
    market has now matured in this program, we may want to look at
    a more longer-term contract that we could then enforce more
    stability in the program and prevent these spikes every 7
    years.
        And quite frankly, my biggest fear is, okay, what happens
    14 or 21 years from now when some future OPM Director is going
    to have to recompete this program and now you have more
    retirees taking the benefits than might be joining the program,
    and all of the private sector saying, ``I don't know if I want
    to join that program.'' And so, we may have no one bid. That
    would be a horrible situation.
        So we need to, I think, take a longer view on this program
    and really design it for the longer term and not in these 7-
    year slices. And so, that is a long answer, but I appreciate
    the sensitivity of the issue.
        Senator Collins. Thank you.
        It is a difficult issue because if you lock one provider in
    for that many years, you may see a decline in service levels.
    That is not necessarily a----
        Mr. Berry. Right.
        Senator Collins. It is a tradeoff, but I apologize for
    going over.
        Senator Durbin. No, that is fine.

                   LESSONS FROM THE 2010 SNOWSTORMS/TELEWORK

        Director Berry, I just have one last question. When I was
    outside today and it was so sunny and beautiful, and I looked
    at the trees budding and blossoming, I thought 6 weeks ago, we
    were in the midst of a blizzard, the worst snowstorm in the
    history of Washington, which literally shut down the Capitol
    and shut down most agencies of the Federal Government for the
    better part of a week. What did you learn from that?
        Mr. Berry. Ah----
        Senator Durbin. Aside from the fact that we need better
    snow removal in a lot of places.
        Mr. Berry. We are working, Mr. Chairman, with the Council
    of Governments in the region. There is going to be on April 5
    an after snow event to discuss lessons learned, and there are a
    lot of areas we could do better in terms of coordination with
    the region with lanes and snow removal. We had it in both
    directions.
        For example, Key Bridge was plowed--all the lanes on the
    bridge were plowed, but then when you got to Arlington, only
    two lanes of traffic were open. So that didn't work well. And
    vice versa, the same, 14th Street was plowed, but when you got
    into the city, only two lanes were open on 14th Street.
        So we created these bottlenecks by just not coordinating
    and saying, okay, if we are going to open four lanes here, let
    us open it the whole way and not pieces. So there is a lot that
    we can learn.
        I think the biggest thing we learned, and it is actually, I
    think, a good news story. The President called me on Wednesday
    during the second blizzard to check in and see how things were
    going. And I explained to him, I said, you know, Mr. President,
    in 1996, which was the last storm of similar import where the
    Government was closed for a period of time, less than 1 percent
    of the workforce could telework at that time because at that
    time, the two biggest obstacles to telework were security,
    protecting secure information, and second was technology. You
    just didn't have the memory capacity that, for example, this
    gentleman has right here on that portable computer.
        Bring the clock forward to this past snowstorm a month ago.
    Over 35 percent of our workforce we know was online with our
    mainframes in many agencies across the Government. Some
    agencies, for example, the Patent and Trademark Office (PTO),
    had an 85 percent productivity level during the snowstorm while
    we were technically closed.
        Well, they did that because they had a very aggressive
    telework program, the staff had the equipment and the security
    all tied up. The last major hurdle that we are trying to defeat
    right now is management intransigence. Managers just like--they
    think the person has to be at their desk, in that chair, or
    they are not doing the job. And we need to move our managers to
    be more results-focused. Because quite frankly, if they are
    doing a good job defining the result, then who cares where the
    work is getting done? Who cares when it is getting done?
        Many women and men both with child-raising
    responsibilities, would love to do work at night between 9 and
    11 p.m. once the kids have gone to bed. And should we, as a
    Government, care about that? Yes, we give them the tools to
    allow them to get the work done. Maybe they are not working
    from 3 to 6 p.m. because they pick the kids up from school and
    are helping with the homework but as long as the work gets done
    that's what matters.
        And so, I think we can still get the 40 hours, but we can
    be more flexible in how we approach it. And where agencies that
    are doing that like the Patent and Trade Office, when we were
    closed, they weren't closed. They accomplished 85 percent
    productivity for the taxpayers.
        At OPM, we accomplished only about 35 percent in that area,
    but we did 95 percent in our background investigations. You
    know why? All of our security background investigations, 90
    percent of what is done throughout the Government are done out
    of people's homes. We have our caseworkers all across the
    country working out of their homes. They do it securely, and
    they do it professionally. And we can do this.
        So I told the President in 12 years, we have got it to a
    point where we went from 1 to 30 percent of the Government
    being able to operate. Shouldn't the goal really be 80 to 90
    percent, where everybody would be like the PTO? So that may be
    within the next couple of years, if we really put our shoulders
    to this, and we get people the right equipment and we deal with
    this management problem of intransigence, we could have 85, 90
    percent Government functionality during any event because we
    ought to be able to maintain continuity of operations.
        And what I ought to be able to say is we're not closed
    today. We are on a mobile work day. And whether it is a
    snowstorm or whether, quite frankly, if a dirty bomb goes off
    somewhere in the city and we might have to evacuate a portion
    of the city for a long period of time, we still need to
    maintain those Government operations. And so, I think this is
    essential for continuity of service. We need to get there, and
    telework is the most powerful tool to do it.
        And so, that would be my biggest lesson learned, Mr.
    Chairman, where I think there is a lot of hope, and we can do a
    lot better.
        Senator Durbin. Thank you.
        Senator Collins.
        Senator Collins. Thank you, Mr. Chairman.

                         ADDITIONAL COMMITTEE QUESTIONS

        Senator Durbin. Director Berry, thanks for coming. We are
    going to submit some questions to you. If you can get back to
    us in a timely fashion, we would appreciate it. Look forward to
    working with you. Thank your staff and all the committed people
    at OPM.
        Mr. Berry. Thank you, sir.
        [The following questions were not asked at the hearing, but
    were submitted to the Office for response subsequent to the
    hearing:]

                Questions Submitted by Senator Richard J. Durbin

                        RETIREMENT SYSTEMS MODERNIZATION

        Question. OPM's processing of Federal employee retirements has long
    been recognized as paper-intensive and reliant on antiquated systems
    while not providing prompt and complete benefit payments upon
    retirement. Since 1987, the agency has attempted to modernize its
    retirement process and systems through a series of four initiatives,
    none of which has been successfully completed. The following timeline
    shows the retirement modernization initiatives from 1987 to present.

        In April 2009, GAO reported that OPM's latest retirement
    modernization effort (referred to as RetireEZ) remained far from
    achieving the modernized capabilities the agency intended. Also, OPM
    did not have a complete plan for proceeding with the modernization.
    What are OPM's specific plans for retirement modernization, including
    program scope, implementation strategy, lines of responsibility and
    authority, management processes, schedule, and expected results?
        Answer. OPM is deeply committed to modernizing the Federal
    retirement system and addressing the issues identified in the
    Government Accountability Office's (GAO) April 2009 report regarding
    OPM's Retirement Systems Modernization (RSM) program. To ensure that
    work on RSM receives the highest level of attention, Deputy Director
    Christine Griffin is leading our efforts on this program and she has
    made it her top priority. We have also realigned the program to the
    Chief Information Officer.
        Consistent with Director Berry's ``back-to-basics'' strategy for
    the RSM program, priorities for fiscal year 2010 include modernizing
    the retirement calculators used to calculate the bulk of Civil Service
    Retirement System (CSRS) and Federal Employees Retirement System (FERS)
    retirements and establishing key ``building blocks'' to transition from
    a paper-based to an automated retirement process. Those ``building
    blocks'' include a data warehouse to store and allow access to
    retirement data and establishment of a method for agencies and Shared
    Service Centers (SSCs) to send electronic retirement information to OPM
    and across the government (``data feeds'').
        The data warehouse improvements will help OPM to process
    retirements faster by enabling collection of retirement data over the
    course of an employee's career rather than primarily at the time of
    retirement. Collection of this information through recurring data
    feeds, and an online retirement application will allow for validation
    of data prior to submission, thereby preventing incomplete or erroneous
    information from being submitted for retirement processing. Storage of
    this information will speed the adjudication process by making clear
    what information is available and what information may be outstanding.
    Given today's environment where over 30 percent of retirement cases are
    incomplete when submitted to OPM for processing, the possibilities
    exist to vastly reduce the amount of work required to ``hunt down''
    missing information.
        Improvements to the retirement calculator consolidate all
    calculations into a central rules engine that can be utilized across
    retirement processing systems as applicable; and will allow for
    integration with the data warehouse, thus eliminating time-consuming
    and error-prone manual data entry from today's paper files. This
    integration will reduce processing time and claim adjudication errors.
        During fiscal year 2010, OPM improved the management of the program
    to address the concerns GAO identified in their April 2009 Report.
    Specifically, the RSM program was put under the Executive leadership of
    Deputy Director Griffin, with a clear strategy, lines of authority and
    management best practices implemented and identified in key program
    documents including a program Executive Charter. The RSM program
    generated cost estimates based on GAO's Cost Estimating and Assessment
    Guide and developed a comprehensive project plan, with a schedule and
    expected results (Integrated Master Schedule). OPM tracked the RSM
    program progress through OPM's Earned Value Management System, which
    measured RSM's performance based on adherence to scope, cost and
    schedule. We have and will continue to keep Congress and GAO apprised
    of our progress in addressing the recommendations made in GAO's 2009
    Report.
        For fiscal year 2011, the RSM program continues to focus on the
    ``building blocks'' needed to improve the retirement system and
    transition from a paper-based environment, including:
      --Modernizing critical calculator and retirement systems;
      --Automating manual paper-based retirement system through electronic
            data collection and applications;
      --Implementing automated tools to improve retirement case processing;
            and
      --Imaging incoming paper retirement records.
        This approach differs from previous modernization attempts in
    several ways. First, each of the previous approaches were based on a
    complete overhaul and replacement of all retirement processing systems.
    The current approach takes a more measured approach in assessing which
    systems are operating effectively and targeting specific systems for
    replacement or upgrade. The second differentiator is the role of the
    government in integrating the various components. In all previous
    iterations, OPM relied primarily on vendors, either the prime vendor or
    a second vendor to integrate the systems components into a
    comprehensive retirement solution. OPM has realized that it was
    extremely difficult to identify a contractor with sufficient knowledge
    of OPM's current systems and proposed solution components to complete
    this task effectively. The current approach puts OPM Federal staff in
    this role, augmented by contractors for specific tasks, but with
    overall OPM staff leadership. The current approach differs from
    previous efforts by focusing on incremental improvements rather than a
    ``big-bang'' implementation with the completely revamped retirement
    system available on day one. This approach allows for much more
    efficient use of resources and decreased risk of system failure that
    would jeopardize retirement processing operations. The primary
    advantage to enabling the success of the current incremental approach
    is a Federal-wide standard, The Guide to Retirement Data Reporting,
    which defines the data and formats for agencies to send retirement data
    feeds to OPM.
        Question. For more than two decades, the agency has attempting to
    modernize its retirement processes and systems, including in-house and
    privately sourced efforts, and none of these has been fully successful.
    Most recently, almost 2 years ago, OPM abandoned the latest effort.
    Where are you now in your decisionmaking process with regard to
    development of a new system?
        Answer. OPM senior leadership and the leadership of OPM Retirement
    and Benefits have fully endorsed the RSM priorities identified for
    fiscal year 2010 and fiscal year 2011, which are consistent with the
    Director's ``back to basics'' approach for the program. These
    activities move the program in a methodical and deliberate fashion in
    order to ensure successful delivery of key ``building blocks.'' These
    activities align to the capabilities GAO identified for a modernized
    retirement system including upgrading the aging OPM calculators and
    moving from a paper-based retirement process to an automated process.
    Delivering modern, improved retirement services, including web-enabled
    retirement applications, self-service tools, retirement estimators, and
    a comprehensive retirement case management system is dependent on first
    establishing the core ``building blocks''.
        Funding has been approved by OPM's Capital Investment Committee and
    is being put in place for the retirement calculator improvements and
    development of a pilot online retirement application tool in fiscal
    year 2011.
        Question. For fiscal year 2011, you are requesting an additional 40
    FTE in order to speed the retirement claims processing time. This
    staffing is needed because over the past few years, staffing levels
    were reduced in anticipation of expected efficiencies which did not
    occur. Please elaborate on the nature of the staff to be hired--what
    will happen to staffing once the efficiencies occur?
        Answer. Retirement processing staffing levels were reduced mainly
    through attrition over the past few years in anticipation of increased
    automation of retirement processing under prior RSM efforts. Since
    Director Berry's ``back-to-basics'' strategy for RSM will not deliver
    on significant efficiencies in the short-term, OPM must increase
    staffing levels in order to process its anticipated workload in a
    timely manner. Beginning in fiscal year 2011, the 40 FTE will permit
    OPM to process an additional 24,000 claims. The additional claim
    processing will reduce claims processing time by up to 5 days.
    Furthermore, the 40 FTE will have a greater impact when the Legal
    Administrative Specialists (LAS) have been fully trained and possess
    more experience. The LAS's will then be expected to process 32,000 more
    claims which will reduce claims processing times by an additional 2 to
    4 days. As greater efficiencies are achieved, staffing needs going
    forward will be evaluated.
        Question. OPM's February 2010 Retirement System Modernization
    Quarterly Report to the Appropriations Committee identified two main
    components of the retirement modernization program: (1) updating all
    computer systems that relate to the administration of retirement
    benefits; and (2) transitioning from a process that is heavily
    dependent upon the use of paper documents to one that utilizes
    electronic data. What has been OPM's specific progress toward
    developing these two components? Has OPM developed results-oriented
    (i.e., objective, quantifiable, and measurable) performance goals and
    measures to use in determining and reporting program progress?
        Answer. In terms of updating the computer systems that support the
    administration of retirement benefits, OPM has focused on improving the
    retirement calculators that perform the bulk of Civil Service
    Retirement System and Federal Employee Retirement System retirement
    calculations. In fiscal year 2010, the RSM program:
      --Completed standardizing 50 percent of rules and calculations. 100
            percent will be completed in September 2010 and will be used to
            verify that all OPM calculators are using standard, current and
            correct calculations.
      --Started to code the standard calculations into a new calculator
            platform (pilot).
        In fiscal year 2011, RSM will continue to code all calculations
    into a single calculator with a goal to consolidate OPM calculators in
    a modern, up-to-date system.
        In terms of transitioning from a paper-based to an automated
    retirement system, in fiscal year 2010, the RSM program:
      --Established a retirement data warehouse, which meets all security
            requirements.
      --Transferred over 9 million imaged retirement records to the
            warehouse.
      --Implemented data feeds to receive data electronically from the
            National Business Center and National Finance Center. Three
            other Shared Service Centers (SSCs) are providing timelines to
            send electronic retirement data via data feeds with OPM (GSA,
            DOD and U.S. Postal Service).
      --Provided initial access to electronic and imaged retirement
            information.
      --Completed the Guide to Retirement Data Reporting and publically
            posted the data standard, enabling agencies and SSCs to send
            retirement data in one format, and share that information
            across the Federal government.
        The work supporting the transition to a paper-less retirement
    system will continue in fiscal year 2011.
        In addition to measurement of RSM's performance against the
    program's Integrated Master Schedule and Earned Value Management
    reporting addressed above, the RSM program has provided results-
    oriented program goals in all budget submissions (i.e., Exhibit 300
    Capital Asset Plans). To demonstrate this, one of the retirement
    program's priority goals is to reduce the percentage of incomplete
    retirement records OPM receives from agencies to less than 30 percent
    by the end of 2010 and, going forward, to reduce the percentage of
    incomplete records to 28 percent by the end of 2011 and 25 percent by
    the end of 2012. This is one of only five of the Director's near-term
    High Priority Performance Goals, on which OPM is reporting quarterly
    progress at Performance.gov.
        Question. According to OPM's February 2010 Retirement System
    Modernization Quarterly Report to the Appropriations Committee, the
    agency has been coordinating with other Federal agencies regarding
    timing and application capabilities for its retirement system
    modernization. In addition, OPM's report stated that it plans to
    continue developing standardization rules through interagency
    coordination. To what extent is OPM dependent on other Federal agencies
    to modify or make changes to their system(s) in order for OPM to
    accomplish its goals for retirement system modernization?
        Answer. The key to transitioning to a paperless retirement process
    is for OPM to receive electronic data from Shared Service Centers
    (SSCs). RSM continues to meet regularly with the SSCs to discuss
    retirement data requirements and the steps necessary to begin sending
    electronic data versus paper. The SSCs are providing schedules to send
    electronic retirement data to OPM. Two SSCs are already providing
    retirement data to OPM electronically, and the rest are planning to do
    so. Regular meetings and discussions with the SSCs also entail
    coordinating the validation checks that can be applied to information
    when it comes to OPM in order to verify it is complete and properly
    formatted. These requirements are documented in the Guide to Retirement
    Data Validations version 1.0. This guide will help OPM identify
    problems SSCs may have when sending information to OPM and also any
    problems with the data itself. OPM will be able to report these
    problems back to the SSCs so they can be corrected in advance of
    retirement processing.
        Question. OPM's February 2010 Retirement System Modernization
    Quarterly Report to the Appropriations Committee included retirement
    call center goals for the agency. According to these measures, OPM has
    not been meeting agency established customer service standards. For
    example, OPM has not met its established goal for answering calls
    within an average of 1 minute since August 2009. What steps is OPM
    taking to improve the call center's service to Federal employees and
    retirees?
        Answer. In our commitment to provide high quality customer service,
    OPM has taken several steps to improve the Call Center's service by
    promoting our Retirement Services Online webpage; focusing on resolving
    customer inquiries in the first call; adjusting work schedules; and
    employee training.
        Many telephone inquiries that are received are transactions that
    can be performed by our customers online. Call Center agents are
    educating our customers about the online tools that are available 24
    hours a day, 7 days a week. This will help customers get their annuity
    information faster, view and manage their annuity, and will help reduce
    call volume and customer hold times.
        Stronger emphasis has also been placed on resolving customer
    telephone inquiries in the first call, which will significantly reduce
    the number of times a customer needs to contact the Call Center. Call
    Transfer Rates have decreased by 40 percent over past 2 years, and
    although Average Talk time increased by 18 percent over past year
    customers are more satisfied having their inquiries resolved in one
    call.
        In an effort to adequately staff the Call Center, staffing
    schedules have been adjusted to better handle the hourly call volume
    during peak times. Higher skilled employees (Customer Service
    Specialists) will now handle calls, which will result in improved
    resolution rates and improved efficiencies.
        Finally, of the current Call Center staff of 84, there are 18 newly
    hired customer service specialists. Talk time should come down as new
    employees become comfortable and familiar with their positions. We have
    already seen a 3 minute decrease in Average-Speed-of-Answer (ASA) in
    July 2010 over the previous month (from 15.8 minutes to 12.8 minutes).
    However, this may not be sustainable as we return to the busy times of
    the year.
        Implementing the steps above will improve customer service at the
    Call Centers, but not be enough for us to reach the 1 minute goal for
    the average speed of answer. This goal is a by-product of past
    priorities which was based on the provision that OPM would have a fully
    automated retirement system and substantially increased Call Center
    staff. Unfortunately, those provisions did not come to fruition.
    Nonetheless, customer service is a priority for OPM and we will analyze
    this in more detail to further improve our performance.
        Question. GAO made recommendations that OPM correct significant
    weakness in five key management areas that are vital for effective
    development and implementation of a modernized system: cost estimating,
    project monitoring (using earned value management), requirements
    management, system testing, and project oversight. Specifically, GAO
    reported that OPM had not developed a cost estimating plan or
    established a performance measurement baseline--prerequisites for
    effective cost estimating and earned value management. In addition, the
    agency had not established processes and plans to guide system
    requirements development work or addressed test activities. Finally,
    although OPM's Executive Steering Committee and Investment Review Board
    were aware of retirement modernization activities, these bodies did not
    exercise effective oversight, which allowed the aforementioned
    management weaknesses to persist. Correcting these weaknesses is
    critical not only for the success of OPM's retirement modernization,
    but also for that of other modernization efforts within the agency.
    What is the status of OPM's efforts to address and overcome the program
    management weaknesses GAO identified? What steps is OPM taking to
    ensure that the program management weaknesses GAO identified are not
    adversely impacting the financial systems modernization program?
        Answer. OPM has met with the GAO as a follow-up to their April 2009
    Report on weaknesses with the technical implementation and management
    of the RSM program. RSM's continuous review process is central to fully
    adopting the recommendations of GAO to ensure the restructured program
    meets its objectives on time and within budget. To this end, RSM
    developed a reliable program cost estimate in 2009 in response to GAO
    findings and OMB guidance to rejustify further investment. Using GAO's
    Guide to Cost Estimation and Assessment the RSM Business Case Analysis
    (BCA) was developed and provided to OMB in September 2009 with the BY
    2011 Exhibit 300. The BCA was recently updated for 2010 in support of
    the BY 2012 program budget and investment justification and provides
    more informed basis for acquisition and other planning. RSM established
    a new Program Management Baseline in June 2010 based on this
    information and updated and continues to develop several documents
    which are used in managing the program.
        These key documents were specifically cited by the 2009 GAO Report
    as inadequate, and have subsequently been updated to correct those
    weaknesses, improve program oversight and reflect current program
    priorities. Status of these documents follows:
      --RSM Executive Steering Committee (ESC) Charter.--This charter was
            updated to improve program oversight. The Charter reflects
            OPM's reorganization, designating the Chief Information Officer
            as the ESC Chair and adding OPM's Deputy Director as an ESC
            member.
      --RSM Change Control Board Charter.--This Charter reflects OPM's
            reorganization and reestablishes standard processes to approve
            and manage program requirements.
      --Program Management Plan.--The update is currently under review.
            This document provides an overview of RSM's governance,
            describes program management roles and responsibilities, and
            identifies the automated tools used by the program for
            management and reporting purposes.
      --Requirements Management Plan.--Version 3.0 was approved by the RSM
            Change Control Board in March and is currently in use in every
            RSM effort to document requirements and calculations for
            retirement business processes.
      --Test Management Plan.--The plan is currently under review. This
            document outlines the testing approach that ensures the
            programs deliver the systems and services required by OPM and
            that those systems work efficiently to meet the requirements of
            the users.
        OPM continues to engage with GAO as they follow up on OPM's
    progress in addressing the recommendations made in GAO's 2009 Report.
    OPM will continue to update our external stakeholders on the program as
    the execution progresses.
        Question. OPM's February 2010 Retirement System Modernization
    Quarterly Report to the Committees on Appropriations discussed the
    development of a plan and timeline for the modernization of OPM's
    legacy retirement IT systems. What is the specific plan and timeline
    for modernizing OPM's legacy retirement IT systems?
        Answer. OPM has developed a plan and timeline for modernizing the
    32 aging OPM retirement systems, prioritizing modernization of the
    systems as follows:
      --Fiscal year 2011-2012.--OPM retirement calculators, employee data
            systems, Service Credit system and Case Control Systems.
      --Fiscal year 2013-2014.--OPM consolidated annuity payment systems
            and post-adjudication support systems.
      --Fiscal year 2015-2016.--OPM consolidated data repository and
            retirement reporting systems.
        OPM will undertake modernizing these systems.

                   IMPLEMENTATION OF GUARD AND RESERVIST PAY

        Question. Director Berry, at our hearing on March 24, 2010, you
    testified that between 5,000 and 15,000 Guard and Reservists employed
    in the Federal Government are eligible for the benefit in a given year,
    and that several thousand would require the pay differential. Following
    up on that, please answer for the record, how many Guard and Reservists
    there are overall in the Federal Government?
        Answer. For the purposes of this response, the term ``reservist''
    refers to members of the National Guard, as well as members of one of
    the Reserves. Based on a recent computer match between DOD records on
    reservists and OPM records on Federal civilians, there are (as of March
    2010) at least 150,000 Federal civilian employees who are reservists.
    (The OPM database does not contain data on all Federal Government
    personnel. Among groups excluded from the OPM database are employees of
    the Postal Service, the Tennessee Valley Authority, the Federal
    Reserve, various intelligence agencies, DOD nonappropriated fund
    entities, the judicial branch, and much of the legislative branch).
        DOD reports that the total number of reservists as of June 2010 was
    about 1,320,000 (including about 1,080,000 in the Ready Reserve). Thus,
    about 11.4 percent of all reservists are known to be Federal civilian
    employees. DOD reported to OPM that, as of June 2010, 102,644 DOD
    civilian employees were reservists (including 87,670 in the Ready
    Reserve). Thus, DOD employees make up about two-thirds of the known
    Federal civilian employee population of reservists.
        As far as the number of reservists who are actually performing
    military service, OPM has made changes in its centralized employee data
    collection program, which should eventually result in readily available
    counts of the number of employees who are absent to perform service in
    the uniformed services in each quarter of the calendar year. Based on
    special analyses of existing Central Personnel Data File data, we
    estimate that 16,429 Federal employees were called to active duty
    during fiscal year 2009 and that 16,260 Federal employees were absent
    for military service as of the end of September 2009. (The
    corresponding estimates for fiscal year 2008 were 14,752 and 12,153.)
    Not all of these employees' service is qualifying for a reservist
    differential. For example, some active duty service is voluntary--i.e.,
    not under the involuntary call-up laws that trigger eligibility for a
    reservist differential. Also, about 10 percent of the service is less
    than 30 days, which indicates the service is probably annual training
    and not qualifying for reservist differential. We note, however, that
    agencies may not have been reporting all annual training service if
    employees covered the training with paid leave. Thus, the true
    percentage of active duty call-ups that are annual training is probably
    more than 10 percent. We have changed the reporting requirements so
    that agencies should use the Absence--Uniformed Services nature of
    action code even for short call-ups covered by paid leave.
        Question. Can you provide a breakdown by Federal agency?
        Answer. We are able to provide a report showing the result of a
    recent OPM-DOD computer match (as of March 2010), which shows counts of
    Federal civilian employee reservists by agency. (The OPM database does
    not contain data on all Federal Government personnel. Among groups
    excluded from the OPM database are employees of the Postal Service, the
    Tennessee Valley Authority, the Federal Reserve, various intelligence
    agencies, DOD nonappropriated fund entities, the judicial branch, and
    much of the legislative branch.)

    ------------------------------------------------------------------------
                                                                  Federal
                             Agency                              Civilian
                                                                Reservists
    ------------------------------------------------------------------------
    Agency for International Development....................              55
    American Battle Monuments Commission....................               3
    Armed Forces Retirement Home............................               9
    Broadcasting Board of Governors.........................               6
    Commodity Futures Trading Commission....................               3
    Consumer Product Safety Commission......................               9
    Corporation for National and Community Service..........               3
    Court Services and Offender Supervision Agency..........              14
    Defense Nuclear Facilities Safety Board.................              14
    Department of Agriculture...............................           1,366
    Department of Commerce..................................             682
    Department of Defense (other)...........................           4,623
    Department of Education.................................              40
    Department of Energy....................................             484
    Department of Health and Human Services.................             821
    Department of Homeland Security.........................           8,950
    Department of Housing and Urban Development.............             135
    Department of Interior..................................           1,027
    Department of Justice...................................           5,634
    Department of Labor.....................................             334
    Department of State.....................................             249
    Department of the Air Force.............................          44,803
    Department of the Army..................................          55,220
    Department of the Navy..................................           9,020
    Department of Transportation............................           2,702
    Department of Treasury..................................           1,297
    Department of Veterans Affairs..........................          10,285
    Election Assistance Commission..........................               1
    Environmental Protection Agency.........................             190
    Equal Employment Opportunity Commission.................              62
    Export-Import Bank of the United States.................               5
    Farm Credit Administration..............................               3
    Federal Communications Commission.......................              15
    Federal Deposit Insurance Corporation...................              73
    Federal Election Commission.............................               3
    Federal Housing Finance Agency..........................               2
    Federal Labor Relations Authority.......................               3
    Federal Mediation and Conciliation Service..............               1
    Federal Retirement Thrift Investment Board..............               3
    Federal Trade Commission................................               7
    General Services Administration.........................             284
    Government Printing Office..............................              34
    International Boundary and Water Commission.............              11
    Merit Systems Protection Board..........................               5
    Millennium Challenge Corporation........................               3
    National Aeronautics and Space Administration...........             341
    National Archives and Records Administration............              58
    National Capital Planning Commission....................               1
    National Credit Union Administration....................              21
    National Foundation on Arts and Humanities..............               2
    National Labor Relations Board..........................               9
    National Science Foundation.............................              14
    National Security Council...............................               1
    National Transportation Safety Board....................              18
    Nuclear Regulatory Commission...........................             168
    Office of Administration................................               4
    Office of Government Ethics.............................               6
    Office of Management and Budget.........................               9
    Office of National Drug Control Policy..................               2
    Office of Personnel Management..........................             142
    Office of Special Counsel...............................               4
    Office of the U.S. Trade Representative.................               1
    Overseas Private Investment Corporation.................               4
    Peace Corps.............................................               4
    Pension Benefit Guaranty Corporation....................              10
    Presidio Trust..........................................               2
    Railroad Retirement Board...............................              14
    Recovery Accountability and Transparency Board..........               1
    Securities and Exchange Commission......................              25
    Selective Service System................................              16
    Small Business Administration...........................              45
    Smithsonian Institution.................................              82
    Social Security Administration..........................             768
    U.S. Holocaust Memorial Museum..........................               2
    U.S. International Trade Commission.....................               2
    U.S. Tax Court..........................................               2
    U.S.-China Economic and Security Review Commission......               3
                                                             ---------------
          Total.............................................         150,274
    ------------------------------------------------------------------------

        Question. Are you able to get more specific numbers from the
    Defense Department about how many eligible for the benefit and how many
    would require the pay differential?
        Answer. OPM has made changes in employee data collection which
    should eventually provide more information on Federal employees absent
    for military service, including counts of those performing service that
    is qualifying under the reservist differential law.
        OPM issued a memorandum to agencies on April 14, 2010, requesting
    the following:

        ``An estimate of the number of employees in your agency with active
    duty service between March 11, 2009, and the date of this memorandum
    that is qualifying under the reservist differential authority. This
    estimate should include all members of the Reserve or National Guard
    that have qualifying service, regardless of whether they are eligible
    for or are actually receiving reservist differential payments. The data
    should be consolidated so that one report is provided to OPM for each
    agency.''

        Based on agency responses to the above request shown on the table
    below, 17,572 employees performed active duty between March 11, 2009,
    and April 14, 2010, that is qualifying under the reservist differential
    law. (This count does not reflect employees who received reservist
    differential payments--only those who had qualifying service.) This
    count included some agencies that do not participate in OPM's
    centralized employee database, including the Postal Service, which
    reported 1,824 employees. DOD had the largest number of employees with
    11,704, which represents about two-thirds of the total. These counts
    were for a 13-month period, thus including employees with any amount of
    qualifying service during that period. A count for employees performing
    qualifying service as of a single point in time would produce a smaller
    number.

    ------------------------------------------------------------------------
                                                               No. employees
                                                                   with
                                                                qualifying
                                                                  service
    ------------------------------------------------------------------------
                           DEPARTMENTS

    Agriculture.............................................             278
    Commerce................................................              37
    Defense.................................................          11,704
    Education...............................................               3
    Energy..................................................              48
    Health and Human Services...............................              44
    Homeland Security.......................................             810
    Housing and Urban Development...........................              10
    Interior................................................             200
    Justice.................................................           1,329
    Labor...................................................              18
    State...................................................              20
    Transportation..........................................         \1\ 129
    Treasury................................................             111
    Veterans Affairs........................................             777
                                                             ---------------
          DEPARTMENTS TOTAL.................................          15,513
                                                             ===============
                      INDEPENDENT AGENCIES

    BBG.....................................................  ..............
    Commission on Civil Rights..............................  ..............
    Corp National and Community Svc.........................               3
    DFNSB...................................................               2
    Defense Intelligence Agency.............................              20
    Export-Import Bank......................................  ..............
    FERC....................................................  ..............
    GPO.....................................................               4
    GSA.....................................................              10
    Missile Defense Agency..................................  ..............
    Morris K. Udall Foundation..............................  ..............
    NASA....................................................              18
    National Gallery of Art.................................               1
    National Geospational Intelligence Agency...............              22
    Nuclear Regulatory Commission...........................               4
    National Security Agency (NSA)..........................              23
    OPIC....................................................  ..............
    OPM.....................................................              13
    RRB.....................................................               2
    SEC.....................................................               2
    Selective Service System................................               1
    Small Business Admin (SBA)..............................               5
    Smithsonian.............................................              11
    SSA.....................................................              70
    U.S. Access Board.......................................  ..............
    U.S. Senate.............................................              13
    USAID...................................................               5
    USPS....................................................           1,824
    U.S. Trade Rep..........................................               1
                                                             ---------------
          INDEPENDENT AGENCIES TOTAL........................           2,059
                                                             ===============
          GRAND TOTAL.......................................          17,572
    ------------------------------------------------------------------------
    \1\ 109 of the 129 are FAA employees.

        We asked DOD to provide us with more up-to-date data on DOD-
    employed employee-reservists. DOD reports that the 11,704 records are
    being analyzed in two parts. As a result of the first group analysis,
    approximately 5,558 appropriated-fund employees were identified as
    being eligible for reservist differential. Approximately 532 were due a
    differential payment. For those 532 employees, the consolidated amount
    of reservist differential owed is approximately $1.3 million. The total
    amounts covered from 1 pay period to 24 pay periods and ranged from
    $10.75 to $26,665.02. The median total figure was $1,518.71. The
    average amount (before taxes) is approximately $2,500. The second group
    of retroactive records is now in its final review stage before
    distribution to DOD components to process payment actions. Payments
    will be effected starting September 17, 2010. DOD does not currently
    have data for service periods covering April 24, 2010, to the present,
    as those records are still being analyzed.
        At any one point in time, about 13,600 DOD appropriated-fund
    employees are in an Absent-U.S. status. Of these, DOD estimates 5,400
    are potentially eligible for reservist differential (i.e., called up
    under one of the qualifying legal authorities), and 540 are actually
    due a differential payment. However, some employees may only be due a
    payment for as little as a single pay period, often associated with
    first entering or leaving active duty when overseas allowances/payments
    are not being paid. Others are due a differential payment every pay
    period of absence.
     nursing shortage and intergovernmental personnel act mobility program
        Question. Following up on the questions I asked at the hearing, I
    have an additional question on this topic. I understand that the
    Intergovernmental Personnel Mobility Program sets guidelines for the
    Departments interested in participating. It is also my understanding
    that in 2007, the Department of Defense, through the leadership of the
    U.S. Army, engaged in a similar project with the University of
    Maryland. OPM was not involved, but can you speak to the possibility of
    providing assistance to other agencies that may want to follow the
    example of the DOD's effort?
        Answer. Even though we do not have the details of the 2007 project
    involving the U.S. Army, Department of Defense (DOD), and the
    University of Maryland, as the Federal agency responsible for
    establishing guidelines and regulations for the administration of the
    Intergovernmental Personnel Act Mobility Program (IPA), OPM remains
    interested in innovations that would expand the use of the IPA Program
    Governmentwide. That could include providing assistance to agencies
    that may want to duplicate other agencies' successful efforts.
        For example, in March 2010 OPM sponsored a forum that included
    representatives from the Department of Defense, the Department of
    Health and Human Services, and the Department of Veterans Affairs. The
    purpose of the forum was to begin a dialogue with Federal agencies that
    have some involvement in the nursing profession to explore what role
    the IPA Program could play in addressing the nursing shortage,
    particularly the impact of the faculty shortage on the nursing
    shortage. Additionally, the Employment Services Division of OPM
    recently established a collaborative listserv for representatives of
    Federal agencies who administer the IPA program at the operational
    level for their agencies. It is our hope that the listserv will act as
    a valuable resource to Federal agencies by allowing them to share
    ideas, ask questions, and share best practices about the IPA Program
    across Government.
        Finally, OPM plans to engage policy and programmatic stakeholders,
    both within and outside the Federal Government, in recommending
    initiatives to promote the IPA Program.

                    PROHIBITIONS ON THE HIRING OF IMMIGRANTS

        Question. The Financial Services and General Government
    Appropriations bill carries a government-wide general provision
    (Section 704) relating to restrictions on the hiring of non-citizens in
    the Federal workforce. This provision has been a component of annual
    appropriations bills dating back to the Treasury and Post Office
    Departments Appropriations Act for Fiscal Year 1939. It has been
    modified at least 18 times in the past 70 years. As I developed the
    fiscal year 2010 bill last summer, I worked with the Chairman of the
    Homeland Security and Governmental Affairs Committee on revisions to
    the language to eliminate discrimination among immigrants based on
    their nation of origin. The changes were included as part of our
    enacted bill in December (Public Law 111-117, Division C, Section 704).
        The modified provision permits the hiring of all legal permanent
    residents, refugees, and recipients of asylum, provided that they
    affirm that they are seeking citizenship. I note that the President's
    fiscal year 2011 budget request proposes to retain the fiscal year 2010
    modifications. This provision applies to excepted service positions
    since a Ford-era executive order (1976) still prohibits non-citizens
    from being employed in the Federal competitive service. What actions
    has OPM taken to implement the changes in the law? Has OPM issued
    guidance to Federal agencies and updated the website? If not, when do
    you expect to do so? What assurances can you give the Committee that
    Federal agencies' human resources staff are aware of the changes and
    understand that the law no longer prevents them from considering and
    hiring immigrants in thousands of Federal positions?
        Answer. OPM has provided information for agencies and job
    applicants on the USAJOBS website (http://www.usajobs.gov/EI/
    noncitizensemployment.asp#icc) regarding the changes to non-citizen
    hiring restrictions contained in Section 704. Also, OPM is discussing
    the statutory change with the Chief Human Capital Officers (CHCOs), and
    has asked CHCOs to inform OPM if agencies seek guidance on
    implementation of the new appropriations provision governing Federal
    hiring. We note that it is the obligation of each agency and its
    counsel to determine the scope of that agency's appropriation law
    restrictions in any given year and to ensure that hiring is done in
    accordance with such laws. OPM will work with OMB to issue guidance, if
    sought, on particular aspects of the new provision.
        Question. Under Executive Order 11935, only United States citizens
    and nationals (residents of American Samoa and Swains Island) may
    compete for, and be appointed to, competitive service jobs. To what
    extent has OPM been engaged in discussions with the Administration and
    OMB officials to evaluate Federal immigrant hiring policies and
    possible revisions to E.O. 11935?
        Answer. OPM has had general discussions with OMB regarding Federal
    immigrant hiring policies and options for revisions to E.O. 11935.
    However, no determination has been made regarding whether revisions are
    needed and what they might include.

                                   TECHNOLOGY

        Question. What percentage of OPM's budget request is allocated for
    technology?
        Answer. The total for all Information Technology spending (for
    example, equipment, software renewals, and applications and systems
    development support) budgeted for fiscal year 2011 is $242.85 million,
    which is 12 percent of OPM's total resources including appropriated
    funds, Common Services funds, and revolving fund activities.
        Question. Please describe the programs that would receive major
    portions of technology funding for fiscal year 2011.
        Answer. OPM's major IT investments in fiscal year 2011 include:
    $77.531 million for Enterprise Human Resources Integration (EHRI),
    which streamlines and automates information exchanges in order to give
    the Federal HR community improved access to employee HR data to improve
    workforce planning for hiring, skills development, and retention
    strategies; $39.759 million for EPIC Transformation and $27.619 million
    for EPIC Operations and Maintenance, which will ensure agencies have
    information to make credentialing, suitability and/or security
    clearance decisions; $33.484 million for operation and management of
    OPM's IT infrastructure, which provides the backbone for OPM's mission-
    critical systems; $20.520 million for the Consolidated Business
    Information System (CBIS), OPM's core financial budget and procurement
    system; $13.621 million for USAJOBS for technology and program
    operations to offer Federal agencies and job seekers a modern platform
    to support online recruitment and job application; $5.105 million to
    develop a data warehouse for the Federal Employees Health Benefit
    Program; $3.160 million for Human Resources Line of Business (HR LOB),
    which drives improved HR solutions and services through the
    establishment of Shared Service Centers service delivery models and
    strategies for agencies; and $1.5 million for Retirement Systems
    Modernization, a multi-year transformation of the Federal civilian
    retirement system.

                COMPREHENSIVE NATIONAL CYBERSECURITY INITIATIVE

        Question. The White House recently released the unclassified
    version of its Comprehensive National Cybersecurity Initiative--the
    government's plan to secure public and private sector computer
    networks. To this end, the White House formed an interagency working
    group to examine the promotion of cybersecurity. Reportedly, the
    working group's efforts would include roles for OPM and the Department
    of Defense to create a high performing cybersecurity workforce. What is
    OPM doing to help achieve this goal?
        Answer. OPM is leading Track 3, Federal Workforce Structure, of the
    National Initiative for Cybersecurity Education (NICE). Our primary
    objective is to implement strategies to ensure Federal agencies can
    attract, recruit, and retain skilled employees to accomplish
    cybersecurity missions today and in the future. We are implementing an
    incremental approach to understanding and defining cybersecurity work,
    developing competency models, analyzing workforce issues, and
    developing strategies that may be needed to address Federal workforce
    needs. We are working closely with agencies to meet current
    requirements, have granted Schedule A hiring authority to several
    agencies, and are encouraging the use of existing hiring flexibilities
    to meet agency needs.
        Question. What are the costs associated with this initiative?
        Answer. OPM did not receive any funding under the Comprehensive
    National Cybersecurity Initiative (CNCI). OPM is working with NICE
    leadership and National Security Staff to identify strategic priorities
    and match those to resource needs. OPM formed a NICE Track 3 workgroup,
    and personnel from OPM policy and program offices are accomplishing
    projects in support of the cybersecurity workforce. Approximately
    $23,000 from other objects funding was applied toward facilitated
    workshops for Track 3 efforts.
        Question. Please explain in detail the particular qualifications
    and skills required for positions in the cybersecurity workforce.
        Answer. In general, qualification requirements for Federal
    positions are based on the occupational series to which each position
    is classified. However, defining those requirements for the
    cybersecurity workforce is not a simple matter. ``Cybersecurity'' is a
    term of art; it is not a specific Federal occupation. Working with
    agencies, we have identified at least 18 different occupations
    (including Computer Science, Computer Engineering, Information
    Technology, Intelligence and Investigations) that cover the different
    aspects of cybersecurity work, each having its own education and
    experience requirements.
        Within its role in NICE, OPM is currently conducting a
    Governmentwide study to identify critical competencies needed across
    the Federal cybersecurity workforce. This information will help us
    correctly identify the occupations involved in cybersecurity work and
    the qualification requirements associated with those occupations. We
    have gathered initial information from agencies and stakeholders and
    will soon be surveying the workforce.

                     TELEWORK AND CONTINUITY OF OPERATIONS

        Question. An oft-cited reason for the lack of progress on telework
    implementation in the Federal government is resistance by managers and
    supervisors. How many OPM managers and supervisors have or are
    teleworking either as an aspect of an ongoing program or in a pilot
    program?
        Answer. We do no currently have the ability to track and report on
    telework instances/participation by individual supervisors. We are in
    the process of implementing a new database that will enable us to
    capture information regarding the number of supervisors who telework.
    In the recent Employee Viewpoint Survey, 56 percent of OPM managers and
    supervisors indicated that they telework (either regularly-scheduled,
    or on an ad-hoc basis) under the provisions of our ongoing Agency
    telework program. Assuming the survey respondents are representative of
    the general supervisory population, this equates to approximately 223
    supervisors who may telework. Director Berry has been a strong
    proponent of telework governmentwide and as the leader of OPM.
        Question. What feedback have these managers and supervisors
    provided to top OPM management on policy changes or approaches that
    could facilitate telework implementation government-wide?
        Answer. We recently held managerial/supervisory focus groups on May
    24 and 26, 2010, in the District of Columbia and on June 23 and 24,
    2010, for supervisors in our field locations. Focus group comments
    reflected that supervisors and managers are supportive of telework
    flexibilities provided at OPM. They would like to see more consistency
    across organizations and expansion of the use of telework arrangements.
    In general, they favor encouraging flexibility without micromanaging.
        Question. Of the Federal employees who are deemed essential
    government-wide, how many are able to telework in an emergency?
        Answer. OPM does not have Governmentwide data on the number of
    employees deemed ``essential''.
        Question. Do you have any government-wide data on how many
    essential Federal employees were able to perform mission critical
    functions during the 4 days of the snow blizzard in February 2010?
        Answer. Based on information we obtained from a special request to
    agencies in the area most affected by the snow storms, we estimate the
    number of essential Federal employees who worked in the National
    Capital Region during the 4 days of the snow blizzard was 13,523.
        Question. How many agencies have incorporated telework into their
    continuity of operations planning?
        Answer. In response to OPM's annual call for 2008 telework data,
    56.4 percent of the 78 responding agencies had incorporated telework
    into their continuity of operations planning. Based on a preliminary
    review of the 2009 data, this number is closer to 70 percent of
    responding agencies.
        Question. How many essential OPM employees were able to continue
    their critical functions?
        Answer. All 48 essential OPM employees were able to continue their
    critical functions.
        Question. What are the savings--or cost avoidance--for each
    employee who is able to telework during continuity of operations
    situations?
        Answer. We do not have per-employee savings data.
        Question. What lessons were learned from the snow blizzard?
        Answer. In view of the extreme circumstances of the snow events, we
    made a special request to the Chief Human Capital Officers (CHCO) Act
    agencies. We sought their voluntary responses to a number of questions
    in an attempt to identify some success stories emerging from the
    events. We received replies from 19 agencies. Following are some of the
    overall results.
      --Thirteen of the respondents stated that telework was incorporated
            into their emergency response plans. Five agencies stated that
            telework was not incorporated into their emergency response
            plan.
      --All agencies that said they had used telework considered it
            effective for those individuals who had power and who had their
            issued equipment available.
      --Agencies that had employees who teleworked experienced little or no
            issues with telework.
      --No agencies reported that they had incorporated transportation,
            sleeping, and food arrangements into plans for emergency
            personnel who were required to come into work during the
            closure event.
      --Several agencies are conducting reviews of their related plans and
            policies after the snow closures of February 2010.
      --Several agencies are planning on expanding existing telework
            opportunities.
        Some agencies reported that not all of their employees eligible to
    telework had brought the necessary equipment and/or work material home
    with them prior to the snow event. Several agencies noted that some
    employees were not able to telework effectively through the event as
    they did not have necessary ``hard'' files/paperwork.
        Clearly, some agencies need to do more to facilitate remote access
    by teleworking employees to files stored on their networks. Our query
    of the agencies also revealed that there are still some agencies that
    have not yet incorporated telework into their emergency response plans,
    which all agencies need to do.
        Question. Last year, OPM and other agencies (to varying degrees)
    established or refined emergency preparedness plans for the possibility
    that a pandemic flu might require social distancing and working off-
    site. Did these plans enhance agencies' continuity of operations during
    the snow blizzard? If so, please elaborate. If not, what emergency
    preparedness policies and procedures might be need for future events,
    whether they are caused by natural disasters or terrorist acts?
        Answer. OPM provided guidance to agencies regarding planning for
    pandemic influenza in 2009 (see http://www.opm.gov/pandemic/OPM-
    Pandemic_AllIssuances.pdf) which emphasized, among other things, the
    importance of agencies and their employees being telework ready. The
    blizzard demonstrated that agencies still have work to do when it comes
    to having the necessary infrastructure to accommodate telework during
    emergencies.
        Question. During the February snow blizzard, it was reported that
    the cost of closing the Federal government was an estimated $100
    million per day. In a radio interview during the blizzard, you
    indicated that the estimate was out of date and that a re-estimate was
    in order. What factors should be considered and what methodology would
    be used for estimating the cost of a 1-day government shutdown? Has OPM
    recalculated the cost of a 1-day government-wide closure? If so, what
    is the revised estimate? If not, when might a recalculation be
    available?
        Answer. Factors considered in estimating the cost of closing the
    Federal Government include the estimated numbers and pay grades of
    employees in the National Capital Region (the area most affected by the
    storms), less the number of emergency personnel and estimated
    teleworkers who worked during the closure. Our revised estimate of the
    cost of a 1-day Governmentwide closure is approximately $71 million.

                   FEDERAL EMPLOYEE RECRUITMENT AND RETENTION

        Question. In January 2010, OPM released its report to Congress,
    Recruitment, Relocation and Retention Incentive--these incentives are
    often referred to as the ``3Rs.'' In calendar year 2008, 47 agencies
    spent a total of $284 million on 39,512 recruitment, relocation, and
    retention incentives for Federal employees. Would you elaborate on the
    implementation of the 3R programs?
        Answer. Agencies have used recruitment, relocation, and retention
    incentives (3Rs) to help recruit and retain Federal civilian employees
    since the authorities were originally enacted in the early 1990s. In
    May 2005, changes in law became effective that provided additional
    flexibility to grant 3Rs payments. Under OPM's regulations, agencies
    have discretionary authority to grant 3Rs payments to employees without
    OPM approval in most situations. Currently, OPM approval is required
    only for 3Rs payments in excess of the normal payment limitations
    (e.g., for retention incentive payments in excess of 25 percent for
    individual employees and 10 percent for a group of employees, up to a
    maximum payment of 50 percent) and to cover non-General Schedule
    categories of employees under the 3Rs authorities.
        Question. Are there categories of occupations and positions that
    have received the major portion of these incentives?
        Answer. In calendar year 2008, agencies typically paid 3Rs payments
    to employees in occupations critical to agency missions, such as
    healthcare, engineering, security, and information technology.
        Of the top 30 occupations that received recruitment incentives, 7
    occupations were in healthcare fields and 7 in engineering fields. The
    single occupation for which recruitment incentives were most used was
    patent examiners, who accounted for more than 11 percent of all
    recruitment incentives paid.
        Relocation incentives were spread across a wide array of
    occupations. Of the top 10 occupations for which relocation incentives
    were used, the two fields in which they were most likely to be used
    were occupations in criminal investigating and contracting, accounting
    for 7.35 percent and 6.62 percent, respectively.
        Retention incentives were primarily used to retain employees in
    healthcare occupations, accounting for 34 percent of all retention
    incentives paid. Security and engineering occupations each accounted
    for almost 8 percent of retention incentives issued. Information
    technology employees received 4 percent of retention incentives paid.
        Question. How many employees have received more than one of these
    incentives--for example, how many, if any, employees received both a
    recruitment and relocation incentive?
        Answer. OPM's regulations prohibit employees from receiving
    recruitment, relocation, and retention incentives concurrently in most
    situations. However, the regulations do not limit how many non-
    concurrent incentives an employee may receive over the course of his or
    her career, provided all the regulatory criteria for these incentives
    are met. OPM is currently working with agencies to improve the quality
    and accuracy of 3Rs data submitted to OPM's Enterprise Human Resources
    Integration (EHRI) data system. Once EHRI data from agencies is
    certified to be accurate, OPM expects to be able to track trends such
    as how many employees received more than one incentive over the course
    of their career.
        Question. What improvements, if any, may be considered?
        Answer. Over the last year, OPM has led an initiative, in
    coordination with an interagency workgroup, to review existing policies
    and identify ways to improve the administration and oversight of the
    3Rs authorities. In February 2009, OPM issued a memo to agencies
    explaining what we found in our review and, as a result, we plan to--
      --Develop additional guidance and tools to help agencies write
            stronger justifications for 3Rs authorizations, improved 3Rs
            plans, and more explicit agency internal monitoring procedures,
            with greater emphasis on the consideration of the costs and
            benefits of the 3Rs;
      --Issue proposed regulations to require agencies to review all
            retention incentives and group recruitment incentives at least
            annually to determine whether they should be revised or
            discontinued; and
      --Review the 3Rs data submitted to EHRI for agencies that used the
            greatest number of 3Rs. OPM will ask agencies to validate or
            certify the data accuracy. Once the 3Rs data is validated, OPM
            and agencies will be better able to track 3Rs trends on an
            ongoing basis and, if necessary, investigate any 3Rs data
            anomaly and take corrective actions immediately.
        Question. Are there any preliminary data on the use of the 3Rs in
    2009?
        Answer. We are currently compiling the calendar year 2009 report
    from the data submitted by agencies. We expect to release the report
    later this year.
        Question. Please describe how OPM has used each of the 3Rs in your
    own organization.
        Answer. During fiscal year 2010 OPM has granted 1 recruitment and 2
    relocation incentives as a recruiting tool for some of our hard-to-fill
    positions, including a senior program director position in our USAJobs
    program office, a supervisory Criminal Investigator who was relocated
    between duty stations within OPM, and a senior Human Resources
    Specialist who was relocated between duty stations within OPM.
        Question. The Chief Human Capital Officer at the Department of
    Homeland Security has testified before Congress on the use of ``virtual
    job fairs'' to recruit employees, particularly information technology
    staff. Please explain how a ``virtual job fair'' works.
        Answer. OPM did not participate in DHS's ``virtual job fair,''
    however, on September 14, DHS will present a briefing to OPM on its use
    of a virtual job fair to recruit top talent.
        Question. To what extent has OPM used this approach to hire
    employees?
        Answer. OPM has not used this approach to hire employees because of
    the lack of 508 compliance (an accessibility issue for individuals with
    disabilities) of ``virtual job fair'' sites. We are currently pursuing
    a 508-compliant job fair site, and when funds become available, we plan
    to pursue the purchase of such a site.
        Question. What safeguards are in place to ensure that the merit
    system principles codified in Title 5 are upheld?
        Answer. As with any recruitment and hiring activity, agencies must
    ensure their practices are in conformance with the merit system
    principles, as well as with all other applicable provisions of title 5.
    In addition, OPM, in its oversight role, will hold agencies accountable
    for compliance with the laws and regulations governing recruitment and
    selection.
        Question. Has the economic downturn slowed the rate of retiring
    Federal employees?
        Answer. We are not able to determine the specific impact of the
    recession on the rate of retirement among Federal employees. However,
    we do have historical data as shown with regards to the number of
    employees added to the retirement roll each year since 2000 which may
    be useful to provide some perspective on the trends in retirement of
    Federal employees.

    ------------------------------------------------------------------------
                                                                   Total
                           Fiscal year                          retirements
    ------------------------------------------------------------------------
    2000....................................................          77,383
    2001....................................................          77,330
    2002....................................................          74,153
    2003....................................................          81,128
    2004....................................................          90,441
    2005....................................................          94,977
    2006....................................................         103,292
    2007....................................................          92,349
    2008....................................................          86,615
    2009....................................................          87,907
    ------------------------------------------------------------------------

         Question. What is the current projection for the retirement of
    baby boomers?
        Answer. It is difficult to make projections regarding retirements
    due to the variety of factors that go into retirement decisions (i.e.
    the economy, retirement savings). Accordingly, OPM is not currently
    able to provide specific projections regarding the retirement of baby
    boomers in the Federal workforce.
        Question. What guidance, if any, does OPM provide to departments
    and agencies to ease the expected retirements of baby boomers in the
    next 5 years?
        Answer. To ease the expected effect of retirements, OPM supports
    knowledge transfer from one generation of leaders to the next
    generation of leaders. OPM has submitted a legislative proposal that
    would allow Federal employees covered by the Civil Service Retirement
    System or the Federal Employees Retirement System to enter a phased
    retirement status at the end of their careers, under certain
    circumstances. This would enable agencies to retain the services of
    highly valued and experienced employees for longer periods than they
    would otherwise be able to. This proposal would require that part of
    the individual's time be spent mentoring other employees.
        To prepare for an increase in the number of retirements from the
    Federal Government, OPM works with agencies to assess leadership needs
    and use current leaders to prepare new and emerging leaders for future
    assignments and roles. The following are some examples of recent OPM
    programs and activities:
      --OPM hosted a best practices forum on mentoring when our ``Best
            Practices in Mentoring'' booklet was made available to agencies
            through the OPM website. OPM participated in a mentoring forum
            conducted by and for the Intelligence Community.
      --OPM is working with agencies to develop an executive on-boarding
            framework. A forum was held for agencies to investigate methods
            and techniques to better prepare new Federal executives for
            successful executive careers. For example, the National Science
            Foundation has initiated a pilot on-boarding program, which
            includes a letter from the outgoing executive to his or her
            successor, among other features.
      --OPM is developing a wiki that will facilitate knowledge sharing for
            the training and development community. The wiki will debut
            with five initial topics later this summer.
      --OPM facilitates knowledge management by hosting best practices
            forums or webcasts. Webcasts on leadership development programs
            have been offered, which are recorded for posting on OPM's
            YouTube channel.
      --Best practices forums are hosted quarterly for performance
            management and executive resources practitioners. At these
            forums, OPM provides agencies with guidance and advice.
            Agencies, in turn, present information on their best practices
            on a wide variety of topics, including their Senior Executive
            Service (SES) career development programs, diversity, and
            leadership succession management.
      --In the Guide to Strategic Leadership Succession Management Model,
            OPM provides recommendations for assessing executive workforce
            needs, projecting attrition, and designing strategies for
            meeting staffing needs. These guidelines are followed by
            agencies in the preparation of their Strategic Leadership
            Succession Plans and their Human Capital Management Reports.
      --Through the Federal Executive Institute in Charlottesville,
            Virginia, OPM offers a course entitled ``Leaders Growing
            Leaders; Building Your Organization by Developing Leaders at
            Every Level.'' The course offers participating executives the
            opportunity to gain experience practicing informal roles as
            exemplar, mentor, coach, and teacher to help cultivate the next
            generation of leaders. Participants also learn how to frame
            their life and work experiences as stories to help others learn
            leadership lessons.
        Question. The government-wide website, USAjobs.opm.gov, has been
    reconfigured. Please discuss the improvements, if any, to the website.
        Answer. The refreshed USAJOBS site enhances the user experience by
    updating the look and feel, including introducing social media and
    increased personalization; improving site navigation, making it easier
    to move about the site; enhancing the job search tool so applicants
    find the right job for them; streamlining employment information to
    ensure guidance is readily available; and providing targeted resources
    for those with special needs (students, executives, veterans, and
    individuals with disabilities). Also, applicants can now email their
    resumes that they created using the USAJOBS resume builder.
        Question. Are there enhanced features to assist veterans and
    persons with disabilities in their job search?
        Answer. All veterans' employment information has been consolidated
    onto one site (www.fedshirevets.gov). A resume mining capability has
    been added for preference eligible veterans and 30 percent or more
    disabled veterans.
        For persons with disabilities, a new page has been added to USAJOBS
    with information that includes tips for applying competitively or under
    the Schedule A appointing authority. Template letters have been created
    for download, to be used when applying under Schedule A.
        Question. What partnerships have OPM formed to reach out to college
    campus to recruit the best talent to public service? Have these efforts
    been successful?
        Answer. In January 2010, OPM created a Student Programs Office to
    promote innovative and coordinated approaches to recruiting and hiring
    students into the Federal Government. A significant part of this new
    office's role involves collaborating with academia and other
    organizations focused on the recruitment of students and recent
    graduates into the Federal service.
        Through the Call to Serve initiative, OPM works in collaboration
    with the Partnership for Public Service to educate a new generation of
    leaders about the importance of a strong civil service, help re-
    establish links between Federal agencies and college campuses, and
    provide students with information about Federal jobs. Through this
    network, we are able to reach more than 700 schools and more than 75
    Federal agencies. Throughout the year, we nurture these relationships
    by providing training workshops, a Federal Service Summit, best
    practices, and other key resources relating to Federal employment.
        In addition to the Call to Serve initiative, OPM has worked with a
    variety of colleges and universities nationwide to promote the Federal
    Government as an ideal place to work. Earlier in fiscal year 2010, we
    sponsored five Federal Career Days--at Johns Hopkins University, City
    College of San Francisco, Massachusetts Institute of Technology,
    University of New Mexico, and Rutgers University--to showcase the
    Federal Government as the most dynamic and progressive employer in the
    country as well as a ``cool'' place to work. These schools offer strong
    curricula relating to Federal agency mission-critical occupations and
    demonstrate a willingness to promote Federal employment opportunities
    for their students. In addition to the Federal Career Days, we have
    partnered with, and participated in many events at, other colleges,
    universities and organizations that have key roles in attracting a
    diverse student population into the Federal workforce. Over the past
    fiscal year, these have included the American Society of Public
    Administration, National Association of Colleges and Employers,
    Government College Relations Council, Federal Employed Women, League of
    United Latin American Citizens, Southeast Federal Recruiting Council,
    Hispanic Association of Colleges and Universities (HACU), and Gallaudet
    University.
        Finally, in 2010 the Presidential Management Fellows (PMF) Program
    expanded its outreach to over 30,000 graduate school contacts across
    the country. This outreach included e-mail blasts, campus visits,
    presentations, and partnering with associations. Recently, OPM Director
    John Berry approved a variety of reinvigoration efforts to enhance the
    PMF Program:
      --Increasing investment in the assessment process to improve the
            quality of PMF finalists. For the upcoming PMF Class of 2011,
            we are enhancing the PMF assessment process to improve both the
            quality of finalists and the applicant experience.
      --Improving the PMF Program experience. The Program is in the process
            of creating ``PMF Power Packs,'' consisting of current PMFs, to
            work on 5 program areas: (1) diversity outreach, (2)
            development of a new orientation program ``for PMFs, by PMFs'',
            (3) assistance with the new assessment process, including
            logistics, event planning, and coordination of the in-person
            phase, (4) development of a job-matching process for PMF
            finalists, and (5) creation of an alumni program.
      --Increasing outreach efforts through strategic partnerships. This
            includes work with organizations such as the National
            Association of Schools of Public Affairs and Administration
            (NASPAA), National Association for Equal Opportunity in Higher
            Education (NAFEO), HACU, etc., to create a marketing and
            outreach plan to reach all segments of society. Many Federal
            Executive Boards (FEBs) also reach out to local colleges and
            universities to share information on Federal employment.
        As a result of the aforementioned efforts, we have witnessed an
    increase in the number of students and recent graduates entering the
    Federal Government through Governmentwide student programs and the PMF
    Program. The PMF Program experienced a 70 percent increase in its
    number of applicants over the number of PMF applicants from 2009. In
    2009, we had approximately 500 Fellows appointed in Federal agencies,
    representing the highest number of Fellows appointed in the history of
    the program. We are expecting even more in 2010.

                               WORK-LIFE PROGRAMS

        Question. What amount and percentage of the OPM budget is allocated
    for administration of work/life programs? How many full-time
    equivalents (FTEs) are associated with this function? What are the two
    most important issues facing the Federal workforce in terms of work/
    life issues and what are OPM plans to address these concerns?
        Answer. Of OPM's budget of $905 million, 0.42 percent is allocated
    for the Governmentwide oversight of work/life programs. There are
    currently 6 FTEs allocated for this function.
        The two highest priority issues are the Federal telework program
    and employee health and wellness. OPM Director John Berry has shown his
    commitment to these two areas by establishing a high priority
    performance goal for each.
        The goal for telework is, by the end of fiscal year 2011, to
    increase by 50 percent the number of eligible Federal employees who
    telework over the 2009 baseline of 102,900.
        Key components of OPM's strategy to meet this goal include: working
    with agencies to make sure they have effective telework policies that
    translate into successful programs; and developing high-quality and
    broadly accessible telework training.
        The goal for health and wellness is, by the end of fiscal year
    2011, for every agency to have established and begun to implement a
    plan for a comprehensive health and wellness program which will achieve
    a 75 percent participation rate. Key components of OPM's strategy to
    meet this goal include: providing guidance to Federal agencies on what
    constitutes a comprehensive health and wellness program and criteria
    for assessing the adequacy of agency plans; and producing a training
    package aimed at employees and managers that agencies can use to inform
    their employees of the value of health and wellness programs.
        Another area that we believe to be an important issue facing
    Federal employees is dependent care. The range of dependents for which
    employees are expected to provide support, and the range of support
    necessary for those individuals, is broad. More than half of Federal
    employees fall into the age category of adult Americans who are caring
    for both elders and children. Providing support through workplace
    programs allows Federal employees convenient access to supports and
    resources, and facilitates productivity while at work.
        OPM's plans to address the dependent care needs of Federal
    employees include providing: training and resources for Federal work/
    life staff; networking opportunities for agency work/life staff; and
    guidance documents and handbooks.
        Question. Some versions of the healthcare reform legislation would
    assign a role to OPM regarding benefit negotiations and administration
    with health insurance providers for plans. How many FTEs and
    appropriated monies currently support Federal Employee Health Benefit
    Program (FEHBP) administration functions in OPM?
        Answer. Currently, OPM is appropriated approximately $11.7 million
    to administer the FEHBP, with approximately 90 FTEs. This does not
    include the support of the Office of Inspector General, which is
    responsible for auditing FEHBP health plans. It also does not include a
    proportionate share of accounting or legal services.

                              [Dollars in millions]
    ------------------------------------------------------------------------
                                               Appropriated
                                                   Money            FTE
    ------------------------------------------------------------------------
    Policy, including Office of the Actuary.            $5.5            22.1
    Operations..............................             6.2            68.0
                                             -------------------------------
          Total.............................            11.7            90.1
    ------------------------------------------------------------------------

        Question. What staff would need to be hired and what additional
    expertise would be needed if the OPM role were expanded in this area?
    How would this added role affect OPM's performance of its core mission?
        Answer. The Patient Protection and Affordable Care Act (Public Law
    111-148), enacted March 23, 2010, gives OPM additional health insurance
    plan oversight and administrative responsibilities. Under section 1334,
    OPM will contract with health insurance issuers to offer at least 2
    multi-State health plans through each State Health Insurance Exchange.
    The Exchanges will make available qualified health plans, including
    multi-State plans, to the general public beginning in 2014.
        This added role will not have any effect on OPM's performance of
    its current core mission. OPM will need to develop the capacity,
    including additional staff, to manage the Multi-State Plan option(s)
    that will be available via State exchanges in 2014. Development of such
    capacity includes examining the interaction between multi-State plan
    requirements and State insurance regulations, analyzing potential
    enrollee demographics and utilization patterns, and modeling potential
    premium costs. Work over the next several months will focus on shaping
    the OPM role with the Multi-State Plan option from the framework
    outlines presented in the new law and identifying the institutional
    support that OPM will require to develop and manage this program from
    2010 to 2014.
        Question. OPM has announced that it is revamping the human capital
    survey that is designed to gauge Federal employee views on a variety of
    key Federal workforce practices on an annual basis. What are the
    significant changes/enhancements in the survey methodology? Will the
    data be disaggregated to allow for a more in-depth look into the views
    of employees in various offices and units of a department rather than
    just the department as a whole?
        Answer. Starting in 2010, OPM plans on administering the Federal
    Employee Viewpoint survey annually to fulfill the growing need for
    Governmentwide standardized data. While changes to the survey in regard
    to content, process, and depth of reporting are currently being planned
    for the future, some minor changes were made to the FedView survey for
    2010 administration. The survey was revised to add items in the areas
    of employees' work experience, supervision, leadership, and work/life
    issues.
        In addition, OPM decided to move questions on Governmentwide
    benefits, like life insurance, health insurance, and retirement, to a
    separate survey; most agencies supported these changes. OPM already
    provides data below department or agency-wide level to allow visibility
    into the perceptions of employees within major organizations and
    subdivisions, and OPM works with agencies to support their needs for
    specialized views or cuts of survey results. In all cases, OPM ensures
    the identity of individual respondents is protected.

                  FEDERAL EMPLOYEES AND GOVERNMENT PROCUREMENT

        Question. Within the government procurement community, the state of
    the acquisition workforce is of great interest. Generally, it is
    understood that the acquisition workforce as a whole--which is dealing
    with complex acquisitions and increased government procurement
    spending, and learning new acquisition methods--is undermanned and
    undertrained. How is OPM assisting the Office of Federal Procurement
    Policy, and other Federal agencies, in bolstering the government's
    acquisition workforce?
        Answer. OPM has designated the 1102 Series as a Governmentwide
    mission-critical occupation. OPM's shared registers include the
    contracting series. We also assist agencies with employees in the 1102
    Series in providing fiscal year reporting for OFPP on the 1102 Series
    workforce strength and 5-year projections of attritions and accretions.
        Agency reporting includes:
      --Resource data for entry-, mid- and senior-level as part of the
            measures reported for each agency's annual Human Capital
            Management Report.
      --Target acquisition workforce profile and actual attrition at the
            end of the reported measurement year.
      --Comparison of current workforce targets with actual population to
            determine gaps or surpluses.
      --Workforce targets and projected attrition for the next fiscal year
            (short-term goal).
      --Workforce targets and projected attrition for an additional 4
            fiscal years in the future (long-term goal).
         Agencies this year were to establish targets and project attrition
    for fiscal year 2010 and fiscal year 2014. Agencies were also to report
    their current population and certifications as of the end of fiscal
    year 2009. OPM will continue to work with agencies and assist them with
    efforts to provide accurate and complete reporting.
        Question. What hiring authority flexibilities can agencies use to
    hire acquisition professionals in a timely fashion?
        Answer. From September 30, 2007, through September 30, 2012,
    agencies have direct hire appointing authority for certain Federal
    acquisition-related positions, such as entry-level and senior
    contracting positions and all purchasing positions.
        Through December 31, 2011, agencies are also authorized to reemploy
    annuitants in the acquisition-related positions mentioned above without
    offsetting their salaries, as is normally required when reemploying
    annuitants. Agencies' decisions to use this authority must be based on
    the unusually high or unique qualifications of an individual,
    exceptional difficulty in recruiting or retaining a qualified employee,
    or a temporary emergency hiring need, which makes the reemployment of
    the individual essential.
        Question. What constraints exist, if any, that might impede
    agencies' efforts to hire and train individuals for their contracting
    offices?
        Answer. One constraint is the challenge of accurately projecting
    future workforce needs. This depends, in part, on how many positions
    are defined as having ``inherently governmental'' functions. The
    definition of ``inherently governmental'' affects the workload of
    contract specialists and informs agencies' decisions regarding the
    number of positions they need to fill. A strong desire to avoid over-
    hiring can also complicate workforce planning efforts.
        In addition, Federal contracting is quite technical and requires
    in-depth knowledge of Government policy and regulations, as well as
    substantial training and experience to be fully productive. Effective
    training programs that are adequately resourced are essential.
    Moreover, once their contract specialists are trained, Federal agencies
    face competition from non-Federal employers willing to pay more for
    employees with Federal work experience and training and credentials.
        Question. As the Director of the Office of Management and Budget
    noted in a July 2009 memorandum, ``[f]ederal agencies use both Federal
    employees and private sector contractors to deliver important services
    to citizens.'' His memorandum also stated that overreliance on
    contractors ``can lead to the erosion of the in-house capacity that is
    essential to effective government performance,'' and counseled that
    achieving the best mix of Federal employees and contractor employees
    can be accomplished by identifying the proper role of each sector. What
    is the human resources perspective on the multisector workforce?
        Answer. We believe an effective balance between Federal employees
    and contractors can be achieved by taking into account strategic human
    capital planning, the concept of ``inherently governmental function''
    and ``critical function'' and effective talent management.
      --Strategic human capital planning is essential to an understanding
            of the full picture of workforce requirements for mission
            accomplishment.
      --The concept of ``inherently governmental'' function and
            ``critical'' function must be clearly understood and properly
            applied to ensure inherently governmental functions are
            performed only by Federal employees and critical functions are
            performed by Federal employees to the extent necessary to
            ensure the government maintains control of its mission and
            operations.
      --Effective talent management strategies should be used (including
            effective recruiting and retention strategies) to ensure that
            agencies have adequate numbers, and the right skill mix, of
            employees to accomplish the mission.
        Question. What are some of the issues that an agency might
    encounter when it has Federal employees and contractor employees
    working side-by-side?
        Answer. Many of the issues that arise when Federal employees and
    contractors have been working side by side concern differences in
    systems for pay and reward, discipline, and termination, as well as
    general ethical considerations (including organizational and personal
    conflicts of interest). Some examples of these differences include:
      --Contractor employees are not subject to the various laws governing
            Federal employment, which impose various protections and
            restrictions.
      --There are generally no limits on the compensation that may be
            provided to contract employees, while Federal employees
            generally are subject to compensation limits. If contract
            employees are paid at higher rates than Federal employees
            providing similar services, this could create morale problems
            within the Federal workforce. It could also lead to Federal
            employees leaving Federal service to accept contract jobs.
      --A retired Federal employee who works for the agency as a contractor
            will receive his or her full annuity whereas that same retired
            employee would be subject to the reemployed annuitant salary
            offset if working for the agency as a rehired annuitant unless
            a waiver is granted. The difference in how retirement is
            treated in these scenarios could be viewed as inequitable.
        Question. What steps can agencies take to maintain a clear
    distinction between the management of its own employees and the
    management of contractor employees? That is, how can agencies avoid the
    appearance of a supervisor-employee relationship between agency staff
    and contractor employees?
        Answer. The agency should take appropriate steps to ensure its
    employees are made aware when contract employees are performing work
    onsite, such as to provide professional and technical services. Such
    steps might include requiring contractor employees to wear distinctive
    badges, work in clearly identified work areas, and use e-mail addresses
    that clearly identify their status as contractors. In addition,
    agencies should ensure their employees are not directing the work of
    contractor employees but instead that agency contracting officials are
    giving direction to the contract supervisor.
        Question. Under Office of Management and Budget Circular A-76,
    agencies may conduct public-private competitions to determine who--
    Federal employees or contractor employees--will perform work that
    agency employees had been doing. When a competition results in the
    awarding of a contract to a company, the Federal employees are no
    longer needed in that function. While it is possible that at least some
    of the agency employees will be hired by the contractor, there is no
    guarantee that this will happen. What role, if any, has OPM played in
    public-private competitions conducted by other agencies?
        Answer. There have been no recent public-private competitions, in
    part as a result of a statutory moratorium on public-private
    competition. However, in past years, when agencies conducted public
    private competitions under OMB Circular A-76, OPM worked with agencies
    to provide soft landings for affected employees both where work was
    converted to private sector performance as well as where work was
    retained in-house but involved a reduction in labor. These efforts
    included consideration of buyouts and early retirements under OPM's
    Voluntary Early Retirement Authority (VERA) and the Voluntary
    Separation Incentive Payments (VSIP) Program. OPM's regulations govern
    how the agency's workforce is reduced because of that decision. General
    and detailed restructuring guidance material is available on OPM's
    website, and we offer on-site assistance through our reimbursable
    services staff.
        Question. Generally speaking, what options are available to Federal
    employees who have been displaced by the outcome of a public-private
    competition?
        Answer. If a permanent Federal employee is separated because of the
    contracting decision, the employee may be eligible either for
    retirement benefits if the employee meets the age and service
    requirements, or for severance pay.
        The employee is entitled, by regulation, to reemployment priority
    in his or her former agency for 2 years to positions at the same or
    lower grade and in the same commuting area. Qualified employees are
    offered reemployment based on their tenure and veterans' preference. A
    displaced employee is also entitled by regulation to selection priority
    for 1 year to positions in other agencies at the same or lower grade in
    the same commuting area. This program requires former employees to
    apply for positions matching their skills and to be well-qualified for
    the positions. Both of these programs provide selection priority over
    candidates from outside the agency's permanent workforce.
        Question. How might OPM track Federal employees who have been
    displaced?
        Answer. OPM can track, through the Central Personnel Data File,
    those employees who were separated because of a decision to contract
    the work under OMB Circular A-76.

                           FEDERAL PAY AND FURLOUGHS

        Question. Discussions of Federal pay rates have been prominent in
    the news of late with the USA Today articles presenting Federal and
    private sector pay comparisons and CNBC commentary calling for salary
    rollback. What is OPM's response to these viewpoints?
        Answer. We have been closely following stories of Federal pay
    during the last few months. However, we view reports published by USA
    Today, the Cato Institute, and the Heritage Foundation critical of
    Federal workers as simplistic and misleading. Average salary
    comparisons as published by the Cato Institute and others ignore the
    huge differences in the occupational makeup of the Federal and non-
    Federal workforces; they do not reflect the complexity of the work,
    level of skill and education required, scope of responsibility/impact,
    special requirements such as security clearances, or the location where
    the work must happen.
        On average, positions in the Federal government generally have a
    higher level of education than the private sector positions. About 19
    percent of Federal workers have a master's degree, professional degree,
    or doctorate versus only 11 percent in the private sector. A full 48
    percent of Federal employees have at least a college degree compared to
    32 percent in the private sector. For example, the two largest private-
    sector occupations today are retail salesperson and cashier, low-paid
    occupations not found in Federal service. In contrast, the vast
    majority of Federal workers are in professional, administrative, and
    technical occupations that are well-paid in the private sector. Job-by-
    job comparisons published by USA Today are based on data published by
    the Bureau of Labor Statistics (BLS), but the data are improperly used.
    The Federal Government uses recognized statistical methods and
    professionally conducted pay surveys. BLS economists, working with OPM,
    have thoughtfully and carefully compared occupations in the Federal and
    non-Federal sectors for more than 50 years to provide Government
    policymakers with factual information in making their decisions on
    Federal employee salary levels.
        When taking into account factors such as differences in
    occupational mix, geographic distribution, and level of work, we
    believe reports finding that Federal workers are paid substantially
    more on average than similarly situated non-Federal workers are false
    comparisons.
        Question. In early 2009, you discussed sending a legislative
    proposal to reform Federal pay setting to Congress. What is the status
    of this proposal and what are likely to be the key components of any
    pay reform?
        Answer. We continue to believe that reform of Federal personnel
    systems is vital, but based on experience and research in this field,
    especially given the current fiscal situation, we feel it makes more
    sense to focus now on enhancing the quality of employee reviews and
    feedback so they are more helpful and fair.
        Question. The Department of Transportation had to furlough some
    employees recently because of an interruption in its appropriated funds
    during debate of a bill that would have extended funds for the National
    Highway Trust Fund on a short-term basis. What have other departments
    and agencies been reporting to OPM about the possibility of furlough
    actions this fiscal year?
        Answer. We do not have any information from agencies regarding
    possible furlough actions this year.
        Question. What specific guidance has OPM provided proactively to
    the departments and agencies both in general and specifically with
    regard to mechanisms that might provide alternatives to furloughs?
        Answer. OPM provides guidance to agencies for options on how to
    reduce budgetary outlays in order to avoid or minimize the likelihood
    of furloughs or other actions such as reduction in force.
        OPM's guidance notes that furlough is not a viable option if the
    agency is faced with a continuing, rather than temporary, lack of work
    and/or funds. For example, an agency may furlough an employee under the
    reduction-in-force regulations only when the agency plans to recall the
    employee to duty within 1 year in the position the employee held when
    furloughed.
        Also, the fiscal savings from a furlough are sharply reduced when a
    furloughed employee becomes eligible for unemployment compensation that
    must be paid by the agency. For example, an employee who is furloughed
    for 5 or more consecutive days is generally eligible for unemployment
    compensation.
        Finally, because furlough is a temporary situation, voluntary early
    retirement authority (VERA) and voluntary separation incentive payments
    (VSIP) are not an option to lessen the impact of furlough on the agency
    and its employees. VERA and VSIP are available only when an agency is
    undertaking long-term restructuring actions.
        Question. Which departments and agencies are in the forefront with
    effective workforce planning models and what specific features of such
    workforce planning could be applied across the Federal Government?
        Answer. Several agencies, including the Departments of State, the
    Department of Transportation, and the Nuclear Regulatory Commission,
    have consistently demonstrated effective workforce planning. These
    agencies have a defined governance structure for the workforce planning
    function, a systematic process that is used for workforce analyses, and
    they use automated tools for analyses and staffing projections. All of
    these agencies have a seamless integration of the strategic human
    capital planning and workforce planning activities.

                       OPM'S STRATEGIC PLAN FOR 2010-2015

        Question. As stated prominently on the OPM website, OPM's mission
    is Recruiting, Retaining and Honoring a World-Class Workforce to Serve
    the American People. What are the most pressing challenges for OPM in
    the next fiscal year?
        Answer. As the Director stated in his testimony and as are
    reflected in OPM's High Priority Performance Goals, the agency's fiscal
    year 2011 budget request reflects the strategic goals for the agency:
    Hire the Best, Respect the Workforce, Expect the Best, and Honor
    Service. These guiding principles also represent the most pressing
    challenges for OPM in achieving the vision of making the Federal
    government a model employer for the 21st century.
        The current Federal hiring process is cumbersome and slow,
    frustrating managers and discouraging many talented individuals,
    including veterans, from considering Federal jobs and opportunities.
    OPM is also challenged to promote greater diversity and inclusion in
    the Federal workforce. The development of Government-wide training,
    health and wellness policies and programs to provide employees with a
    meaningful balance of work and life is another challenge that must be
    faced to improve Federal government performance.
        The Federal Government's retirement systems face significant
    challenges and are at high risk of failure due to technology gaps.
    These challenges have been identified in numerous OPM and GAO reports
    and improvements are needed to ensure that employees' claims are
    settled timely and accurately.
        Question. What initiatives or improvements are needed to address
    these challenges? What are the costs of these initiatives?
        Answer. As stated in the Director's testimony, the Administration
    believes that reforming the Federal hiring process is an urgent
    priority to attract the best and brightest talent into the workforce.
    OPM's fiscal year 2011 budget requests $4,000,000 in order to promote
    innovative and coordinated approaches to help agencies streamline their
    end-to-end hiring process. OPM is also committed to increasing
    employment outreach to veterans. OPM has requested $2,400,000 in fiscal
    year 2011 to advance efforts to reduce barriers to entry for Veterans
    and transitioning service members pursuing careers in the Federal civil
    service.
        OPM has initiated the Retirement Systems Modernization (RSM)
    program to modernize and automate retirement processes to ensure
    Federal retirees and annuitants are paid accurately, timely, and
    receive high-quality customer service. OPM has requested $1,500,000 to
    stabilize the retirement systems in fiscal year 2011, with a focus on
    upgrading the retirement calculator, transitioning from a paper-based
    operation to an automated retirement process, and implementing an
    online retirement application tool. OPM has also requested an
    additional $2,800,000 to increase retirement claims processing staffing
    levels and assist in reducing the claims processing times.
        Question. Would you describe the key components of OPM's recently
    released, A New Day for Federal Service, Strategic Plan 2010-2015?
        Answer. The strategic plan positions the agency to make the Federal
    government America's model employer. The plan outlines four broad
    strategic goals that define OPM's direction for the next 6 years in
    order to achieve its mission to Recruit, Retain and Honor a World-Class
    Workforce to Serve the American People.
        The key components of the plan are the strategic goals that have
    been designed to assist agencies in enhancing the experience as
    individuals moves from applicant to Federal employee to retiree. The
    ``Hire the Best'' strategic goal concentrates on improving the Federal
    hiring process. The focus of the ``Respect the Workforce'' strategic
    goal is on employee retention through training and work-life
    initiatives. OPM's ``Expect the Best'' strategic goal strives to
    provide the tools and resources necessary for employees to perform at
    the highest levels while stressing accountability. Finally, the ``Honor
    Service'' strategic goal seeks to recognize the service of Federal
    employees through well-designed and well-administered compensation and
    retirement benefits programs.
        Question. How will the fiscal year 2011 budget request specifically
    address each of the strategic plan's goals?
        Answer. Each of the strategic goals is related to OPM's major
    performance improvement initiatives reflected as in the budget request:
      --Hire the Best.--Funding requested will be used to reform Federal
            government recruiting and hiring policies, programs and
            procedures. The initiative will better enable agencies to
            recruit and hire qualified students, mid-career professionals,
            and retirees. OPM will continue efforts to revamp the USAJOBS
            website, building on improvements that have already been made
            to make the site more user-friendly and aligned with the Hiring
            Reform initiative. The budget request supports ongoing
            Administration efforts to assist veterans to find opportunities
            in the Federal workplace, and to promote diversity in the
            Federal workforce. Finally, the request continues efforts to
            have the information they need to make timely decisions on the
            credibility and suitability of Federal employees, contractors,
            and military members.
      --Respect the Workforce.--The budget request calls for the Federal
            government to invest in its employees in order to improve the
            results of Federal programs and services. The development of
            Government-wide health and wellness policies and programs to
            provide employees with a meaningful balance of work and life
            will continue to be a top priority in fiscal year 2011 in order
            to help continue to attract the best and the brightest for
            Federal employment. Focus will continue on the importance of
            training throughout an employee's career, as well on programs
            and initiatives such as alternative work schedules, telework,
            and employee assistance programs that benefit current employees
            and help us continue to attract the best and brightest for
            Federal service. Resources will also help continue efforts to
            encourage labor-management collaboration in the furtherance of
            agencies' goals.
      --Expect the Best.--Funds requested in the fiscal year 2011 budget
            will support OPM's responsibilities to advise and assist
            agencies on strategic human resources management. This includes
            operational activities to monitor compliance with civil service
            laws and regulations, ensure appropriate use of flexibilities
            and authorities, and providing agencies with tools, resources,
            guidance, education, and evaluation to continuously improve
            their human resources operations.
      --Honor Service.--The budget request addresses the strategic goal to
            honor the service of Federal employees by ensuring timely and
            accurate delivery of OPM-administered retirement and insurance
            benefits for 2 million Federal retirees. Continued funding for
            the Retirement Systems Modernization (RSM) program will go
            toward priorities like upgrading the retirement calculator,
            automating the manual paper-based retirement system, and
            imaging incoming paper retirement records. The implementation
            of an online retirement application tool for gathering initial
            retirement information electronically from service centers will
            help improve the accuracy of retirement calculations.
            Altogether, these initiatives will help to ensure that OPM and
            agency benefits officers have access to information necessary
            to perform their duties of processing claims and providing
            customer service to employees and annuitants.
             national council on federal labor-management relations
        Question. In December 2009, President Obama issued an Executive
    Order (EO), Creating Labor-Management Forums to Improve Delivery of
    Government Services, which created the National Council on Federal
    Labor-Management Relations. The Council will support the creation of
    labor management forums across the Federal government to allow agency
    managers, employees, and union representatives to discuss agency
    operations in a non-adversarial setting. How will the Council ensure
    that the forums result in the implementation of productive ideas and
    innovation among Federal agencies?
        Answer. The Executive order required each agency to develop, and
    submit for certification, a written implementation plan which
    addressed, among other things (1) how the agency would conduct a
    baseline assessment of the current state of labor relations and (2) how
    the agency will develop metrics to monitor improvements in such areas
    as productivity gains and cost savings resulting from establishment of
    labor-management forums. The achievement of productivity gains and cost
    savings is clearly dependent on the adoption of productive ideas and
    innovation by agencies. The operation and effectiveness of these forums
    will be monitored both internally by agencies and externally by the
    Council. As discussed below, the Council has adopted general
    recommended metrics and has established a work group on metrics, which
    is developing more detailed and focused metrics for agencies to use.
        Question. Did all Federal agencies meet the March 9 deadline to
    submit plans to create labor-management forums?
        Answer. While not all Federal agencies met the March 9 deadline to
    submit plans, all but a handful of agencies did submit plans by early
    April, and plans were received from all agencies by early May.
        Question. How many of the plans have been certified? What are the
    issues in certifying the plans?
        Answer. Fifty of the 51 agency plans have been certified by the
    Council. At the request of the National Council, SSA submitted a
    revised implementation plan on July 23, 2010. The National Council is
    currently evaluating that plan, and working with the agency on
    certification.
        Question. At this point, what measures has the Council developed to
    ensure that these labor-management forums will improve efficiency in
    government operations and improve services to clients?
        Answer. At its initial meeting in February, the Council adopted
    recommended categories of metrics for agency use in establishing and
    implementing forums. Those metrics were organized under three broad
    goals, the first and most important one being improvement in the
    agency's ability to accomplish its mission and deliver high-quality
    products and services to the public. At its May meeting, the Council
    established a work group to develop more detailed metrics. That work
    group has held a number of meetings, will be collecting information
    from and drafting guidance for the forums, and expects to make
    recommendations for the full Council to adopt this fall.
        Question. How can you ensure that these councils will improve
    government operations and services to clients?
        Answer. The LMF metrics working group is currently exploring
    practical answers to this question--to figure out what and how to track
    and measure to learn from each LMF experience and apply those lessons
    to improving government operations and services. We recognize that the
    overriding reason for creating labor-management forums is ``to improve
    the productivity and effectiveness of the Federal Government,'' and we
    are confident this goal will be achieved.

                    FEDERAL LONG-TERM CARE INSURANCE PROGRAM

        Question. The Federal Long-Term Care Insurance Program (LTC)
    insurance program has entered a new contract cycle and OPM has notified
    Federal workers enrolled in the Automatic Compound Inflation Option
    (ACIO) (about 60 percent of enrollees) that their premiums will
    increase 25 percent from current rates. At congressional hearings last
    fall, OPM acknowledged that the marketing materials used during the
    first contract cycle could have misled enrollees in assuming that
    premiums would not increase in the future if that option was chosen.
    What processes and procedures does OPM have in place to ensure that
    this does not happen again?
        Answer. New educational and marketing materials, along with new
    applications, were introduced in October 2009. These materials more
    prominently and frequently describe the conditions under which premiums
    may increase and that premiums are not guaranteed, including in the
    sections that describe the different types of inflation protection. We
    are also planning new marketing materials and application forms for an
    open season which we expect to hold in the spring of 2011. We are
    committed to making any other changes needed to make the rate
    information clear to current and prospective enrollees.
        As an example of what we have done, every enrollee not eligible for
    or receiving benefits (e.g., not in a nursing home) received a decision
    package in late 2009 outlining options for moving to the new plan
    design or avoiding the premium increase (for those facing an increase).
    The decision package included background material illustrating the
    difference over time between a 4 percent and a 5 percent compound
    benefit increase. Historical inflation increase data were also
    provided. Modeling tools were available online to allow enrollees to
    project the growth of their current daily benefit under each inflation
    rate. The decision packages also contained detailed comparisons of
    specific benefits and the differences between the original plan, FLTCIP
    1.0, and the new plan, FLTCIP 2.0.
        In addition, the materials for the new FLTCIP 2.0 benefits are
    currently online at www.ltcfeds.com and available by request from LTC
    Partners. The new materials, both in hard copy and online, provide
    detailed information and graphs that illustrate the difference over
    time between 4 percent and 5 percent compounded benefits, as well as
    detailed information about other benefit decisions.
        The new educational materials state prominently and frequently that
    premiums are not guaranteed, and they explain the conditions under
    which premiums may increase. In addition, the Agreement and
    Acknowledgement section of the application, which requires the
    applicant's signature, discloses that premiums are not guaranteed. The
    new Benefit Booklet (the contractual statement of benefits) contains on
    the second page a section titled, ``When We May Increase Your Premium''
    and discloses in several other places that premiums are not guaranteed.
    All current and future enrollees will receive a copy of this new
    Benefit Booklet.
        Finally, Long Term Care Partners conducts hundreds of educational
    seminars each year at Federal agencies and meetings of Federal employee
    groups like the National Active and Retired Federal Employees
    Association (NARFE). They keep in frequent contact with Agency Benefit
    Officers to make sure information about the FLTCIP is widely available.
    Enrollees and prospective applicants can call Long Term Care Partners
    toll-free to speak with a Certified Long Term Care Consultant for
    expert assistance in learning about the Program.
        Question. Since the stated purpose of the Federal LTC Insurance
    program was to encourage people to purchase long-term care insurance
    and serve as a model for other employer-sponsored programs across the
    Nation, how does OPM intend to restore confidence in the program among
    Federal workers and to promote future participation given this issue?
        Answer. OPM conducts close contractual oversight of the carrier,
    which means we can shape the LTC policies and products. OPM includes
    the NAIC Shoppers Guide to Long Term Care Insurance in the Information
    Kit provided to all applicants who request a hard copy application.
    This Guide is also available online as part of the online application
    process. OPM also requires its insurer to price its premiums according
    to NAIC rate stability guidelines. It is important that standard rate
    stability guidelines be applied universally across the long term care
    industry. While we understand there have been concerns about the
    program, we take our responsibility very seriously to serve the
    interests of enrollees by doing all we can to improve and to promote
    the continued success of the Program.

                                OPEN GOVERNMENT

        Question. In December 2009, the President issued an Open Government
    Directive to Federal agencies instructing them to launch open
    government web sites within 60 days, draft open government plans with
    long- term steps to improve transparency, and solicit public feedback
    on agencies' core mission activities. Please describe OPM's actions to
    fulfill the President's open government and transparency initiative.
        Answer. In response to the President's Open Government Directive,
    OPM has established an Open OPM governance structure that comprises the
    Executive Board, their respective representatives on the Core Team and
    Component Teams. The Teams will develop and implement actions to ensure
    accountability and the sustainability of transparency, participation,
    and collaboration at OPM. All Component Teams include OPM employees as
    well as members from public/nonprofit groups, other agencies, academia
    and unions. The Component Teams will gather information from the
    individual team members, exchange ideas and generate innovative options
    for solving problems. Those ideas and options will be forwarded to the
    Core Team (OPM employees) for analysis and to make recommendations to
    OPM leadership on the Executive Board.
        It is our policy to integrate Open Government into OPM's ongoing
    mission activities, including, but not limited to, partnering with
    stakeholders, advising and assisting agencies, working with Congress
    and other stakeholders on developing policies, promoting effective and
    efficient human resources policies and practices across government
    while leading by example. The Open Government ethos will be integrated
    into our programs and sustained throughout each of the aforementioned
    methods for improving Federal customer service life cycle, from hiring,
    employment, retirement to annuitant.
        The agency has created an Open OPM web site at http://www.opm.gov/
    open/ for providing information on OPM's Open Government activities,
    including high-value data sets, the agency's Open Government Plan, and
    an Open OPM blog to provide updates and receive feedback from the
    public.
        Question. Have you received feedback from citizens? If so, can you
    summarize some of the responses OPM has received?
        Answer. We used the Open OPM Web site to solicit and receive public
    suggestions for our Open Government Plan. We have received and
    processed more than 1,000 e-mails from the public via our Open
    Government e-mail address and have received 58 unique ideas to improve
    Open Government through an IdeaScale Web tool. Feedback from the public
    focused primarily on the Agency's operations in recruitment, staffing,
    retirement, and benefits. The Director's goal ``Expect the Best'' was
    echoed in these comments, as was the Vision that ``The Federal
    Government will Become America's Model Employer for the 21st Century.''
    The Open OPM team continues to receive and respond to feedback from
    citizens through the use of a new Searchable FAQs tool on OPM's
    website, the Open OPM email address, and the Open OPM Blog.

                              SUBCOMMITTEE RECESS

        Senator Durbin. The session stands recessed.
        [Whereupon, at 3:33 p.m., Wednesday, March 24, the
    subcommittee was recessed, to reconvene subject to the call of
    the Chair.]

      FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR FISCAL
                                   YEAR 2011

                                  ----------

                           WEDNESDAY, APRIL 14, 2010

                                           U.S. Senate,
               Subcommittee of the Committee on Appropriations,
                                                        Washington, DC.
        The subcommittee met at 2:30 p.m., in room SD-138, Dirksen
    Senate Office Building, Hon. Richard J. Durbin (chairman)
    presiding.
        Present: Senators Durbin and Collins.

                       CONSUMER PRODUCT SAFETY COMMISSION

    STATEMENT OF HON. INEZ TENENBAUM, CHAIRMAN

                 OPENING STATEMENT OF SENATOR RICHARD J. DURBIN

        Senator Durbin. Good afternoon. This hearing of the
    Financial Services and General Government Appropriations
    Subcommittee will come to order.
        And I've got to report that Senator Collins will arrive
    momentarily. She'll miss my opening remarks. It will be
    devastating, but she'll recover.
        Today's hearing is on the President's fiscal year 2011
    budget request for the Consumer Product Safety Commission
    (CPSC). And testifying is Chairman Inez Tenenbaum.
        Thank you for being here.
        The Consumer Product Safety Commission is the Federal
    regulatory body tasked to protect children and families from
    unsafe consumer products. Every day, infants sleep in cribs,
    children don bike helmets and ride bicycles, and adults
    purchase medicines. We rely on the Consumer Product Safety
    Commission to make sure that infants aren't strangled by the
    slats or sides of the cribs, that children don't sustain head
    injuries while biking, and that parents don't worry that their
    children will open the child-resistant packaging.
        Two years ago, the Consumer Product Safety Improvement Act
    (CPSIA) was enacted, giving the CPSC new authorities and
    resources, and significantly strengthening its ability to
    protect Americans from defective and unsafe products. Many
    people deserve credit for that, and I want to single out
    Senator Mark Pryor of Arkansas. What a great job he did
    bringing us all together for a bipartisan bill to authorize and
    empower your Commission.
        For example, lead content levels for cribs, bunk beds,
    infant rattles, and children's jewelry have been reduced.
    Levels must be certified, based on independent third-party
    testing by a CPSC-recognized laboratory. Tracking labels will
    soon be on children's products, accompanied by product
    registration cards. And a publicly available, searchable
    database with safety information on consumer products is being
    established and will be operational early next year, we hope.
        While the new lead limits are among the most stringent in
    the world for some children's products, the Commission voted to
    defer enforcement of testing and third-party certification
    requirements until February 10, 2011, in order to increase the
    number of available testing and certification facilities.
        What a difference a few years can make. The Consumer
    Product Safety Commission has been transformed from a quiet,
    modest little agency with mostly voluntary enforcement powers
    to a more robust and proactive agency with enhanced enforcement
    authority.
        Staffing, at a low of 385 in January 2008, is now at 502
    and will grow to more than 530 by the end of this year. The
    budget this year, 2010, is double what it was 6 years ago. The
    first foreign office in Beijing has been opened, after all of
    the publicity that came out about products that were being
    exported from China into the United States. The need--now, this
    is a significant--of all the statistics--the need for toy
    recalls has declined 75 percent from 2008 to 2009, including an
    80-percent decline in toy recalls due to lead-content
    violations.
        For fiscal year 2011, CPSC is requesting $118.6 million--
    $400,000 more than the fiscal year 2010 enacted amount of
    $118.2 million, and a staffing level of 576, which is an
    increase of 46 FTEs.
        I'm not going to go through all the details of the budget
    request. They're going to come up during the course of our
    questioning here.
        I'm looking forward to the testimony of Chairman Tenenbaum,
    and I am going to introduce her after I defer to my colleague
    here, Senator Collins.

                       STATEMENT OF SENATOR SUSAN COLLINS

        Senator Collins. Thank you, Mr. Chairman.
        And thank you for calling this hearing.
        While the Consumer Product Safety Commission is a
    relatively small agency, as your statements pointed out, it has
    a critical mission of keeping the public safe from dangerous
    products. We all remember the alarming and too frequent tragic
    stories of hazardous toys that demonstrate the need to
    strengthen protections for consumers, particularly for
    children, as the chairman has pointed out.
        In 2008, we acted to strengthen the laws governing the
    safety of goods entering this country and to provide much-
    needed additional resources to intercept unsafe products by
    passing the Consumer Product Safety Improvement Act. This new
    law included provisions resulting from a 2007 product safety
    investigation that I conducted in my role as the ranking member
    of the Homeland Security and Governmental Affairs Committee.
    That investigation produced provisions that included better
    coordination and information sharing between the Commission and
    Customs and Border Protection (CBP) so that inspectors at our
    Nation's ports can focus their resources on the most risky
    shipments, targeting products, manufacturers, and importers
    with poor consumer safety records. And I'll be interested today
    to hear more about this improved import surveillance plan and
    the efforts to improve coordination with CBP.
        While it is crucial for the Consumer Product Safety
    Commission to implement regulations to protect children from
    lead and other hazardous materials, we do want to ensure that
    the regulations do not prove overly burdensome or costly to
    small businesses, such as thrift shops and those who produce
    handmade crafts, clothing, and toys. The Commission needs to
    consider these small, often home-based businesses when issuing
    its rules and guidance, particularly for third-party testing.
        Again, I very much look forward to hearing from the
    Chairman today, and appreciate our chairman, as we consider the
    budget request for the Commission.
        Senator Durbin. Thanks, Senator Collins.
        I'm pleased to welcome Chairman Inez Tenenbaum, the ninth
    Chairman of the Consumer Products Safety Commission, sworn into
    office on June 23, 2009. Previously, Ms. Tenenbaum was elected
    as South Carolina's State superintendent of education, where
    she served two terms. She has extensive experience in legal,
    legislative, administrative, and regulatory matters and served
    on numerous task forces that provide oversight on children and
    family services.
        Thanks for being here. I look forward to your testimony.
        Ms. Tenenbaum. Good afternoon, thank you--thank you. I'll
    start all over again.
        Good afternoon, Chairman Durbin and Ranking Member Collins.
    Thank you so much for this opportunity to appear in front of
    you.
        I am pleased to be here today to discuss the U.S. Consumer
    Product Safety Commission's fiscal year 2011 budget. During the
    past 9 months as Chairman of the CPSC, I have had the
    opportunity to see firsthand the great work that the Commission
    undertakes every day. From new regulations to ensure the safety
    of cribs, to enforcement action against children's jewelry with
    harmful levels of lead, cadmium, and other toxic metals, the
    CPSC is once again an agency that means business when it comes
    to protecting the safety of the American consumer.
        Much of this progress would not have been possible without
    the reauthorization of the Commission through the Consumer
    Product Safety Improvement Act of 2008 and the additional
    funding received by the agency in fiscal years 2009 and 2010. I
    greatly appreciate the increased resources that members of this
    subcommittee have supported over the past 2 years, and can
    assure you that these resources have been put to good use
    through increased staffing and improved import surveillance and
    enforcement efforts. It has also provided the resources
    necessary for the Commission to develop robust responses to new
    and emerging hazards, such as contaminated drywall, that has
    caused serious problems for thousands of homeowners. The
    results of this new commitment to the CPSC are already very
    encouraging.
        One concrete example of this increased staffing and
    resources at the agency: During 2008, the number of CPSC full-
    time employees, FTEs, had dropped to only 385. This was the
    lowest level in the agency's history and down from a high of
    978 in 1980. Section 202 of the CPSIA required the agency to
    increase the number of FTEs to at least 500 by the end of
    fiscal year 2013. And I'm very pleased to report that we've
    already reached that milestone and currently have 505, as of
    April 9, dedicated FTEs at the CPSC.
        But, employee numbers are only one indicator of change.
    Another key metric is results. One concrete example of that is
    our ability to stop dangerous products before they enter the
    stream of commerce. In fiscal year 2007, the CPSC collected
    approximately 750 samples of suspect products entering our
    country. In 2009, that number rose to almost 1,600. At the same
    time, we started to see a commensurate decrease in the number
    of voluntary recalls, from 563 in fiscal year 2008 to 466 in
    fiscal year 2009. The Commission's proposed 2011 budget
    requests $118.6 million--and it's designed to accelerate this
    forward momentum by continuing internal modernization and
    rebuilding efforts.
        As noted in my written statement, the proposed 2011 budget
    is only $400,000 over our current 2010 level, but it will allow
    the Commission to support the key areas of emphasis by
    reallocating $13.9 million in funds used in 2010 nonrecurring
    activities. Specifically, the proposed budget will allow the
    Commission to pursue new and enhanced initiatives in four key
    areas:
        The first is the Commission's compliance initiative. Since
    the passage of the CPSIA, the Commission's staff has worked
    diligently to promulgate and implement the numerous rules
    required by that law. In 2011, the CPSC's work will shift from
    developing rules mandated by the CPSIA to enforcing those
    rules, both within our borders and at ports of entry. To
    further facilitate those efforts, the CPSC's 2011 budget
    requests approximately $4.6 million and an addition of 41 full-
    time employees to support additional responsibilities
    associated with three key elements of the compliance program:
    regulatory enforcement, import surveillance, and defect
    investigations.
        The second area is information technology modernization and
    Commission implementation of a searchable public database of
    consumer product safety information. Section 212(b) of the
    CPSIA requires the Commission to upgrade its information
    technology systems and to develop a database that allows
    consumers to submit incident reports that can subsequently be
    reviewed by all members of the general public.
        In response to this mandate, CPSC is developing a single,
    integrated, Web-based environment. The Consumer Product Safety
    Risk Management System, or RMS, will change the way the
    Commission receives and analyzes data. With the new RMS, the
    CPSC will be transformed. The Commission will have one powerful
    database for the input and analysis of multiple sources of
    data. Overall, this new capability has the potential to uncover
    more defect patterns for staff to examine and to triage. This,
    in turn, could lead to an increase in recalls of defective
    products and the prevention of injuries and deaths. The
    Commission has already allocated approximately $20 million to
    fund many of the initial planning and design costs of the RMS
    and deeply appreciates this subcommittee's past support of the
    program.
        In 2011, funding resources--requirements will largely shift
    from design-and-build costs to maintenance items. Therefore,
    the 2011 budget requests $1.8 million for a staffing
    combination of eight FTEs and contract positions to maintain
    the system and comply with OMB's requirements for information
    technology governance, cybersecurity, and privacy.
        The third area is consumer outreach and education.
    Providing consumers with recall and product hazard information
    that helps make families and communities safer is one of my top
    priorities. Over the past year, the Commission has made great
    strides in consumer outreach by reestablishing our presence on
    network television, in the national newspapers, and on the
    radio. The agency also launched CPSC 2.0, a social media
    initiative that is reaching out to tens of thousands of
    consumers via YouTube, Twitter, Flickr, the OnSafety blog, and
    our own recall widget. This year and in fiscal year 2011, the
    Commission plans to accelerate efforts to conduct grassroots
    education and advocacy in hard-to-reach and vulnerable
    populations. We will also continue to focus on public education
    and outreach efforts to prevent drownings and entrapment
    involving children in residential and public pools.
        Fourth, the 2011 budget proposes an additional $2 million
    for the CPSC to support the National Nanotechnology Initiative.
    In the last few years, there have been increasing public
    concerns over potential health impacts associated with this
    technology. Although nanomaterials may have the same chemical
    composition as non-nanomaterials, at the nano scales, they may
    demonstrate different physical and chemical properties and
    behave differently in the environment and the human body. The
    $2 million proposal will allow the Commission to conduct
    exposure and risk assessments of nanotechnology materials,
    allow for database updates to properly flag reports of
    nanotechnology incident with consumer products, and conduct
    consumer outreach efforts, such as public meetings.

                               PREPARED STATEMENT

        Mr. Chairman, thank you again for the opportunity to
    testify on the proposed 2011 budget for the U.S. Consumer
    Product Safety Commission, and I look forward to working with
    you and other members and Ranking Member Collins on this
    subcommittee, and will be happy to answer any of your
    questions.
        [The statement follows:]

                      Prepared Statement of Inez Tenenbaum

        Good afternoon, Chairman Durbin, Ranking Member Collins, and
    Members of the Subcommittee on Financial Services and General
    Government. I am pleased to be here today to discuss the U.S. Consumer
    Product Safety Commission's (CPSC) fiscal year 2011 budget request.
        During the past 9 months as Chairman of the CPSC, I have had the
    opportunity to see first-hand the great work that the Commission
    undertakes every day. From new regulations to ensure the safety of
    cribs to enforcement action against children's jewelry with harmful
    levels of lead, cadmium and other toxic metals, the CPSC is once again
    an agency that means business when it comes to protecting the safety of
    American consumers.
        Much of this progress would not have been possible without the
    reauthorization of the Commission through the Consumer Product Safety
    Improvement Act of 2008 (CPSIA), and the additional funding received by
    the agency in fiscal year 2009 and fiscal year 2010. I greatly
    appreciate the increased resources Members of this Subcommittee have
    supported over the past 2 years, and can assure all of you that those
    resources have been put to good use through increased staffing,
    improved import surveillance, and increased compliance activities. It
    has also provided the resources necessary for the Commission to develop
    robust responses to new and emerging hazards such as contaminated
    drywall that has caused serious problems for thousands of homeowners.
        The results of this new commitment to the CPSC are already very
    encouraging. One concrete example of this is increased staffing and
    resources at the agency. During fiscal year 2008, the number of CPSC
    full-time employees (FTEs) had dropped to only 385--the lowest in the
    agency's history. Section 202 of the CPSIA required the agency to
    increase the number of FTEs to at least 500 by the end of fiscal year
    2013. I am very pleased to report that we have already reached that
    milestone, and have 502 FTE positions filled at the CPSC as of April 1,
    2010.
        But employee numbers are only one indicator of change. Another key
    metric is results. One concrete example of that is our ability to stop
    dangerous products before they enter the stream of commerce. In fiscal
    year 2007, the CPSC collected approximately 750 samples of suspect
    products entering our country. In fiscal year 2009, that number more
    than doubled to almost 1,600. At the same time, we started to see a
    commensurate decrease in the number of voluntary recalls from 563 in
    fiscal year 2008 to 466 in fiscal year 2009.
        The Commission's proposed fiscal year 2011 budget request of $118.6
    million is designed to accelerate this forward momentum by focusing on
    modernization efforts that will flag emerging hazards and help us keep
    those products out of our country and the hands of children.
        While this request is only $400,000 over the fiscal year 2010
    level, it will allow the Commission to increase the FTE level by 46 in
    fiscal year 2011 (for a total of 576 FTEs), fund a broad new compliance
    initiative, implement the second phase of the Commission's continued
    Information Technology (IT) modernization, continue to improve consumer
    outreach, and direct $2 million in support of the Federal National
    Nanotechnology Initiative by reallocating $13.9 million in funds used
    for fiscal year 2010 nonrecurring activities.

                     THE COMMISSION'S COMPLIANCE INITIATIVE

        Since passage of the CPSIA, Commission staff has worked diligently
    to promulgate and implement the numerous rules required by that law. In
    2011, the CPSC's work will shift from developing rules mandated by the
    CPSIA to enforcing those rules--both within our borders and at ports of
    entry.
        To further facilitate those efforts, the CPSC's fiscal year 2011
    budget requests $4,647,000 and the addition of 41 full-time employees
    (FTEs) to support additional responsibilities associated with three key
    elements of the compliance program: regulatory enforcement, import
    surveillance, and defect investigations.
    Regulatory Enforcement
        Experience shows that enforcing new rules takes considerably more
    resources than enforcing an existing rule that has been in place for a
    number of years. The number of new rules mandated by the CPSIA during
    fiscal year 2009 and fiscal year 2010 are more than double the number
    of rules promulgated by the Commission since 1990--and will result in a
    dramatic increase in enforcement responsibility.
        The fiscal year 2011 budget, therefore, requests $1,647,000 and 15
    FTEs to enforce the new rules. This includes four new compliance
    officers, five field investigators, three lab testing and other
    technical specialists, two attorneys, and one FTE to coordinate with
    state and local authorities.
    Import Surveillance
        The Commission's import enforcement workload will also increase as
    investigators ramp up efforts to verify testing certifications and
    collect increasing numbers of suspect product samples at our Nation's
    ports. The need for more staff and better coordination with U.S.
    Customs and Border Protection (CBP) was specifically highlighted in an
    August 2009 Government Accountability Office (GAO) report. Mr.
    Chairman, I know this is an area of critical interest for both you and
    Ranking Member Collins, and the Commission is eager to fully address
    this issue.
        Accordingly, the fiscal year 2011 budget requests $1,965,000 to
    expand coverage at the ports, verify third-party testing
    certifications, collect samples of suspect products, and--most
    importantly--stop unsafe products from entering the country. This
    request will support an additional sixteen FTEs dedicated to import
    surveillance (five investigators and analysts that will be stationed at
    ports, two compliance officers to process additional import samples,
    and nine FTEs for lab testing and other specialties), as well as
    $100,000 for the destruction of goods refused at the ports by CPSC.
    Defect Investigations
        The number of product incident reports the Commission receives
    almost doubled between fiscal year 2003 and now. With the rollout of
    the searchable public database by March 11, 2011, we expect that the
    number of incident reports will grow exponentially. These reports often
    provide critical information and data to the CPSC. However, with
    current resources, CPSC staff is only able to thoroughly investigate a
    very small number (approximately 10 percent) of the total reports
    received.
        Increased resources are needed to enhance our defect investigation
    capability, and ensure that the Commission can adequately review and
    process the rapidly increasing number of product incident reports.
    Therefore, the fiscal year 2011 budget requests $1,035,000 and ten
    additional FTEs (three compliance officers, five field investigators,
    one technical specialist, and one attorney) to support this critical
    effort.

                      INFORMATION TECHNOLOGY MODERNIZATION

        Section 212(b) of the CPSIA requires the Commission to develop a
    database that allows consumers to submit incident reports that can
    subsequently be reviewed by all members of the general public and
    upgrade its information technology systems.
        As noted above, the searchable public database will be launched in
    less than 1 year, and I look forward to working with Members of this
    Subcommittee to ensure that your constituents know how to access and
    use it. In the course of completing the database, we are also working
    to solicit extensive public input and establish clear rules for how the
    database will operate and how CPSC will interact with consumers and
    manufacturers.
        In order to support the data that will be generated by the database
    and meet the information technology modernization mandate, CPSC is
    developing a single, integrated, web-based environment, the Consumer
    Product Safety Risk Management System (RMS), that will change the way
    the Commission receives and analyzes data. Current systems at the
    Commission are fragmented, and information flows often have to be
    manually sorted by staff to identify new and emerging hazard patterns.
        CPSC will be transformed with the new RMS. The Commission will have
    one powerful database for the input and analysis of multiple sources of
    data. This capability will be absolutely critical as data streams from
    the new public database start flowing into the Commission. In addition,
    the system will have new predictive ``data mining'' tools that will
    allow the CPSC to compare new incidents electronically with all prior
    incidents. Overall, this new capability has the potential to uncover
    more defect patterns for staff to examine. This, in turn, could lead to
    an increase in recalls of defective products and the prevention of
    injuries and deaths.
        The Commission has already allocated approximately $20 million to
    fund many of the initial planning and design costs for the RMS, and
    deeply appreciates this Subcommittee's past support of this program. In
    fiscal year 2011, funding requirements will largely shift from design
    and build costs to maintenance items. Therefore, the fiscal year 2011
    budget requests $1.880 million for a staffing combination of eight FTE
    and contract positions to maintain the system and comply with
    Congressional and Office of Management and Budget (OMB) requirements
    for information technology governance, cybersecurity and privacy.

                        CONSUMER EDUCATION AND OUTREACH

        Providing consumers with recall and product hazard information that
    helps make families and communities safer is one of my top priorities.
    Over the past year, the Commission has made great strides in consumer
    outreach by re-establishing our presence on network television, in
    national newspapers, and on the radio. We have also re-established the
    trust of consumers that CPSC is putting their interests first.
        The agency also launched ``CPSC 2.0,'' a social media initiative
    that is reaching tens of thousands of consumers via YouTube, Twitter,
    FlickR, the OnSafety blog, and our Recall Widget. This year the
    Commission plans to further accelerate this initiative by expanding the
    platforms we use to include cell phone text messages.
        The Commission also plans to accelerate efforts to conduct
    grassroots education and advocacy in hard-to-reach and vulnerable
    populations. In August 2009, the GAO released a report recommending
    that the CPSC increase its focus on reaching minority populations.
    Since becoming Chairman of the CPSC, I have directed Commission staff
    to explore additional outreach efforts to underserved populations. In
    carrying out a special Minority Outreach initiative, we will increase
    our use of existing tools, such as the Neighborhood Safety Network
    (NSN) program--that provides vital information to more than 5,600
    community organizations and leaders--as well as use new tools, such as
    targeted, grassroots programs for Hispanics, African-Americans,
    American Indians, and other minority groups. This will also remain a
    key priority of the Commission in fiscal year 2011.
        One of the most tragic subjects the Commission deals with are
    drownings and entrapments involving children in residential and public
    pools. I am pleased to note that the fiscal year 2011 budget contains
    $1,000,000 specifically for continuing pool and spa safety education.
    This funding will build on the previous funding of $8.1 million in
    fiscal year 2009 and fiscal year 2010, and continue to help the agency
    drive down the 300 child drownings each year and increase compliance
    with the Virginia Graeme Baker Pool and Spa Safety Act.

                                 NANOTECHNOLOGY

        The CPSC's fiscal year 2011 budget also proposes $2 million to
    support the Federal National Nanotechnology Initiative, and seeks to
    collect additional data and explore environmental, health, and safety
    issues related to the increasing use of nanotechnology in consumer
    products.
        In the last few years, there has been increasing public concern
    over potential health impacts associated with this technology. Although
    nanomaterials may have the same chemical composition as non-
    nanomaterials, at the nanoscale they may demonstrate different physical
    and chemical properties and behave differently in the environment and
    in the human body.
        The $2 million proposed will allow the Commission to conduct
    exposure and risk assessments of nanomaterials, allow for database
    updates to properly flag reports of nanotechnology incidents with
    consumer products, and conduct consumer outreach efforts such as public
    meetings. Perhaps even more importantly, it will also allow the
    Commission to take a very proactive approach to this emerging issue,
    rather than merely reacting to incident reports after they are
    received.
        Mr. Chairman, thank you again for the opportunity to testify on the
    proposed fiscal year 2011 budget for the U.S. Consumer Product Safety
    Commission. It provides the funding necessary to continue the
    transformation of this agency from what some have described as a
    ``teething tiger'' into the world's leading lion of consumer
    protection.
        I look forward to working with you and other members of the
    Subcommittee on the Budget Request, and would be happy to now answer
    any questions you may have.

                               STAFFING INCREASES

        Senator Durbin. Thanks, Chairman Tenenbaum.
        And I might note that the increase--or, should I say--the
    restoration of employees at the Consumer Products Safety
    Commission, we thought, was warranted, because of the massive
    numbers of products that come your way, and particularly the
    increase in imports into the United States, which created a
    brand new challenge for us. And so, just for the record, that
    was our thinking behind the increase in full-time equivalent
    employees.
        I want to discuss about five issues, and I'm sure I won't
    get into all of them.

                                 LEAD STANDARDS

        So, let me ask about lead, because we were concerned, when
    we wrote the bill, as to whether or not we came up with a
    reasonable standard for lead in toys. And before the bill was
    written, there was no lead limit at all for children's
    products. In February 2009, permissible lead levels in
    children's products were reduced to 600 parts per million. By
    August, the lead limit in children's products were to come down
    to 300 parts per million. In those coated with paint, the limit
    dropped to 90 parts per million.
        A stay of enforcement on third-party testing requirements
    was granted by the Consumer Products Safety Commission in
    February 2009 for 1 year because there was ``substantial
    confusion,'' in the industry, regarding specific requirements
    related to the applicability, as well as testing and
    certification. An extension of that stay of enforcement was
    granted in December of last year on testing and certification
    for many children's products for 1 year, until February 2011,
    while the CPSC continues to accredit third-party-testing labs.
        Now, I want to make sure I understand. If we have written
    this law in a fashion that makes it difficult for you to either
    understand or enforce--when I read the word ``confusion,'' I
    want to make sure I understand what's behind that--then it's
    our responsibility to step forward and correct any errors that
    we've made there. If, however, this is a question of just
    setting up the mechanism for enforcement, that, to me, is a
    different question, and I can understand it takes more time.
    So, could you address the lead issue in toys and children's
    products first?
        Ms. Tenenbaum. Thank you, Mr. Chairman.
        Yes, we did stay the enforcement on certain products while
    we put in place the specific testing requirements for those
    products, so that we could have laboratories who knew how to go
    about testing those products. But, third-party testing and
    certification was never stayed on lead in paint, which now is
    at 90 parts per million. We are also enforcing full- and
    nonfull-sized cribs; pacifiers; small parts; and lead content
    on metal children's jewelry. What we stayed was lead content in
    nonmetal, not in children's jewelry or in paint. So, it could
    be lead content in brass or something else, but not children's
    jewelry.
        But, we've also realized that the strict levels under 101,
    which says that you can exempt articles where the lead is
    inaccessible to the child or if you can show that, through
    normal and foreseeable use and abuse, any lead is not absorbed
    into the body. So, it's that ``any lead,'' where you might have
    very small levels and contact with the children's product is
    very infrequent. For example, bicycles and all-terrain vehicles
    (ATVs).
        Senator Durbin. We heard about that.
        Ms. Tenenbaum. So, we stayed the bicycles and the ATVs, in
    terms of testing, until we could work this out, and also
    certain books. The newly printed ordinary children's books do
    not contain lead, but, the children's books printed before 1985
    do. We had a problem with exempting those. So, if we had more
    flexibility around section 101 for any lead, then we would be
    able to work with the products as they came up for our
    consideration.
        We have proffered a discussion around functional purpose.
    It would require industry to come to us and say, ``We need this
    lead in our product for the functional purpose. If it's an ATV,
    we need it to make the ATV stronger. The contact with lead
    components on the ATV will be infrequent. It will have no
    adverse health effect on the user.'' And so, then, we could
    give the ATV or the bicycles an exemption.
        So, it's a narrow class of products that, if we had a
    functional purpose amendment to the CPSIA, then we would be
    able to exempt those products, like ordinary children's books.
        Senator Durbin. But, do you think that's going to require
    an amendment to the law?
        Ms. Tenenbaum. We do.
        Senator Durbin. Okay. So, we ought to look at that.
        Now, let--and to make it clear, the stay does not apply to
    lead paints, small parts, or children's jewelry. We are talking
    about functional products and ATVs and the like. If----
        Ms. Tenenbaum. And we stayed enforcement of the lead in
    ATVs last year.
        Senator Durbin. Okay.

                             OTHER TOXIC SUBSTANCES

        Now, I'm going to go 2 extra minutes and give Senator
    Collins the same time, because I wanted to ask, as a followup--
    and we're finding that there were replacements by some who are
    sending products into the United States--replacing lead with
    cadmium and antimony. And are you regulating those, as well?
        Ms. Tenenbaum. Well, I issued a stern warning to Chinese
    manufacturers, in a speech to the Chinese, back at the
    beginning of this year. I was unable to attend the conference
    in China, because I had a hearing in Congress. But, we gave a
    stern warning. And our counterpart in China, the AQSIQ, issued
    the same stern warning to manufacturers and said, ``Do not
    substitute any of these metals for lead.'' Now, we really don't
    think that that is occurring, that they're intentionally
    substituting. But, we think they're being careless in not
    realizing that you cannot use these metals in children's
    products.
        Under the ASTM F963 standard, which is the toy standard,
    the surface coating on toys is regulated.
        Senator Durbin. But, I understood----
        Ms. Tenenbaum. Also, children's jewelry is regulated under
    the Federal Hazardous Substance Act. We could call a toxic
    metal a banned hazardous substance. And right now, we are doing
    our research to establish the level of what we will allow for
    cadmium and other metals in children's jewelry.
        Senator Durbin. So, I understood that the children's pets--
    Zhu Zhu pets out of China, there was--they found some evidence
    of antimony in those. Are you saying that----
        Ms. Tenenbaum. Well, the company----
        Senator Durbin [continuing]. They did or didn't?
        Ms. Tenenbaum. The company who manufactures the Zhu Zhu
    pets came to the CPSC, just days after one nonprofit
    organization announced they had found the antimony, and showed
    us all of their laboratory tests. We did our own testing, and
    then we established that the antimony was not at harmful levels
    to children. And we put that press release out that there were
    no harmful levels of antimony in Zhu Zhu pets.
        Senator Durbin. Okay.
        Senator Collins.
        Senator Collins. Thank you, Mr. Chairman.
        Obviously, our first priority is to make sure that all
    products, including toys for children, are safe. There has been
    an issue with small home-based businesses finding it very
    expensive to comply with the standards in the new law. They
    obviously do not want to be selling products that aren't safe,
    that are not--that would in any way endanger our children. But,
    the cost of third-party testing can be prohibitive.
        And I want to give you an example. Last year, I met with a
    woman who owned a business called The Little Hat Company in
    South Berwick, Maine. And she produced children's hats. And she
    had this network of women who made the hats out of their homes.
    It worked so well for them, because they all had young children
    and they could stay home with the children, yet be able to make
    some money. Well, the combination of the cost of third-party
    testing for the Consumer Product Safety Improvement Act plus
    the economic downturn has forced this business to close up
    altogether. And that affected not only the business owner, but
    all of these part-time sewers whom she employed who were
    producing these cute little caps out of their homes.
        As a result of this concern, last year we included language
    in the report accompanying the omnibus bill noting the concerns
    of these very small manufacturers--seems even odd to call them
    ``manufacturers''; they're really craftspeople--regarding the
    third-party testing requirements. And we urged you to consider
    these types of home-based businesses when you issue your rules
    and your guidance on third-party testing, because we really
    need to find a way that allows them to ensure their products
    are safe, but doesn't put them out of business when, in fact,
    their products are safe.
        What efforts have you made to address the concerns of these
    small businesses?
        Ms. Tenenbaum. Thank you, Senator.
        We have been extremely sensitive to the concerns of small
    businesses and crafters throughout the implementation of the
    CPSIA. In fact, we wrote a guidance on the CPSIA for small
    businesses, resaler crafters, and manufacturers of children's
    products. And over the last 9 months, the Commission has had
    four actions which provided relief to small businesses and
    crafters. And here are the four rules that we promulgated to do
    this:
        First of all, tracking labels. The CPSIA required that
    children's products have a tracking label. We decided that
    there was no ``one size fits all'' and for small crafters, that
    was very important to them.
        Two, lead determinations proceeding. This was a rule that
    we wrote, and we said products made out of cotton, paper,
    untreated wood, to name a few, do not--will never have--contain
    lead. Therefore, businesses like The Little Hat Company, if it
    was a cotton hat, would not have to have third-party testing.
    And we put that out to tell people that you do not even have to
    have a certificate, which would save them a tremendous amount
    of resources.
        The third thing was component-part testing. If the hat was
    made of cotton, the hat would not have been testing, but if
    they had buttons sewn on it to make it decorative, if they
    bought buttons from a company that could certify they were
    lead-free, then The Little Hat Company would not have had to do
    additional testing. And so, if you could just test the
    component, then you would not have to test the whole product.
        And the fourth is, we continue to stay enforcement on
    testing and certification for many children's products, giving
    people time to understand this law, and also to let the
    component-part testing market develop. Groups like the Handmade
    Toy Alliance have recognized our work, and they continue to
    work with us. We, for example, just last month, we had two
    Webinars with the ETS4 community, which is the handmade toy and
    handmade crafters, on eBay, and the Handmade Toy Alliance, so
    that we could talk to them about what the CPSIA requires and
    make sure they understood how to comply with the law.
        We will continue to keep small manufacturers in mind as we
    go into our rulemaking. And we also want to make our small
    business ombudsman, which is a part-time job, a full-time job,
    and expand this into education and outreach, so that we can
    have regularly broadcast Webinars for small businesses and
    answer their questions individually to allay their concerns
    with compliance.
        Senator Collins. Thank you. Those sound like very
    worthwhile and protective moves on the Commission's part.
        This women's business was cotton hats. And she did ornamate
    them, at times, with buttons, and was concerned about having to
    test the buttons. And I remember raising with her, ``Well,
    wouldn't that be the button manufacturer's job?'' So, I'm very
    happy that you've clarified that. And I will relay that
    information to her, in the hopes that, when the economy
    improves, she can get back in business and not have to worry
    about adding what really is a tremendous cost to a very small
    business.
        I'd like to, in my remaining moment, just ask you a little
    more about the small business ombudsman, since I did note that
    you plan to establish a full-time position. How would you
    ensure that this position is truly going to be able to assist
    small businesses? How are you going to inform small businesses
    that it even exists?
        Ms. Tenenbaum. Well, we've had a small business ombudsman
    for a number of years, and most recently the small business
    ombudsman was located in the Office of International Programs
    and Intergovernmental Affairs, and the duties were only part
    time.
        We are working with Booz Allen Hamilton to write a new
    strategic and operational plan for the Commission. And we are
    already beginning to realize that one of our primary functions
    should be education and outreach. So, we could place this full-
    time small business ombudsman in a larger Office of Education
    Outreach, where we would work with colleges and universities.
    We could invite professors to participate. We could work with
    nonprofits. And also, we would have a regular curriculum, where
    we would regularly host workshops. Since I've been the
    Chairman, we've hosted two workshops. One was a workshop for
    the database and another one was for continued testing. And we
    reached out and reserved a block of seats just for the Handmade
    Toy Alliance and small businesses. And so, we will continue to
    be very sensitive to small businesses in that regard.
        Senator Collins. Thank you.
        Thank you, Mr. Chairman.

               ADDRESSING HARMFUL CHEMICALS/ELEMENTS IN PRODUCTS

        Senator Durbin. I want to ask you about a couple of issues
    that raise a larger question: the relationship of the CPSC to
    some other agencies of the Federal Government, when it comes to
    particular hazards.
        The first one is known as BPA--I'm going to mispronounce
    this--Bisphenol A, which is, as I understand it, a plastic
    coating that may be in virtually every canned product we buy
    and shows up in other things--baby bottles and sippy cups,
    sometimes; maybe pacifiers. And it's been linked to heart
    disease and cancer in humans and abnormal development in
    animals.
        The EPA, Environmental Protection Agency, listed BPA as a
    chemical of concern. Although some products are labeled BPA
    free, they're still found to contain this chemical. So, to what
    degree does the Consumer Product Safety Commission feel a
    responsibility, under the law, to verify labeled contents or
    claims, such as ``BPA free'' in consumer products?
        Ms. Tenenbaum. We feel very responsible. In fact, we work
    regularly on interagency committees with the EPA, with the
    National Institute of Standards and Technology (NIST), with the
    National Science Foundation (NSF), and the National Institutes
    of Health (NIH). And the research that all of these agencies
    do, we read and take very seriously. So, we are tracking the
    research on BPA and other chemicals. We track all the
    nanotechnology research. And then, our scientists will make
    determinations and recommendations, and we will eventually go
    into rulemaking if we think that it's necessary.
        We also can take the information and begin voluntary
    recalls or mandatory recalls.
        Senator Durbin. Have you done that in relation to BPA yet?
        Ms. Tenenbaum. Let me get back with you. I know we have
    done extensive work on BPA. And before I misspeak today, let me
    get you a full report on what we've done on that.
        [The information follows:]
     U.S. Consumer Product Safety Commission Activity on Bisphenol-A (BPA)
    Overview
        Bisphenol-A (BPA) is used in the manufacture of polycarbonate
    plastics and epoxy resins. Small amounts of BPA can migrate out of
    products made out of polycarbonate (such as reusable bottles and food
    containers) during their normal use. BPA is considered an endocrine
    disruptor. BPA has also been shown to cause reproductive and
    developmental effects in animals at high doses. However, there is a
    lack of scientific consensus over whether BPA causes these types of
    effects at low doses.
    Regulatory Jurisdiction
        Jurisdiction over BPA is split between two agencies: The Food and
    Drug Administration (FDA) and the CPSC.
      --BPA used in food containers or surfaces that come in contact with
            food is considered an unintentional food additive and is
            subject to the jurisdiction of the FDA.
      --Polycarbonate is also used in bicycle helmets and safety glasses,
            which is under CPSC jurisdiction. These products are made of
            polycarbonate because that material is very hard. The hardness
            of the polycarbonate in these products is beneficial in terms
            of the safety provided to the user, and CPSC Health Sciences
            staff does not believe the exposures from these products would
            be significant compared to products under FDA jurisdiction that
            come into contact with food or liquids.
      --If BPA is used in children's products that are intended for
            children to mouth or which children could mouth, that would
            also fall under CPSC jurisdiction. In such products, staff
            would have to look at the hazard, the exposure and the
            subsequent risk posed by any BPA present.
      --Several Federal agencies (the National Institute for Environmental
            Health Sciences (NIEHS), FDA, the National Toxicology Program,
            and the U.S. Environmental Protection Agency (EPA)) are
            currently conducting research on the safety of BPA, especially
            at low levels of exposure. CPSC staff is monitoring these
            studies and are participating, as appropriate, to provide
            technical input and peer review.
    Current Efforts Involving CPSC and Our Federal Partners to Further
            Study BPA
        CPSC's Heath Sciences staff recently participated in an Office of
    Management and Budget (OMB) coordinated Federal agency review of the
    EPA draft Notice of Proposed Rulemaking (NPRM) to establish the Concern
    List under section 5(b)(4) of the Toxic Substances Control Act (TSCA).
    This list included BPA.
        Health Sciences staff are also currently participating in the
    activities of the revitalized President's Task Force on Environmental
    Health and Safety Risks to Children. One of the reasons for
    revitalization of this task force is to create a high-level group that
    can ensure coordination across agencies that are dealing with common
    chemical concerns. CPSC was specifically recognized as a key partner on
    this group.
        Staff from EPA's Design for the Environment (DfE) project recently
    invited CPSC staff to participate in a group being organized to look at
    BPA alternatives in thermal paper. CPSC staff has participated in
    meetings with that working group.

        Senator Durbin. So, now let me raise another question,
    another issue, involving other Federal agencies, from a
    slightly different perspective. The first example was a claim
    that a product was BPA free. And, as I said, it could have
    contained a chemical of concern, and the manufacturer said,
    ``No, it doesn't.'' And you're saying that you accept the
    responsibility to test to make sure that it doesn't.
        Ms. Tenenbaum. We would.
        If it's within our jurisdiction as a consumer product, we
    would follow the research and we would ask for copies of the
    reports. Our scientists also sit on numerous committees with
    the other Federal agencies.
        Senator Durbin. So, let me give you another example that
    comes at it from a different angle. Recent research has
    questioned whether Triclosan--I hope I'm pronouncing it
    correctly--an antibacterial chemical widely used in home
    products, such as liquid soaps, hand sanitizers--I probably put
    it on my hands 10 times a day--dishwashing liquid, shaving
    gels, toothpaste, some clothing and toys--may disrupt the
    body's endocrine system--so, that explains my problems--and
    whether it helps to create bacteria that are resistant to
    antibiotics. Now, the Centers for Disease Control has found
    that the chemical is so pervasive that it has been found in 75
    percent of Americans.
        This chemical is regulated by three agencies: Food and Drug
    Administration (FDA), Environmental Protection Agency, and the
    Consumer Product Safety Commission. The FDA now says that
    recent research raises valid concerns about the possible health
    effects of this chemical, and EPA is also reexamining it.
        So, what--in light of that situation, where no claim is
    being made that it's free of Triclosan, but there have been
    questions raised by other Federal agencies about its safety and
    impact on humans--what is the CPSC's responsibility, and what
    have you done, related to this?
        Ms. Tenenbaum. We saw the same article and were discussing
    it on the way over here. And again, we will receive the
    research, work with our colleagues in the other agencies, and
    if their concerns are such that we think consumers are
    endangered, then we will take action either to issue a safety
    warning, do a voluntary recall, or write regulations.
        Senator Durbin. So, here's what I'm getting at, Madam
    Chairman. Assume, hypothetically--I won't mention this
    particular chemical--but, assume the set of circumstances I
    just described for chemical x. But, assume that the industry
    says, ``Well, you're just wrong. It doesn't create these
    problems. And we have our scientists, who come to a different
    conclusion.'' What is the threshold at which the CPSC says,
    ``Here is what we're looking for. We are looking for an
    assertion--a credible assertion by a certain Federal agency
    that puts us on notice that we have to be sensitive to and look
    for this certain chemical. It can be litigated in court, it can
    be disputed in laboratories, but we are looking for this
    threshold.'' What is that threshold on a chemical, such as
    Triclosan, as to when the CPSC says, ``We are sufficiently
    warned that it could be dangerous that we are going to step
    forward and try to protect Americans from exposure''?
        Ms. Tenenbaum. The threshold would be whether or not it
    causes harm or the threat of harm to a consumer.
        Senator Durbin. Who makes that decision on----
        Ms. Tenenbaum. We would on our products. For example, in
    this year's--in the 2011 budget, we're requesting $2 million so
    that we can work with the National Nanotechnology Initiative to
    get the agencies who are doing the research on nanotechnology
    to test our consumer products so that we will know, firsthand,
    what we have to do with those products, regarding
    nanotechnology.
        Senator Durbin. So, you aren't looking to the FDA or the
    EPA or the Centers for Disease Control. You're basically
    establishing testing standards to establish whether there's a
    danger to humans, and then regulating, based on your
    conclusions.
        Ms. Tenenbaum. We have our own scientists who draw the
    threshold. In fact, they are working right now to come up with
    a threshold, in children's jewelry, for cadmium and any other
    metals. So, we will look at what the research other agencies
    have done. We would not duplicate it. But, if we feel like--
    that the work is good science, good solid data, then we can act
    on it.
        Senator Durbin. Do you take into consideration if States
    have decided to regulate? For example, BPA, if I'm not
    mistaken, has been regulated--I think it's in California, maybe
    even in Connecticut. Do you take that into consideration?
        Ms. Tenenbaum. We do. And, in fact, when I became Chairman,
    I asked the Office of General Counsel to have quarterly
    meetings with all the States' attorneys general. We wanted to
    not have an adversarial position with them. We felt like they
    were our partners, because we're a small agency. We need our
    attorneys general in all 50 States--and I came out of State
    government--to work with us. And in the last meeting we had,
    nearly every one of them attended either in person or by
    conference call they or their representative. So, we feel like
    California, for example, is very aggressive when it comes to
    consumer products, and they give us information on what they
    find.
        Senator Durbin. Thank you.
        Senator Collins.
        Ms. Tenenbaum. Illinois' attorney general is also very
    proactive.
        Senator Collins. Madam Chairman, I want to go back to an
    issue I raised in my opening statement, and that is, I authored
    provisions of your new law that were intended to bring about
    better coordination and information sharing between the
    Commission and Customs and Border Protection. I was alarmed to
    learn that CBP had so little authority, prior to this law, to
    actually seize and destroy dangerous consumer products. So,
    what was happening is, a lot of times, the products were turned
    back at one port and then would be shipped through another
    port.
        So, we were trying to close that port-shopping hole, if you
    will. The bill authorized CBP to seize and destroy these
    products that are entering our ports, rather than just refusing
    them. But, the success of that depends on close coordination
    with the Commission, and the Commission was charged with
    developing a comprehensive risk assessment so that there would
    be better targeting of the incoming shipments for inspection.
    So, the idea was that the Consumer Product Safety Commission
    was supposed to target the shipment, and then CPB would go
    inspect that, and could actually destroy the products, rather
    than just refusing them.
        That is why I was disappointed when the Government
    Accountability Office (GAO) reported, last August, that not as
    much progress been made in this area as I would have held--
    hoped. The Commission, for example, it says, does not have
    access to key CBP import data that it could use to target the
    incoming shipments. It said that it--the agreements hadn't been
    updated between the two agencies, that there still was not the
    kind of information sharing that's absolutely essential for
    this to be successful.
        Why hasn't there been more progress made in this very
    important area? Because this is really critical to keeping
    dangerous products from ever coming into our country in the
    first place.
        Ms. Tenenbaum. You are so right. And actually, the GAO
    report helped propel us to having even closer coordination and
    cooperation with the CBP.
        On March 25 of this year, we submitted our concept of
    operation to define our plans for using the International Trade
    Data System to the CBP. And that will help us look at the types
    of products and the names of importers, to help us quickly and
    more proactively identify potential risk and provide more
    timely responses.
        And we're also asking for resources, in the 2011 budget, so
    that we can have the capacity for our IT system and CPB's to
    talk to each other; we need to be able to data-mine between the
    two agencies.
        We are working with the CBP and have piloted enforcement
    programs that are developing new and streamlined import
    procedures with them. So, we already have pilot projects going.
    We have placed a full-time employee at the Commercial Targeting
    and Analysis Center (CTAC), right here in Washington, which is
    CTAC, which allows us to look at pre-arrival manifest systems,
    so that our people know what is coming in on the shipments. We
    can target whether or not our products--consumer products--are
    on that shipment.
        We also have developed a repeat-offender listing and work
    with the CBP to identify and stop potentially hazardous
    shipments. Also, we work with them to have specific targeting
    operations which have proven that, when we can target
    shipments, we're finding a very high percentage of products
    that are violative of the standards.
        We have the Operation Guardian Program, which we use the
    CBP's resources, and they will go ahead and identify violative
    holiday lights, Christmas lights, children's upper- and
    outerwear with drawstrings, and seize those products.
        Right now, we're waiting to have the memorandum of
    understanding (MOU) between the two agencies signed. Once that
    MOU is signed, then we hope that we will have access to their
    automated targeting system. And once we have access to their
    system, we will have greater knowledge and potential
    information on how to improve further targeting methodologies.
    In fact, we will have a risk assessment methodology, and we're
    asking for funding in the 2011 budget to help us with this
    project, because then we'll be able to have information to
    develop a full-risk assessment methodology so that CBP and the
    CPSC can share data and collectively target incoming ships.
        Senator Collins. Well, I'm pleased to hear of that
    progress, a lot of which is quite recent. I think it might be
    helpful, after 6 months or so, if the Chairman and I ask the
    GAO for a new assessment on how that relationship is working.
        I just have one final issue that I wanted to raise with
    you, and that's the Chinese-made drywall problem. Now, I feel
    fortunate, because my State, fortunately, did not, apparently,
    get a lot of the Chinese-made drywall that has produced such
    problems in 37 other States. What concerns me is, there were
    some 3,000 reports from residents of 37 States related to
    problems with this drywall, including health concerns, noxious
    fumes, metal pipe corrosion--significant problems. What can
    CPSC do to better anticipate and prevent problems like this? It
    seems like you shouldn't have to get to a point where you have
    3,000 complaints before a problem is identified.
        Ms. Tenenbaum. Well, let me start by saying that I
    understand the anxiety and stress that the families that have
    had the impacted drywall have gone through. I've visited homes
    in Florida and Virginia, and I saw, firsthand, the impact that
    they had on people's lives. Young families, where all their
    equity was tied up in this one home, had to move out and move
    in with relatives. Some of them had to file for bankruptcy. And
    it was a crisis that I walked into when I became the Chairman
    last year.
        There have been more resources spent on this--over $3.5
    million--than any other investigation we've ever undertaken at
    the CPSC. It's taken longer than we had liked for it to, but,
    we were also pioneering protocols and testing to validate a new
    science.
        We partnered, last year, with other Federal agencies to do
    a 51-home study. We were able to find out that certain gases
    were being off-gassed in the homes. With that information, we
    then went to Lawrence Berkeley Laboratories. We recently
    released the findings of those chamber tests, in which we found
    that the Chinese drywall was off-gassing hydrogen sulfide at
    100 times greater limits than domestic drywall.
        Now, not all Chinese drywall was off-gassing the hydrogen
    sulfide. In fact, there were over 6 million pieces of Chinese
    drywall imported into the country after Hurricane Katrina, and
    not all of it had the problem. What we are able to do working
    with the Department of Housing and Urban Development (HUD), is
    to develop an identification protocol to determine if you have
    the off-gassing in your home. We've just come out with our own
    protocol for remediation, which basically is, remove all the
    Chinese drywall, rewire the house, and remove the pipes. This
    is the only way to make the homeowner able to move back into
    the home.
        Now, we provided all of our research to the multidistrict
    litigation, which was a Federal lawsuit in Louisiana, and the
    judge in that case, last week, even went further. There was a
    company--a Chinese company, called Taishan, which did not
    respond to the complainant. It was a damages hearing tried in
    their absence, in which the judge awarded $2.6 million to seven
    Virginia homeowners. In that case, he said, ``Take out all the
    drywall, Chinese and non-Chinese. Take out all the wiring. Take
    out all the cabinets and appliances, carpet. And essentially
    take the home down to the studs, and rewire. So, it was more
    extensive than what we said was the remedy.
        And now we are wrapping up studies. We have one study
    ongoing on long-term corrosion. How much would this corrosion
    result in any kind of fire hazard, for example? And that's what
    the long-term corrosion is. But, this was an anomaly, the off-
    gassing of hydrogen sulfide, because it wasn't found in all the
    Chinese drywall, just some out of parts of China.
        So, the next step is, how can homeowners find resources to
    remediate? There are really four ways.
        In some cases, the builder has gone back in--I've seen this
    in Florida and in Virginia--and torn out the drywall, torn out
    the wiring, rewired the house, put in new drywall, and moved
    the homeowners back in. And that has happened in both States.
        In other cases, there have been civil suits. We have the
    multidistrict suit, down in Louisiana. There have been other
    civil suits where builders, retailers, manufacturers on up the
    chain of commerce are being sued.
        A third way is to try to find some kind of public funding.
    I know that the Director of HUD has sent a letter saying States
    can use the community block grant funding. If that funding is
    available, that funding can be used.
        And then, the fourth way is to try to get some
    participation from Chinese manufacturers. We have told the
    AQSIQ and the Chinese, from the Chinese Ambassador to all the
    people with whom we deal, that we are going to work with the
    Chinese companies to try to find a just and fair solution. We
    want them to participate in some way, financially. And so, we
    will begin those talks relatively soon.
        Senator Collins. Thank you.
        Senator Durbin. I had the same issue on my list to bring
    up, and I'm glad Senator Collins did. And I think her question,
    though, is one that I still want to try to probe a little more.
        After 3,000 complaints, we knew we had a problem. The
    question is, when it comes to children's products and toys,
    we're basically trying to reach a point where we have a
    certification of testing before they arrive in the United
    States. So, let me ask about a product like drywall, here. Is
    it your impression that there is any requirement for testing in
    China of such things before they are exported to the United
    States?
        Ms. Tenenbaum. The regulations relating to drywall in the
    United States have to do with the strength, in terms of how
    much weight it can bear. We did not have regulations which
    said, ``You cannot off-gas hydrogen sulfide.'' It was a
    novelty. And so, therefore, we had to build the protocols. We
    had to start from the ground up and work through getting the
    test designed to even figure out what was coming off the
    drywall.
        Senator Durbin. So, look at it prospectively. If there was
    another shipment of drywall being manufactured in China for
    export to the United States, would it be subject to testing for
    this hydrogen sulfide?
        Ms. Tenenbaum. Not right now. And it was only after
    Katrina, when we needed more drywall than we could manufacture
    domestically, that we started importing the drywall. We were
    handling our own needs just in the United States, and we did
    not have the problem.
        Senator Durbin. Well, I would say----
        Ms. Tenenbaum. But, the other thing is, we have started
    requiring labeling. We want tracking labels so that we know the
    company and the area of China in which the drywall was
    manufactured. And we also have worked with the CBP, where they
    have stopped shipments into the country. In fact, they found a
    shipment coming in from San Francisco, and they notified us.
    And then we went out to check on it, and it was not gypsum.
        Senator Durbin. Well, I can tell you that--whether it's
    this situation with drywall or the melamine spiking into the
    pet food, which showed up as a higher level of protein, and
    therefore, was worth more--nominally worth more, until they
    discovered it was dangerous. It really might be beyond us to
    imagine how many possible things could happen from products
    coming in from a place where there are very few standards being
    applied at the source of manufacture.
        I'd like to close by asking about one of your beloved
    retirees, whom we talked about over and over again in this
    subcommittee. And I don't even remember his last name, but his
    name was Bob. And Bob was the toy-tester. And some of our staff
    went out with their cameras and took pictures of Bob's
    workshop, which consisted of a table with toys stacked up on
    them. And Bob had made some marks on the wall at certain
    levels--4 foot and 6 foot--and then would drop the toys from
    those levels and see if they busted into little pieces that
    kids could swallow. And it didn't strike most of us as the kind
    of sophisticated testing most Americans would expect from an
    agency with your reputation. Now, Bob has retired, God bless
    him. And I know he did a good job for us while he was there,
    with the resources available. But, please tell me what the
    world of toy testing looks like at CPSC after Bob.
        Ms. Tenenbaum. Well, thank you. Bob the toy-tester has
    retired. And we do not have just one person testing toys. Our
    staff estimates, depending on the workload, that toy-testing
    involves up to 20 staff from the Office of Hazard
    Identification and Reduction at any given time, including the
    laboratory, the engineering, human factors, and health
    scientists.
        In addition, our field and import surveillance staff tests
    or screen toys at the port and the field. For example,
    investigators at the port have XRF machines, and they can
    screen for lead and other metals. If the toy fails XRF
    screening, it's sent to the laboratory for further analysis by
    our toxicologists and our chemicals. And if the toy fails on
    the small-parts screening, then it's sent to human factors to
    conduct an age determination to identify the age of the child
    for whom the toy will be purchased and is most appropriate. And
    based on this age determination, the laboratory and health
    scientists test the toy for small parts and sharp edges.
        For toy hazards that fall outside of a specific toy
    regulation, many other CPSC technical personnel conduct product
    safety assessments on the specific toy in support of compliance
    activities.
        And if you give me a moment, I'd like to tell you about our
    new lab. We brought pictures of the new lab. After 35 years at
    our current antiquated lab space, the CPSC will open a new
    modern testing facility in Rockville, Maryland. We're leaving
    Gaithersburg. And we will open it in December 2010. And this
    facility has 63,000 square feet, and we will be able to hold
    100 staff and guest researchers in our laboratory. And for the
    first time, we'll have all of our technical personnel involved
    in testing housed under one roof.
        This building was built by a private company as a
    laboratory. And it's very impressive. And we invite you, when
    we open the lab later on this year--you might want to wait til
    January 2011--to go with us out to see our new lab.
        Senator Durbin. Only if you invite Bob.
        Ms. Tenenbaum. All right. We'll bring Bob back.
        But, we want to show you--this is our new lab, and this is
    the old lab. The old lab has 37,000 square feet, as compared to
    the 63,000 square feet. And these were nine buildings that were
    1950s-era buildings, all over that campus. And it only was able
    to hold 42 people. And we would have to do one test and then
    take the equipment down to reassemble it to do another test.
    This new lab allows us to test multiple products at one time.
    It enhances our ability to look at the children's electrical,
    combustion, sports, recreational equipment. We will have a
    dedicated space for children's testing. So, we'd love to show
    it to you, when we're ready.

                         ADDITIONAL COMMITTEE QUESTIONS

        Senator Durbin. Chairman Tenenbaum, we're going to send you
    some more questions in writing----
        Ms. Tenenbaum. Thank you.
        Senator Durbin [continuing]. And open it up to other
    members of the subcommittee who might like to do the same.
        Keep the record open until Wednesday, April 21, at 12 noon
    for subcommittee members to submit statements or questions.
        And I thank you very much for your testimony.
        I thank Senator Collins for joining me today.
        [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

                                CHINESE PRODUCTS

        Question. How are things progressing with the safety of Chinese
    products?
        Answer. Recalls of product manufactured in China have begun to
    decline. After increasing steadily for many years, from a low of 121 in
    fiscal year 2003 to a high of 346 in fiscal year 2008, the number of
    recalls of consumer products manufactured in China dropped to 230 in
    fiscal year 2009. Through June of fiscal year 2010, we have recorded 80
    recalls of these consumer products, indicating a rate that should put
    the China recalls well below 200 for fiscal year 2010.
        In general, we find the Chinese government cooperative in pressing
    its industry to correct specific issues. However, while the government
    has publicly stated its policy that industry should comply with best
    manufacturing practices for making safe consumer products, it needs to
    put more resources behind that policy.
        Question. Have the Chinese disseminated information on standards
    and manufacturing processes throughout China and are their toys being
    tested and certified? How does the process work?
        Answer. The Chinese government has stated that its own laboratories
    that inspect toys for export under Chinese rules must adhere to the
    safety requirements of the export market. We have conducted training
    for these laboratories on numerous occasions. CPSC also has made a
    significant amount of information about toy safety requirements
    available in Chinese on our web site and Chinese toy industry
    publications have picked up our material and reprinted it for their
    readers on several occasions.
        All toys imported from China (and elsewhere) are subject to the
    CPSIA mandate that they be certified compliant with U.S. regulations
    and tested for compliance by an independent third party conformity
    assessment body (lab) accepted by CPSC. Importers typically select a
    lab from CPSC's list and instruct their Chinese suppliers to have the
    product tested by the lab. Alternatively, they permit the Chinese
    suppliers to select the lab from our approved list.
        Question. In October 2009, the Chinese CPSC (AQSIQ) agreed to take
    immediate action to eliminate the use of lead paint in toys. Have the
    Chinese banned products with lead paint? What about products with lead?
        Answer. There is an AQSIQ directive in place prohibiting the
    practice. AQSIQ has been aggressive in taking corrective action with
    manufacturers who attempt to use lead paint on toys exported to the
    United States. Overall, we have seen a substantial decrease in cases of
    toys with lead paint level exceeding current limits.
        Question. When is your next meeting with Chinese officials and what
    do you hope to accomplish?
        Answer. I will participate in a trilateral U.S.-EU-China Product
    Safety Summit in October 2010. AQSIQ will participate at the
    ministerial level and the European Commission will send their
    Commissioner responsible for product safety. Both the CPSC and our
    European partners view the event as an important opportunity to impress
    upon AQSIQ the need to get Chinese manufacturers to rely on best
    manufacturing practices for producing safe consumer products.
        Question. Have any other countries followed suit to make their
    products safer?
        Answer. The European Commission is a close partner with CPSC in our
    work with China. We have conducted joint training for manufacturers and
    continue to coordinate our messaging on product safety to the Chinese
    government.

                         BEIJING OFFICE AND ACTIVITIES

        Question. I understand that at the end of last year, you
    established CPSC's first overseas office at the U.S. Embassy in Beijing
    and hired a Product Safety Specialist to work there. What are the
    responsibilities of this individual?
        Answer. The Product Safety Specialist--
      --acts as a pro-active resource distribution point for Chinese
            suppliers and government officials who need U.S. consumer
            product safety compliance information;
      --serves as a liaison with AQSIQ to ensure timely exchange of
            critical regulator-to-regulator information;
      --reports regularly to CPSC, in writing, on China's regulatory
            implementation of product safety measures and the effectiveness
            of Chinese product safety reform efforts;
      --works closely with the CPSC Office of International Programs and
            Intergovernmental Affairs' China Program Coordinators to
            facilitate implementation of the U.S.-China Product Safety Work
            Plan (i.e., personnel and information exchanges);
      --proposes and coordinates monitoring and evaluation activities to
            determine the impact of CPSC product safety initiatives for
            Chinese suppliers;
      --analyses data from Chinese government and industry sources
            regarding safety and quality of consumer products;
      --provides information to CPSC and the Beijing Embassy Economic
            Section on changes in Chinese practice, regulations, laws, or
            structures associated with product safety;
      --translates relevant product safety documents and verifies document
            translations;
      --coordinates visits to China of CPSC officials and assists with
            visits to CPSC by Chinese officials;
      --with approval from CPSC headquarters and using fully cleared
            materials, provides selected Chinese audiences with briefings
            on U.S. requirements for consumer products;
      --upon specific request by CPSC headquarters, visits production
            facilities and test labs, by arrangement with, and at the
            invitation of Chinese government officials and facility
            managers, in order to observe specified operations and verify
            specific activities.
        Question. What are your plans to hire a Regional Product Safety
    Officer? What will be the responsibilities of that individual and what
    countries will be overseen?
        Answer. The recruiting announcement for the Regional Product Safety
    Officer was listed on USAJOBS.gov on August 6, 2010. The deadline for
    applications is September 6, 2010.
        The Regional Product Safety Officer will have the following
    responsibilities in the Asia-Pacific region:
      --act as a pro-active resource distribution point for Asia-Pacific
            regional regulators, suppliers, and other stakeholders, who
            should understand U.S. consumer product safety compliance
            information;
      --serve as a liaison with regional regulators to ensure timely
            exchange of critical regulator-to-regulator information;
      --report regularly to CPSC on important regulatory implementation of
            product safety measures in the region and the effectiveness of
            national product safety programs;
      --speak at appropriate events in the region to brief key target
            audiences on U.S. requirements for consumer products.
      --with CPSC headquarters approval, visit regional production
            facilities and test labs, by arrangement with, and at the
            invitation of local government officials and facility managers,
            in order to observe specified operations and verify specific
            activities; and
      --supervise the local hire Product Safety Specialist working in
            Beijing.

                                    STAFFING

        Question. Your 2010 operating plan states that staffing will remain
    at 530 FTEs in 2010, however, our enacted fiscal year 2010 conference
    report language states that the increased funding we provided shall
    support new staff hires, including at key ports of entry. May I have
    your assurances that you intend to hire additional staff in 2010? What
    will your FTE goal be? How many part-time and full-time employees are
    currently employed at the Commission?
        Answer. The Commission continues to aggressively hire key staff
    during the remainder of fiscal year 2010. As of July 28, we have made
    96 new hires since the start of the fiscal year 2010, which represents
    a 21 percent increase in overall agency staffing. During the current
    fiscal year, we have hired four additional employees at ports of entry
    for our Import Surveillance Division, and currently have five
    additional hires pending in this Division.
        To date in fiscal year 2010, the CPSC has had 38 resignations and
    retirements. As a result, we project that we will average about 490
    ``annualized'' FTEs for the fiscal year. This is a 13 percent increase
    over the annualized FTE usage for fiscal year 2009. The current FTE
    ceiling target we have given managers for fiscal year 2011 is 576 FTEs.
    This is the FTE number funded in the fiscal year 2011 CPSC budget
    request.
        As of August 7, 2010, CPSC employment stood at 520.4 FTEs. This
    number includes approximately 25 temporary student hires that count
    against our FTE limit. As of August 7, 2010, we also have 15 pending
    hires and over 69 active vacancy announcements.
        Question. I am aware that a number of long-time, well-qualified and
    knowledgeable staff have left the Commission. What are you doing to
    fill the gaps left by these important staff members? Are you having
    difficulty recruiting the highly technical staff that you need?
        Answer. Our attrition rate has remained steady and is 5.9 percent
    thus far in fiscal year 2010. We continue to hire in all of our
    technical areas to handle the workload, provide for expertise in each
    technical area and ensure the transfer of knowledge as staff leave.
        We have had difficulty filling positions for a few technical areas
    such as Mathematical Statisticians, Engineering Psychologists, Fire
    Protection Engineers, Toxicologists, and Chemists. To maximize hiring
    potential in these areas, we have utilized the full range of
    recruitment flexibilities and incentives available for these positions,
    including recruitment and relocation bonuses, annual leave service
    credit, superior qualifications appointments, and telework
    opportunities. We have also opened many of these positions at both the
    entry grade level and at the senior journeyman level to ensure
    opportunities for applicants with varying degrees of education and
    experience.
        The CPSC has also sought to expand the pool of qualified applicants
    by attending targeted job fairs, posting ads in professional journals
    and engaging in outreach to colleges and universities with a
    concentration in the technical areas we are recruiting.

                                    WORKLOAD

        Question. The reauthorization placed many new requirements on CPSC
    along with deadlines for achieving those milestones. How is CPSC
    managing the balance of meeting its long-standing responsibilities with
    the new mandates placed on the agency by the Consumer Product Safety
    Improvement Act?
        Answer. In the Consumer Product Safety Improvement Act (CPSIA),
    Congress set an aggressive regulatory agenda for the CPSC over the
    course of the first 2 to 3 years after enactment. While the CPSIA
    mandates 42 separate action items for the Commission to undertake, that
    number understates the agency workload that results from each of those
    mandates. For example, that count does not include any interpretative
    rules, such as the definition requirements for ``child care article''
    and ``toy'' under section 108.
        To put this in context, mandatory rulemaking activity averaged less
    than seven per year from fiscal year 2000 through fiscal year 2008,
    with the number of rulemaking projects per year ranging from a low of
    one in fiscal year 2005 to a high of 10 in both fiscal year 2007 and
    fiscal year 2008. With the passage of the CPSIA, rulemaking activity
    has increased significantly, averaging about 26 substantial rulemaking
    activities each year for fiscal year 2009, fiscal year 2010 and
    proposed fiscal year 2011. The Commission also conducted an additional
    15 activities supporting rulemaking proceedings in fiscal year 2009 and
    15 to date in fiscal year 2010.
        The work required by the CPSIA is in addition to the Commission's
    ongoing regulatory activity in a variety of areas, including
    upholstered furniture, portable generators and cigarette lighters, as
    well as our ongoing compliance work in evaluating and recalling
    products that present hazards to consumers.
        Timely implementation of the CPSIA is the agency's top priority,
    but we have also tried to prioritize our work in a way that maximizes
    effectiveness and provides flexibility if new hazards emerge. One
    example of this flexibility is the Commission's ongoing investigation
    of contaminated drywall, which is now the largest investigation in the
    history of the CPSC.
        Question. How is the Commission prioritizing work associated with
    new responsibilities as a result of the reauthorization act? What
    criteria are being used to prioritize this work?
        Answer. The CPSIA established a schedule of mandatory rulemaking
    activities, and these requirements have been placed on the Commission's
    rulemaking agenda.
        In addition, the CPSC has a regulation entitled ``Policy on
    Establishing Priorities for Commission Activities,'' (16 CFR
    Sec. 1009.8) that guides its efforts to prioritize the work of the
    agency. A description of the process for prioritizing Commission action
    can be found in our semi-annual regulatory agenda/plan submission that
    summarizes the regulation cited above and lists following general
    criteria: frequency and severity of injuries; causality of injuries;
    chronic illness and future illness; cost benefit of CPSC action;
    unforeseen nature of the risk; vulnerability of the population;
    probability of exposure to the hazard; and any additional criteria.
        Completion of congressionally mandated tasks is a key agency
    priority and resources have been allocated accordingly. Other work,
    such as the investigation of contaminated drywall and other potential
    emerging hazards are also allocated priority resources as necessary.
        Question. In what areas do you feel that CPSC has been slow to act
    due to the complexity of issues and why?
        Answer. The development of a draft proposed rule addressing the
    third-party testing requirements under CPSA section 14(d)(2) has been
    extremely complex and involved thousands of hours of staff resources.
    This proposed rule has the potential to offer families a vital new
    layer of safety and reassure U.S. consumers that toys and other
    children's products are free of many known hazards. On the other hand,
    the rule also impacts tens of thousands of manufacturers and importers
    across all of the various industry sectors producing children's
    products, including small business entities.
        Given the complexity of the global supply chain and the number of
    various industries affected by these requirements, CPSC staff has
    sought extensive public comment from all interested stakeholders to
    further inform development of the proposed rule. On December 10 and 11,
    2009, the Commission held a Testing Policy Workshop and invited public
    comment on aspects of section 14 of the CPSA, as amended by the CPSIA.
    Staff presentations were given, and breakout sessions were held on the
    following topics: Sampling and Statistical Considerations; Verification
    of Third-Party Test Results; Reasonable Test Programs and Third-Party
    Testing; Challenges for Small Manufacturer/Low Volume Production;
    Component Testing and Material Changes; and Protection Against Undue
    Influence.
        A draft Federal Register notice for the proposed rule was published
    April 1, 2010, and the comment period expired August 3, 2010. Work is
    progressing, with the final rule scheduled for completion this year.

                               PORT SURVEILLANCE

        Question. How many full-time CPSC staff work at how many U.S.
    ports?
        Answer. The Import Surveillance Division currently staffs 11 U.S.
    ports with 14 on-site compliance investigators. The 11 U.S. ports with
    current on-site CPSC staffing include: Buffalo, New York; Denver,
    Colorado; Houston, Texas; John F. Kennedy International Airport, New
    York City, New York; Los Angeles/Long Beach, California; Miami,
    Florida; Newark, New Jersey; Norfolk, Virginia; San Francisco,
    California; Savannah, Georgia; and Seattle, Washington. We are
    currently recruiting for four additional locations (Chicago, Illinois;
    Laredo, Texas; Detroit, Michigan; and Port Everglades, Florida) and
    expect to have staff in place in those locations by October 30, 2010.
        CPSC has also co-located staff in the Commercial Targeting and
    Analysis Center (CTAC) located within the Office of International Trade
    at U.S. Customs and Border Protection in Washington, DC.
        Question. How will your fiscal year 2011 budget request augment
    this?
        Answer. The fiscal year 2011 budget request proposes to increase
    the number of personnel in the Import Surveillance Division to 23 FTEs.
    Of those 23 FTEs, 19 would be stationed in ports of entry.
        Question. In what ways are you working with Customs and Border
    Patrol?
        Answer. CPSC has partnered with U.S. Customs and Border Protection
    (CBP) on a series of efforts focused on increasing surveillance of
    imported consumer products.
        In March 2010, CPSC submitted to CBP our revised Concept of
    Operations that defines CPSC's plans for using the International Trade
    Data System. This plan includes defined processes to create screening
    and targeting criteria and the overall automation of import enforcement
    mechanisms. By doing so, we have identified touch points between the
    agencies where cooperation and coordination can be developed.
        On April 26, 2010, CPSC was the first agency to sign an interagency
    Memorandum of Understanding (MOU) with CBP allowing CPSC personnel to
    co-locate at the Commercial Targeting and Analysis Center (CTAC). This
    MOU will greatly improve upon our interagency communication and
    information sharing.
        This month, CPSC also formally executed an MOU with CBP that will
    give CPSC access to information in the Treasury Enforcement
    Communication System (TECS). This will assist CPSC investigators in the
    ports by providing them access to information that will improve local
    targeting and product interdiction activities.
        CPSC is also actively involved in supporting the Importer Self
    Assessment-Product Safety (ISA-PS) program that is currently being
    piloted by CBP. The ISA-PS is envisioned to be a partnership among CBP,
    CPSC and importers to maintain a high level of product safety
    compliance to prevent unsafe imports. The ISA-PS is a voluntary
    approach to product safety compliance and will allow the agency to
    direct our resources to those companies with higher risk.
        Question. For the future, do you envision locating a testing
    laboratory on the west coast so that many of the nation's imports can
    be tested at, or near their point of entry?
        Answer. It does not appear that funding will be available in the
    near future for an additional CPSC testing laboratory on the west
    coast. However, CPSC and CBP have been in discussions for several
    months on utilizing CBP laboratories to test samples collected by CPSC
    at import. Training of select CBP laboratory personnel has been
    completed and beginning September 20, 2010, targeting will begin for an
    operation at several ports of entry focusing on potentially violative
    imitation jewelry.
        Products collected as part of this operation will be sent to both
    CPSC's lab and a CBP lab for analysis. This pilot analysis program will
    enable us to determine if the results obtained at a CBP lab are
    comparable to those obtained at the CPSC lab. If the pilot confirms
    that the results are comparable, the anticipated next step is to begin
    having CBP labs test CPSC samples independently, with Compliance
    relying on those results to make admissibility determinations. When
    implemented, the use of CBP labs will increase the number of import
    samples that can be collected and tested.

              GAO REPORT ON CPSC'S OVERSIGHT OF IMPORTED PRODUCTS

        Question. A GAO report from August 2009 found that CPSC didn't have
    access to key Customs and Border Patrol import data that could be used
    to target incoming shipments for inspection. Further, the report found
    that CPSC's activities at U.S. ports could be strengthened by better
    targeting incoming shipments for inspection and by improving CPSC's
    coordination with CBP. What is being done to address these issues? Are
    you revising your agreements with Customs and Border Patrol? Please
    address the additional key issues raised in the August 2009 GAO report
    (GAO-09-803) on CPSC's Oversight of Imported Products, and discuss
    steps taken to address these concerns.
        Answer. As noted in a previous response, CPSC is now an active
    participant in the Commercial Targeting and Analysis Center (CTAC) that
    has been developed by U.S. Customs and Border Protection (CBP) to
    spearhead the coordination of the efforts of the various Government
    agencies responsible for import safety enforcement.
        On April 26, 2010, CPSC and CBP signed a Memorandum of
    Understanding (MOU) for the exchange of information within the CTAC.
    This document gives both agencies authority to share information,
    combining for the first time CBP entry and advance cargo data with CPSC
    violator information. This partnership has enhanced information
    exchange, improved targeting decisions, and assisted in development of
    risk analysis capability.
        In addition, CPSC and CBP just executed an MOU that gives CPSC
    access to information in the Treasury Enforcement Communication System
    (TECS). This will assist CPSC investigators at the ports by providing
    them access to information that will improve local targeting and
    product interdiction activities.

                                 NANOTECHNOLOGY

        Question. Your fiscal year 2011 request includes $2 million to
    support the Federal National Nanotechnology Initiative data collection
    activities and environmental, health and safety research, related to
    consumer products. Why are nanomaterials of concern? What kinds of
    activities will CPSC undertake as part of the National Nanotechnology
    Initiative?
        Answer. The National Nanotechnology Initiative (NNI) has developed
    a definition of nanomaterials that specifies that these materials have
    a specific size range in the nanoscale, 1-100 nm (a nanometer (nm) is
    one-billionth of a meter), and unique physical and chemical properties
    that differ from other materials not in that specific size range.
    Because of the small size and unique properties of nanomaterials, there
    is a concern that they may cause health effects in humans or organisms
    in the environment. In particular, there is concern about nanomaterials
    incorporated into consumer products, and the potential risk of
    nanomaterials entering the bodies of adults and young children who use
    products that contain these materials.
        As part of the NNI activities, several Federal agencies, including
    the CPSC, have worked together to identify and prioritize the questions
    that should be addressed and the types of research to be conducted to
    ensure the responsible development of nanotechnology and the safe use
    of nanomaterials. These research priorities are listed in the Federal
    environmental, health, and safety research plan that is currently
    undergoing revision by several Federal agencies. (A copy of the plan is
    available online at http://www.nano.gov/NNI_EHS_Research_Strategy.pdf).
        There are also international efforts, including the OECD Working
    Party on Manufactured Nanomaterials (WPMN), to prioritize the testing
    needed for nanomaterials, sponsor health effects studies, and share
    information on test results. The CPSC staff participates in the
    international efforts along with several Federal agencies.
        CPSC staff is aware of its role in the national and international
    efforts to address nanomaterial health and safety concerns, and has
    proposed a number of projects for fiscal year 2011 that address the
    identified needs outlined in the Federal strategy. In fiscal year 2011,
    CPSC plans to establish agreements with a number of agencies including
    the Environmental Protection Agency (EPA), National Institute for
    Occupational Safety and Health (NIOSH), the National Institute for
    Standards and Technology (NIST), and the National Science Foundation
    (NSF) to develop testing methods and conduct studies to quantify the
    releases of a variety of nanomaterials from several classes of consumer
    products. The information derived from these studies will be used in
    evaluations to determine if there are any potential risks associated
    with identified releases of nanomaterials from tested products. The
    CPSC also intends to work with other Federal agencies to increase the
    availability of information about nanomaterials in publically available
    databases and literature.

                         CHINESE DRYWALL INVESTIGATION

        Question. I understand that CPSC and HUD have now issued guidance
    to homeowners with problem drywall, instructing that all problem
    drywall and wiring be eliminated and replaced. Is your guidance the
    culmination of your work on this subject or what are the next steps
    with regard to Chinese drywall?
        Answer. CPSC and HUD have provided the public an effective means of
    identifying homes with problem drywall and of remediating those homes
    through the issuance of our interim guidance. In our remediation
    guidance, we have recommended the replacement of all possible problem
    drywall, all fire safety alarm devices, all electrical components and
    wiring, and all gas service piping and fire suppression sprinkler
    systems. CPSC and HUD expect to fine-tune our guidance documents as we
    analyze the results of our scientific studies as those studies wrap up.
        While our scientific investigation is wrapping up, the CPSC
    continues to vigorously pursue avenues for relief for consumers as we
    continue to monitor private litigation and remain engaged with AQSIQ.

                               LABORATORY STATUS

        Question. I believe you were scheduled to move into your new
    laboratory space this year but the contract award process took longer
    than expected and you now expect to move at the end of the year. What
    activities will occur at the new laboratory space?
        Answer. The CPSC Laboratory supports the overall CPSC mission to
    reduce unreasonable risk of injury associated with consumer products.
    This function requires selecting, procuring, calibrating, operating,
    and maintaining sophisticated laboratory equipment by knowledgeable and
    skillful personnel. Work results must be competent in order to
    withstand the scrutiny of litigation.
        The new laboratory will house facilities for the testing and
    evaluation of products for hazards under Sections 7, 8, 12, or 15 of
    the Consumer Product Safety Act. This includes facilities for testing
    of regulated products such as children's sleepwear, general wearing
    apparel, mattresses and futons, and carpeting.
        The flammability test laboratory will include a 2-hour fire-rated
    burn room for large- and bench-scale ignition test, various hoods and
    test chambers for small-scale ignition tests, and a chemistry
    laboratory and chemical hood for fiber analysis and specialized
    (plastic film, chemicals and solids) flammability testing.
        The chemistry laboratory will house all the analytical
    instrumentation used by the chemists to evaluate children's and
    consumer products and household chemicals. This laboratory will contain
    four separate laboratory testing cells used for sample preparation
    where solvents and acids are used, the analysis of total acids and
    bases, testing for flash point and viscosity analysis and extractions
    such as those used in the phthalate plasticizer project.
        The Instrumentation Laboratories will house the inductively coupled
    plasma spectrometer, which is used for analysis of metals, two Gas
    Chromatograph Mass Spectrometers, a Fourier Transform Infra-red
    Spectrophotometer, and two small indoor air quality exposure chambers.
        CPSC's combustion products and appliances laboratory will contain
    three specialized and highly sophisticated chambers and instrumentation
    for testing a range of residential appliances including furnaces,
    stoves, ovens, gas-fueled fireplace sets, unvented space heaters, and
    camp stoves and heaters. A temperature- and humidity-controlled carbon
    monoxide gas chamber used to test CO alarms will also be situated in
    that space. Adjacent to these chambers, we plan to install the
    apparatus of the mechanical test laboratory: a large fatigue cycle test
    frame, a 14-foot tall monorail head-form drop tester for helmet and
    playground surface testing, two tensile/compression strength testers
    for evaluating mechanical support structures (such as bicycle frames),
    and a hydraulic pressure test facility for evaluating fire suppression
    sprinklers.
        The electrical and mechanical test laboratories will be used for
    testing various consumer products, such as ATVs, small electrical
    household appliances, cribs, baby walkers, and toys. We will also have
    fireworks laboratory space to test some of the characteristics of Class
    C pyrotechnic devices for compliance with Federal regulations.
        Question. I understand that the new facility does not allow for
    fireworks testing? Are you not testing fireworks then?
        Answer. CPSC is not able to conduct the full range of fireworks
    testing at our current laboratory and will not be able to conduct the
    full range of testing at our new facility. We conduct testing to
    evaluate fireworks fuse burn time, functionality and reliability of the
    fuse to ignite the device, launch tube integrity, functionality and
    location of the aerial effects, and other characteristics at the
    Blossom Point Research Facility in southern Charles County.

              SEARCHABLE CONSUMER PRODUCT SAFETY INCIDENT DATABASE

        Question. In less than a year, the public will be able to access a
    CPSC database that will allow an individual to report an incident or
    injury from a product and also allow an individual to research safety
    information about a product. Where is the Commission, at this point, in
    developing the system?
        Answer. In September 2009, funds were apportioned by the Office of
    Management and Budget (OMB) for the development of the public database.
    Since that apportionment, CPSC staff has worked diligently to complete
    the tasks required to implement the database by the March 2011
    deadline.
        In January, public workshops were held with consumer groups and
    industry to solicit comments and suggestions about how to best meet the
    requirements of Section 212 of the CPSIA. In April, the Commission
    proposed a rule specific to the implementation of the database.
    Comments received through this implementation proceeding have been used
    to help develop the system.
        With strong support from agency executives, much of the development
    work has been completed and internal and several external focus groups
    have reviewed specific parts of the application. CPSC has also taken
    advantage of opportunities for presentations at meetings held by the
    Consumer Federation of America, the International Consumer Product
    Health and Safety Organization, and with the National Association of
    Manufacturers. Comments have been positive.
        Later this fall, CPSC plans to hold more workshops with industry
    and consumer groups to garner more feedback. CPSC's Office of Public
    Affairs is also coordinating the development of the public awareness
    campaign consistent with the release of the database in March 2011.
    Overall, development work for the public consumer product safety
    incident database is on target and we anticipate a successful release
    in March 2011.
        Question. What types of issues are you grappling with as you
    envision the system's development?
        Answer. CPSC has not run into significant issues with the
    development of the system. During the public workshops held on the
    database many useful comments and suggestions were provided by industry
    and consumer groups. The Commission also received close to 50 comments
    in response to the proposed rule. These comments are currently being
    analyzed in preparation of the final rule. Although some of the
    technical details of the database design may be affected by the
    adoption of the final rule, the possible changes are manageable within
    the implementation timeframes.
        Question. What types of input or assistance are you receiving for
    this type of undertaking?
        Answer. As noted above, CPSC held public workshops with industry
    and consumer groups to help provide input for the design and
    functionality of the system. Meetings with other stakeholders and
    external focus group testing in recent months have also proven useful.
    Additional workshops are planned, along with more extensive use of the
    Commission's saferproduct.gov website to provide more information to
    the public as updated information becomes available. CPSC will continue
    to work as closely with industry and consumer groups well in advance of
    the launch of the public database to ensure its success.

                 STATEMENT SUBMITTED SUBSEQUENT TO THE HEARING

        Senator Durbin. Subsequent to the hearing Senator Mary
    Landrieu has requested that a statement she has submitted be
    inserted into the record.
        [The statement follows:]

                 Prepared Statement of Senator Mary L. Landrieu

        Thank you Chairman Durbin and Ranking Member Collins for calling
    this oversight hearing on the Consumer Product Safety Commission's
    (CPSC's) budget for fiscal year 2011. The Consumer Product Safety
    Commission continues to do great work to ensure that consumers
    protected against hazardous products. Of particular interest to me and
    the state of Louisiana is the CPSC's ongoing investigation into
    defective drywall made in the People's Republic of China. As homeowners
    in my state, and nationwide face possible health and environmental
    risks from Chinese-made drywall products, it is my hope that the CPSC
    will be able to provide a definitive solution in the investigation into
    this issue facing impacted consumers in the near future.
        According to published reports, since 2006 more than 550 million
    pounds of drywall have been imported to the United States from China.
    This is enough to make tens of thousands of homes. However, these
    products may have come into the country as far back as 2000 and could
    be in over 100,000 homes nationwide. This is because since 2004,
    builders have turned overseas for materials because our own U.S.
    suppliers could not keep up with demand created by the U.S.
    construction boom, as well as a series of hurricanes and other natural
    disasters. This would include the 2004 Florida hurricanes, Hurricanes
    Katrina and Rita of 2005, and other disasters. The drywall entered the
    United States through numerous ports, including the Port of New
    Orleans. As I understand it, Florida was the number one destination for
    these products with over 3 million drywall boards. Louisiana was next
    with almost 660,000 drywall boards. In Louisiana alone, this could be
    as many as 7,000 homes. Overall to date, the CPSC has received about
    3,082 incident reports from 37 states, the District of Columbia, Puerto
    Rico, and American Samoa. This problem spans the country, from
    California in the West to right here in the District of Columbia and
    Virginia. It is not just an isolated issue for homeowners in the Gulf
    Coast--Chinese drywall is a nationwide problem.
        It is my understanding that the CPSC received its first consumer
    incident report from Florida in December 2008. In Louisiana, we began
    to see reports from homeowners in southeast Louisiana in late February
    of 2009. These reports were similar to those seen in Florida homes: a
    ``rotten egg'' smell within homes; health issues such as skin
    irritation, persistent cough, bloody noses, hair loss, and asthma
    attacks; lastly homeowners noticed blackened and corroded metal
    components in their homes. According to the Louisiana Department of
    Health and Hospitals, 990 calls have been received regarding defective
    drywall, and 551 of those callers have completed the DHH survey. The
    majority of these reports were centered in New Orleans and surrounding
    parishes in southeast Louisiana. From Orleans Parish, 151 calls have
    been received, followed by St. Tammany Parish with 118 calls, and
    Jefferson Parish, St. Bernard Parish, and East Baton Rouge Parish
    follow close behind. Just to give you an example of how widespread this
    issue is in my state, we have seen hundreds of homeowners ranging from
    St. Bernard Parish Fire Chief Thomas Stone to New Orleans Saints Head
    Coach Sean Payton report this product in their homes. Many parents have
    been seeking answers on what might be making their kids sick or, now
    that more details are coming out, how they should safely remove this
    product from their homes. This defective Chinese drywall represents an
    attack on these families and presents another obstacle on our road to
    Gulf Coast recovery.
        In response to these reports, my office has heard from countless
    constituents on the need for consistent, scientifically-based
    information on the product, as well clear guidance on the public
    safety, health, and environmental impact. Families have asked for
    information on which Federal or State agencies to contact, in addition
    to any updates we have on the health risks posed by this product. Many
    families also called concerned about the impact of defective drywall
    not just on their children but also on pets. To address these
    questions, on April 23rd, my office issued a fact sheet for homeowners
    updating them on the Federal/State response, providing key contact
    information, and answering frequently asked questions. My office
    updates this document regularly as new information becomes available.
        On the state level, it is my understanding that the calls which the
    Louisiana Department of Health has received have ranged from homeowners
    requesting home inspections, advice on home evacuations, in addition to
    inquiries on specific health information to provide their primary care
    physicians and veterinarians. A key question is that of remediation or
    possible financial assistance in order to deal with this problem. Many
    of my constituents received either Federal Emergency Management Agency
    (FEMA) or Small Business Administration (SBA) disaster assistance to
    rebuild these homes following Hurricanes Katrina and Rita of 2005.
    These families spent months in FEMA trailers and rental units following
    these disasters, they paid out of pocket or took on debt to rebuild.
    Now they find their rebuilt homes in worse shape than these post-
    disaster temporary units. In this situation, families are looking for
    answers and a timeline for when more information will be known on the
    definitive health impacts of this product.
        In response to these concerns from my constituents, I have been
    working closely with Senators whose states contain contaminated
    drywall. Along with my colleagues, I have sent letters to various
    agencies requesting appropriate assistance for homeowners and I have
    filed S. 2731, the ``Small Business Administration Disaster Recovery
    and Reform Act of 2009.'' S. 2731 includes a provision, which with
    restrictions, would authorize SBA to make disaster home loans for the
    repair and replacement of Chinese drywall. Senator Nelson has co-
    signed, and I look forward to pushing for this bill to become law to
    provide relief to homeowners.
        Earlier this year, CPSC and the U.S. Department of Housing and
    Urban Development (HUD) issued a protocol to help identify problem
    drywall in homes. Further, interim remediation guidance was released by
    these agencies on April 2 based on CPSC's ongoing scientific research.
    These guidelines are a positive step to relief for affected homeowners,
    and the coordination of the CPSC and HUD is to be commended. However,
    it is important for all Federal agencies to better coordinate with CPSC
    and HUD in an effort to better assist in the remediation and recovery
    efforts.
        While I understand the need to be thorough and build a case that
    might stand up to future legal scrutiny, and I understand that accurate
    scientific testing takes time, my constituents need definitive answers
    now. Parents caring for sick children or pets need answers, workers
    removing these products from homes need to know potential health risks,
    and local health officials need to know what environmental impact may
    occur if this drywall is dumped into landfills. Though results which
    have been released and interim remediation protocol are great leaps, I
    must stress the importance of a final solution.
        In closing, I believe that the scope of this problem is huge
    because it touches on so many different stakeholders. The first thought
    is on the impact to homeowners and renters, as it should be for a
    health risk of this nature. However, medical professionals and
    veterinarians are also dealing with this issue as families report
    health problems. The possible public safety impact also draws in fire
    marshals, construction workers, and environmental inspectors. So this
    defective product is not just a concern for homebuilders or homeowners,
    but is a concern for many other professions in both the public and
    private sectors. That is why the testing of this hazardous material is
    so important--we must ensure that there is a timely and effective
    Federal response in cooperation with local health authorities. I look
    forward to working closely with my colleagues to support additional
    efforts to address this critical matter facing our homeowners.
        I thank the Chairman and ask that a full copy of my statement
    appear in the record.

                              SUBCOMMITTEE RECESS

        Senator Durbin. And this meeting of the subcommittee stands
    in recess.
        [Whereupon, at 3:26 p.m., Wednesday, April 14, the
    subcommittee was recessed, to reconvene subject to the call of
    the Chair.]

      FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR FISCAL
                                   YEAR 2011

                                  ----------

                           WEDNESDAY, APRIL 28, 2010

                                           U.S. Senate,
               Subcommittee of the Committee on Appropriations,
                                                        Washington, DC.
        The subcommittee met at 2:36 p.m., in room SD-138, Dirksen
    Senate Office Building, Hon. Richard J. Durbin (chairman)
    presiding.
        Present: Senator Durbin, Lautenberg, Collins, Bond, and
    Cochran.

                      COMMODITY FUTURES TRADING COMMISSION

    STATEMENT OF HON. GARY GENSLER, CHAIRMAN

                 OPENING STATEMENT OF SENATOR RICHARD J. DURBIN

        Senator Durbin. Good afternoon. I am pleased to convene
    this hearing and apologize for being a few minutes late.
        This is a hearing to consider the fiscal year 2011 funding
    request of two of our most important Federal regulatory
    agencies, the Commodity Futures Trading Commission (CFTC) and
    the Securities and Exchange Commission (SEC).
        I am happy to welcome my colleague, a little tired I am
    sure from yesterday, Senator Susan Collins of Maine, who is my
    ranking Republican on this subcommittee, my friend. We have
    worked together on many aspects of many different laws over the
    years, and this is a very important one.
        We will have other colleagues who will join us during the
    course of the hearing.
        I want to welcome Gary Gensler, Chairman of the Commodity
    Futures Trading Commission, and after his testimony, Mary
    Schapiro, Chairman of the Securities and Exchange Commission.
        Both Chairmen have invested countless hours in helping to
    craft a more reliable regulatory foundation to guide us in the
    future. These two agencies occupy pivotal positions at the
    forefront of stimulating and sustaining economic growth.
        When this subcommittee was created and started, I insisted
    that it bring these two agencies together into one
    Appropriations subcommittee because they parallel one another
    in their regulatory responsibilities and I felt that the
    ancient separations no longer applied, that they really should
    be considered as a tandem operation to bring confidence to
    important marketplaces in America. And I think the President
    has chosen well in the two people who guide these agencies
    today.
        The SEC, of course, is responsible for maintaining orderly
    and efficient stock and securities markets and conducting day-
    to-day oversight of major market participants.
        The Commodity Futures Trading Commission, well known to me,
    is an agency that also carries out market surveillance,
    compliance, and enforcement programs in the futures arena, very
    important to our Nation and certainly to the city of Chicago
    and the State of Illinois.
        This subcommittee has an oversight responsibility over both
    of these agencies. We are now debating whether or not any
    committee like the Appropriations Committee should have
    oversight over these two agencies. I believe sincerely that we
    should. We have dramatically increased the resources and
    personnel at both of these agencies, and I hope we will
    continue that trend because their responsibilities are growing
    and we have to provide them the people and the technology to
    meet that challenge. But as we provide these resources, we also
    need to provide oversight. No agency that comes before this
    Government should be above oversight and review. That is why
    this subcommittee will continue to work diligently to exercise
    its oversight responsibility. There are some who question that,
    but I feel very strongly that not only will these agencies
    receive resources but they will be held accountable for the way
    they use these resources and spend them.
        I will not go into detail here about the money that has
    been allocated so far to both of these agencies. We will get
    into that in the course of questioning.
        I would like to, at this point, give my colleague, Senator
    Collins, an opportunity to make an opening statement before Mr.
    Gensler testifies.

                       STATEMENT OF SENATOR SUSAN COLLINS

        Senator Collins. Thank you, Mr. Chairman.
        Mr. Chairman, let me begin by associating myself with your
    comments, in fact, with all of your comments. I know that both
    of us share such a commitment to providing these two important
    consumer agencies with the resources that they need, but like
    you, I also believe in effective congressional oversight. And
    if we essentially put the budgets of these two agencies off
    budget, if we allow them to avoid the annual appropriations
    process, I believe congressional oversight and accountability
    will suffer.
        Therefore, I am going to try to ensure that the financial
    reform bill that passes--and eventually a financial reform bill
    will pass--does not take these agencies--and particularly it
    has been proposed for the SEC--outside of the annual
    appropriations process. I think it is so important.
        And I would note to the two Chairmen that we have before us
    today that this subcommittee has been extremely responsive to
    concerns for more resources. We want to reverse the years when
    you had insufficient staff to do effective enforcement. Indeed,
    as we begin to review your budget requests for this year, we
    should take note of the significant funding increases that our
    subcommittee provided for your agencies last year. In the case
    of the SEC, we went above the President's budget request. We
    gave an increase of nearly $159 million over the previous
    fiscal year; in the case of the CFTC, an increase of $23
    million over the previous year.
        I have been pushing very hard to make sure that you not
    only have the levels of staffing that you need, but you have
    the skilled staff that you need. In fact, I have a feeling that
    the two chairs are competing for skilled staff in many ways,
    for the attorneys, the experts, the accountants that you need.
        The roles that you are playing are so important.
        I will say that I am very disturbed by the recent press
    reports that senior SEC staff were looking at pornography at
    work instead of focusing on securities fraud. That behavior is
    despicable at any time, but it appears to have occurred during
    the height of the financial crisis and that makes it even more
    inexplicable.
        I look forward to discussing a lot of the important issues
    in financial reform with our witnesses today.
        Again, thank you, Mr. Chairman, for your leadership in this
    area.
        Senator Durbin. Thank you, Senator Collins.
        Senator Bond, unless you have an opening statement, I am
    going to recognize Chairman Gensler, but you are going to be
    recognized if you do.

                    STATEMENT OF SENATOR CHRISTOPHER S. BOND

        Senator Bond. Let me state very briefly because I do have a
    question or two for the Chairman. We welcome him here.
        Everybody is talking about the financial regulatory system
    and the changes. In the heartland I am from, we hear and
    understand that Wall Street provides critical financial
    support. We also understand that the changes to the system are
    necessary on Wall Street, but if they alter significantly the
    way people do business back home, we want to make sure reform
    is done right.
        The derivatives, yes. Some of the derivatives really need
    to be regulated. But a lot of the small businesses back home
    are in commodities hedging where the contracts pose no systemic
    risk, and lumping these into risky derivatives trading, as far
    as I am concerned, makes no sense. These are not speculative
    contracts. They are contracts between parties who operate
    normally. And to be blunt, if that goes through, I am afraid
    that this will entail higher costs for energy production, for
    transportation, particularly for farmers.
        So I would like to ask you about that and appreciate the
    chance to raise that, Mr. Chairman.
        Senator Durbin. Thank you very much, Senator Bond.
        Let us let Mr. Gensler give his opening statement, and then
    we will pose some questions. Please proceed.

                     SUMMARY STATEMENT OF HON. GARY GENSLER

        Mr. Gensler. Thank you, Chairman Durbin, Ranking Member
    Collins, and Senator Bond. I thank you for inviting me here to
    testify on behalf of the Commodity Futures Trading Commission.
    I am also honored to be here with Chairman Schapiro. Mary and I
    work very closely on many things. I remember last year we were
    at the table together, and I appreciated that as well because
    she took more questions than me.
        But I guess this year I'm at the table alone.
        With the help of this subcommittee, the CFTC has risen to
    staffing levels of 600 people. This is roughly where we were in
    the 1990s, but it is with your help that we came back from
    about 440 people just 2\1/2\ or 3 years ago. We do believe, to
    fulfill our mission and protect the American public and promote
    transparency in markets, we need 745 people. We also need to
    get a bit more in our technology budget.
        The CFTC, as you know, ensures that futures exchanges and
    the clearinghouses that we oversee work to lower risk to the
    public and increase transparency. We also oversee all of the
    intermediaries or the dealers in these markets as well.
        Though our staffing level is only slightly higher than it
    was 10 years ago, futures trading volume--and I think I have a
    chart over here, if I might. The blue is the trading volume in
    this period of time in the 10 years since 1999. And as you can
    see, our staff actually shrunk and we are coming back.

        Now, one might look at this and say that is productivity,
    but just imagine a city with police officers that has grown
    five-fold. You would not really want to have the police force
    shrink because you cannot investigate cases. You cannot protect
    the public. It is the same thing really in an agency like ours.
    We are like that police force that shrank while the city grew
    five-fold.
        But with the help of this subcommittee, we have turned the
    corner. We have come back to, as I said, where we were in the
    1900s. And this increased funding, if I can just tell you what
    we have been able to do with it, but why we think we need some
    more.
        First, we have been able to significantly increase our
    Enforcement Division. That Enforcement Division by the end of
    this year will be about 170 people. We think we need to get to
    200 people however.
        Second, we have embarked--we have just started--on a
    program to do automated surveillance. We have hundreds of
    thousands of trades that come in to us a day. We see all those
    trades. That is very good and the exchanges see them. But we
    want to automate the surveillance of those and bring 21st
    century computing power to the American public.
        Third, we have also implemented the authorities that you
    and others in Congress granted us under the farm bill in 2008.
    That was to bring enhanced regulation to the markets and put
    out rules. We have proposed rules on position limits. We have
    proposed rules on foreign exchange. We are planning to put out
    rules on collocation in the near future.
        But even with these recent increases, we need more. The
    market participants have technology now that we have to stay up
    with, and that is the thought.
        So starting in 2010, we started a multiyear project to
    automate our surveillance. It is going to take us several
    years, and we have included that in the numbers.
        Second, we do need staffing levels and resources to conduct
    annual reviews. When I got to the CFTC, I said are we like the
    bank examiners. Are we inside the banks every year? And I found
    out actually because we had shrunk, that we were not inside the
    exchanges and inside the clearinghouses every year just to do
    what is called a rule enforcement review. We think that we
    really need to be there every year and work with the exchanges,
    work with the clearinghouses to do that.
        Third, our enforcement staff. We really do feel we need to
    get up to 200. Our financial crisis exposed more fraudulent
    schemes that require extensive staff resources. Manipulation
    cases particularly can take up to 2 to 3 years, and what Doug
    is putting up for me is just our overall funding request. And
    then I think my time will be up.
        But our overall funding, which you helped us get to, is
    $169 million, on the left. And what we are asking for in 2011
    is $216 million, or 745 full-time equivalents (FTEs). Much of
    that is to keep current services. We have taken out some more
    space because of the growth. Of course, there will be a cost-
    of-living increase and technology. But in addition to that, if
    Congress were to move forward, as I hope in the next few days
    that the Senate will--I was encouraged, Senator Collins, by
    what you said on that. But if the Senate takes up the full
    debate on derivatives reform, the SEC and CFTC will have a lot
    of additional responsibilities and authorities. The over-the-
    counter derivatives marketplace is 8 to 10 times the size of
    the on-exchange derivatives market measured in notional amount.
    I do not want to frighten you. It is a smaller number of
    transactions.

                               PREPARED STATEMENT

        The President was good enough to include a $45 million
    request that will get us part-way there. We think in 2011, we
    will need somewhere on the order of 240 more people and $18
    million more in technology to get started on the derivatives
    oversight. And I know that Chair Schapiro will have some of
    those numbers as well, but the thought is for 2011, it may be a
    conditional appropriation or if the derivatives reform were to
    go through, maybe you would include it in the whole
    appropriations package.
        With that, I would be glad to take any questions.
        [The statement follows:]

                       Prepared Statement of Gary Gensler

        Good afternoon Chairman Durbin, Ranking Member Collins and members
    of the Subcommittee. I am pleased to testify on behalf of the Commodity
    Futures Trading Commission (CFTC), and I thank you for the opportunity
    to discuss issues related to the Commission's 2011 budget.
        In the fall of 2008, the financial system and the financial
    regulatory system failed. While more than 1 year has passed and the
    system appears to have stabilized, we cannot relent in our mission to
    vigorously implement our mandate to protect the public from fraud,
    manipulation and other abuses in the commodity markets. I would like to
    express my gratitude to Congress for the recent increases in
    appropriations that now permit the Commission to address longstanding
    regulatory and oversight weaknesses. The CFTC, however, requires
    additional resources to hire staff with new competencies and skill sets
    and to ensure our technological infrastructure and systems keep pace
    with the industry we regulate. These improvements are essential to
    promoting transparency and integrity in the marketplace. Only through
    strong, intelligent regulation can we fully protect the American people
    and keep our economy strong.

                             CFTC REGULATORY REGIME

        Before I discuss the President's budget request for the CFTC, I
    will take a moment to discuss the agency's oversight of the futures
    markets. Futures have traded since approximately the Civil War, when
    grain merchants came together and created the new marketplace. It took
    nearly 60 years and the Great Depression until President Franklin
    Roosevelt and the Congress regulated the futures markets.
        The CFTC ensures that futures and commodity options exchanges have
    procedures to protect market participants and ensure fair and orderly
    trading, free from fraud, manipulation and other abuses. Exchanges are
    where buyers and sellers meet and enter into a transaction. The CFTC
    also oversees clearinghouses, which enter the picture only after two
    counterparties enter into the transaction. Clearinghouses act as
    middlemen between the two parties and take on the risk that one
    counterparty to the trade may fail to meet its obligations under the
    contract for the duration of the contract. Centralized clearing has
    helped lower risk to the markets for decades in both calm markets and
    in the stormiest of markets, such as during the 2008 financial crisis.
        The CFTC has wide-ranging transparency efforts designed to provide
    as much information about commodity futures markets and trading to the
    American public as possible under current law. The agency also has
    broad surveillance powers to police the markets for fraud, manipulation
    and other abuses.
                                   the budget
        The President's budget proposes that $216 million be appropriated
    for the Commission for fiscal year 2011 to remain available until
    expended through fiscal year 2012.

        This amount would be for the agency to perform its duties under
    current statutory direction. In addition, the budget proposes that $45
    million be appropriated to be available through fiscal year 2012
    contingent upon the enactment of authorizing legislation of new or
    enhanced financial regulation activities of the Commission.
        Ten years ago, the CFTC was near its peak staffing level at 567
    employees, but shrunk by 20 percent over the subsequent eight years
    before hitting a historic low of 437. Thanks to increased funding from
    Congress, the CFTC now has almost 600 staff on board, which is a net
    increase of 100 staff over were we stood a year ago.

        All Commission programs: technology, market and intermediary
    oversight, enforcement, economic, legal and risk analysis have
    benefited from increased staff resources. Still, merely raising our
    staffing levels to the same as a decade ago will not be enough to
    adequately fulfill the agency's statutory mandate. In the last 10
    years, futures trading volume increased almost five-fold.

        The number of actively traded futures and options contracts
    increased seven-fold, and many of these have become considerably more
    complex in nature.

        We also moved from an environment with open-outcry pit trading to
    highly sophisticated electronic markets. What was once a group of
    regional domestic markets is now a global marketplace. What was once
    just a $500 billion business has grown to a $33 trillion industry. In
    short, the Commission requires funds to hire and retain highly trained
    professionals and equip them with information technologies that are as
    sophisticated as the expanding markets they we oversee.
        Despite rapid advances in technology and the increased size and
    number of regulated futures markets, funding for the CFTC has lagged
    behind the growth of the markets.

        While market participants have the technology to automate their
    trading, we do not yet have the resources to employ modern technology
    to automate our surveillance. Further, the CFTC still does not have the
    staffing levels or the resources to conduct regular examinations of
    market intermediaries, exchanges and clearinghouses. Until additional
    staff resources are acquired we can conduct those examinations only
    periodically and have no choice but to leave routine examinations of
    intermediaries to self-regulatory organizations. The CFTC needs
    additional staff, with new expertise to conduct yearly examinations of
    the registrants we regulate.
        For these reasons, it is appropriate for our staffing levels and
    our technology to be bolstered to meet the new financial realities of
    the day. As such, the CFTC's Budget and Performance Estimate for fiscal
    year 2011, for existing statutory authorities, would increase the
    agency's funding by $47.2 million to $216 million and would augment
    agency staff by 95 FTE to a total of 745 FTE.
        The requested funding increase to cover current statutory
    authorities includes resources to accomplish the following goals:
        Updating the Commission's Surveillance and Technology Programs.--
    The Commission requires additional resources to replace legacy
    surveillance technology with 21st Century computers and software.
    Significant changes in the markets demand new systems capable of
    efficiently receiving and managing massive amounts of raw data and
    converting it to useful information for analysis by skilled market
    experts, economists and technologists. For example, existing Commission
    surveillance systems annually process more than one billion
    transactions to capture mission-critical data. Recent Commission
    initiatives to promote transparency of market data reveal the need for
    a substantial investment in systems development.
        The timely reporting of quality and meaningful market information
    is not possible with current legacy systems. Integration of two legacy
    systems, one with position data and one with trade data, is vital to
    building necessary functionality to capture more detailed data by
    trader, account ownership, inter-day transactions and intra-day
    transactions across all markets.
        Upgraded systems and analytical tools, such as market compliance
    detection and alert software, together with new staff competencies and
    skill sets, will increase the staff's efficiency and ability to monitor
    the markets and provide better information about futures and options
    trading to the American public. Market transparency is crucial to
    public trust and confidence in the price discovery and risk management
    functions of the futures and option markets. In addition, increased
    transparency, sophisticated use of automation and a heightened level of
    oversight will foster market compliance and integrity and enable the
    CFTC to keep pace with a rapidly evolving industry.
        Strengthening the Commission's Enforcement Program.--The CFTC
    should be adequately resourced to vigorously investigate and litigate
    complex market manipulation and trade-practice violations. Properly
    functioning markets must be free from fraud, manipulation and other
    abuses to ensure their integrity in setting prices and offsetting risk.
    A robust Enforcement program will foster regulatory compliance in the
    marketplace, protecting the American public and the marketplace.
    Adequate legal staff is necessary to act swiftly to investigate and
    prosecute fraudulent acts, such as the rash of Ponzi schemes uncovered
    during the recent market downturn.
        Rigorously Exercising Existing Authorities to Ensure Market
    Integrity.--Additional economic and legal staff will enable the CFTC to
    conduct mandatory annual reviews of all contracts listed on exempt
    commercial markets (ECMs) to determine if they are significant price
    discovery contracts (SPDCs). Such contracts must be reviewed to
    determine whether the ECM should be subject to statutory Core
    Principles and Commission's regulations. These and other new and
    increasingly diverse products add to the scope and complexity of
    products staff must review and monitor to ensure the integrity of the
    marketplace.
        Initiating Major Reviews of Existing Programs.--The Commission
    seeks additional resources to initiate major programmatic reviews of
    existing programs; expand development of the Commission's continuity of
    operations program (COOP); increase public and consumer education and
    outreach; implement the strategic plan; improve performance metrics;
    and enhance the Commission's equal employment opportunity program. The
    Commission is committed to creating a diverse pool of qualified
    candidates.
        Continuing Current Service Level.--The CFTC requires additional
    resources to provide a continuation of the fiscal year 2010 current
    service level into fiscal year 2011. This includes annual merit based
    compensation adjustments for staff, lease of office space, utilities
    and communications, printing, supplies, capital equipment and fixed
    equipment.
        Specifically, the funding will be allocated to increase staffing
    levels in the following divisions:
        Division of Enforcement.--The Commission's Enforcement program is
    on track to reach a staff level of more than 170 by the end of this
    fiscal year. This is a significant program turnaround from an all-time
    low of 109 in fiscal year 2008. Nevertheless, a staff of 170 may be
    below what is needed to address the current challenges brought by the
    recent financial crisis. Our goal for fiscal year 2011 is to have an
    Enforcement staff of 200, including strategic plans to double the
    Enforcement staff in the Kansas City office. In addition, the
    Commission intends to augment the enforcement staff with improved
    litigation and forensics support technologies, such as the e-Law
    system. Use of the e-Law system improved productivity and has permitted
    the Commission to pursue resource-intensive investigations and
    litigation involving manipulation. It also has improved our ability to
    implement our new Farm Bill authorities in the over-the-counter forex
    futures market.
        Division of Market Oversight.--The rapid changes occurring in the
    futures markets over the last decade have brought new challenges to the
    Commission's Division of Market Oversight (DMO). DMO now needs
    additional experienced professional staff to actively monitor exchanges
    to ensure compliance with CFTC regulations; keep a close eye for signs
    of manipulation or congestion in the marketplace and decide how to best
    address market threats; and ensure that traders do not exceed Federal
    position limits. Thus, the Commission seeks to increase DMO's staff
    from 139 in fiscal year 2010 to 168 in fiscal year 2011.
        Specifically, DMO requires additional highly skilled economists,
    investigators, attorneys and statisticians so that: (1) position data
    may be analyzed quickly and thoroughly; (2) exchange applications and
    rule changes may be reviewed efficiently and comprehensively to ensure
    compliance with Core Principles and CFTC rules and policies; (3)
    exchange self-regulatory programs may be examined on an on-going annual
    basis with regard to trade practice oversight, market surveillance and
    compliance with disciplinary, audit trail and record-keeping
    regulations; (4) comments related to a proposed energy position limits
    rulemaking, proposed significant price discovery contract
    determinations and other proposed rulemakings and industry filings can
    be comprehensively reviewed and summarized; and (5) proposed
    rulemakings and determinations can be effectively implemented should
    the Commission approve them.
        Division of Clearing and Intermediary Oversight.--Additional
    resources would allow the Commission to perform regular and direct
    examinations of registrants and more frequently assess compliance with
    Commission regulations.
        In the case of intermediaries, the Commission requires additional
    resources to directly assess compliance instead of relying on
    designated self-regulatory organizations (DSROs). The frequency of the
    reviews will increase to once a year from approximately once every 3
    years. New staff will permit the review annually of all derivatives
    clearing organizations (DCOs) and the audit and financial surveillance
    programs of each DSRO ensuring ongoing rather than intermittent
    oversight. The Commission seeks to increase the Division of Clearing
    and Intermediary Oversight staff from 113 in fiscal year 2010 to 120 in
    fiscal year 2011.
        Offices of the Chairman and the Commissioners.--The Offices of the
    Chairman and the Commissioners require professional, legal and economic
    expertise as they undertake a number of high priority programmatic
    initiatives, including: (1) subject to enactment of new authorities,
    regulation of derivatives markets and regulatory changes to protect the
    American public from systemic financial risks; (2) regulatory
    coordination with other agencies such as the Securities and Exchange
    Commission (SEC) and Federal Energy Regulatory Commission (FERC); (3)
    promoting market transparency; (4) promoting transparency on the
    Commission's website; (5) regulation of energy markets--especially with
    regard to position limits and the Commission's review of significant
    price discovery contracts; (6) increasing frequency of reviews and
    audits of Commission registrants; and (7) technology modernization,
    resource justification and program performance. The Commission proposes
    to bolster these offices from 35 staff in fiscal year 2010 to 47 staff
    in fiscal year 2011.
        Office of the Chief Economist.--The CFTC's Office of the Chief
    Economist (OCE) conducts research on major economic issues related to
    the futures and options markets; participates in the development of
    Commission rulemakings; provides expert economic support and advice to
    other CFTC offices; conducts special studies and evaluations; and
    participates in the in-house training of staff on matters related to
    futures, options, swaps and risk management. OCE requires additional
    economists to review and analyze new market structures and off-exchange
    derivative instruments. OCE also needs additional resources to review
    and analyze risk management models supportive of the Commission's
    enforcement and surveillance programs. The Commission proposes to
    increase OCE staff from 13 in fiscal year 2010 to 17 in fiscal year
    2011.
        Enterprise Risk Management Office.--The budget proposes a new
    Enterprise Risk Management subprogram, consisting of three staff, to
    focus on proactively developing and employing methods and processes to
    manage risks that may be obstacles to the discharge of the Commission's
    responsibilities. The staff will identify plausible risks posed by
    current and future events or circumstances that may affect the
    Commission's ability to respond effectively. Risks will be assessed in
    terms of the likelihood and magnitude of impact. The program will
    determine an appropriate response strategy and monitor outcomes.
        Office of the Executive Director.--The budget requests additional
    staff within the Office of the Executive Director to establish a
    Commission strategic and operational planning and evaluation function,
    the first such permanent resource. The additional two staff members
    will assist the Commission's programs in establishing metrics to track,
    monitor and evaluate program results, outcomes and goal achievement to
    ensure the effective and efficient allocation of resources. Adequate
    staff in the office is needed to ensure a sufficient level of human
    capital expertise focusing on employee development, recruitment and
    outreach, leadership, management training and employee relations. The
    Commission is mindful of the need to effectively manage staff resources
    to develop and sustain a professional workforce capable of keeping pace
    with our growing regulatory responsibilities.
        Office of International Affairs.--The budget requests an additional
    staff member in the Office of International Affairs, which coordinates
    the Commission's non-enforcement related international activities,
    represents the Commission in international organizations such as the
    International Organization of Securities Commissions (IOSCO),
    coordinates Commission policy as it relates to U.S. Treasury global
    initiatives and provides technical assistance to foreign market
    authorities. The financial crisis has heightened the need for
    international cooperation among regulators, and an additional staff
    member is required to meet the mission critical responsibilities of the
    office.
        Office of Proceedings.--The Office of Proceedings is responsible
    for providing an inexpensive, impartial and expeditious forum for
    handling customer complaints against persons or firms registered under
    the Commodity Exchange Act. The Commission requires one additional
    staff to ensure expeditious processing of complaints.

                               REGULATORY REFORM

        In addition to implementing the authorities established in the
    Commodity Exchange Act, the CFTC also is working with Congress to bring
    comprehensive regulation to the over-the-counter derivatives
    marketplace. The Commission's budget request includes an additional
    $45,000,000 and 119 full-time equivalent employees for fiscal year 2011
    to begin implementation of the Administration's comprehensive proposal
    for financial regulatory reform. As proposed, the request is contingent
    on Congressional enactment of legislation giving the Commission new
    authorities. The Commission's fiscal year 2012 total (current and
    proposed new authorities related to financial regulatory reform) staff
    requirement is estimated to be approximately 1,000 FTE. The requested
    funds will permit Commission implementation of new responsibilities
    under consideration by Congress, such as:
      --Requiring swap dealers and major swap participants to register and
            come under comprehensive regulation, including capital
            standards, margin requirements, business conduct standards and
            recordkeeping and reporting requirements;
      --Requiring dealers and major swap participants to use transparent
            trading venues for their standardized swaps;
      --Ensuring that dealers and major swap participants bring their
            clearable swaps into central clearinghouses; and
      --Providing the CFTC with authority to impose aggregate position
            limits including in the OTC derivatives markets.
        Specifically, the Commission's fiscal year 2011 budget request for
    regulatory reform would be allocated as follows: 41 additional staff
    for Market Oversight; 30 additional staff for Clearing and Intermediary
    Oversight and Risk Surveillance; 18 additional staff for Enforcement;
    15 additional staff for Information Technology; eight additional staff
    for General Counsel; five additional staff for Human Resources and
    Management Operations; one additional staff for the Chief Economist;
    and one additional staff for International Affairs.

                                    CLOSING

        The staff of the CFTC is a talented and dedicated group of public
    servants. The financial crisis and the significant increase in trade
    volume, market complexity and globalization require that additional
    resources be committed to the protection of American taxpayers. For all
    of these reasons, it is necessary and appropriate that Commission
    staffing levels and technology be bolstered to address the new
    financial realities of the day.
        In short, despite the recent increase in funding, the Commission
    remains an underfunded agency. With additional resources, we will be
    more able to police the market, promote market integrity and protect
    the public from fraud, manipulation and other abuses.
        I thank you for inviting me to testify today. I will be happy to
    answer any questions you may have.

    ------------------------------------------------------------------------
             Past 2004-2008            Present 2009-2010        Future
    ------------------------------------------------------------------------
     AUTOMATING MARKET SURVEILLANCE

    Critical IT systems for the       Development of new  Robust, linked and
     surveillance of positions and     staff skill sets    fully integrated
     trading practices were not        with access data    IT surveillance
     robust. They have not been        query, analysis,    systems that
     upgraded to reflect the vast      algorithmic         produce the
     increase in volume and            models and          surveillance
     complexity of the markets.        reporting tools     reports needed to
                                       that alert staff    meet the
                                       to the conditions   analytical needs
                                       for potential       of our
                                       abusive trading     professional
                                       or misconduct.      staff and the
                                                           transparency
                                                           needs of the
                                                           public.

      IMPROVING MARKET TRANSPARENCY

    Lack of market transparency       New staff with new  Collect and report
     stemming from lack of reliable    skill sets have     data from swaps
     data about the size or effect     improved data       dealers and index
     of influential investor groups    collection and      investors.
     and potential harm posed by a     reporting on the    Release data on
     commodity asset bubble.           size of positions   commodity index
                                       held by large       investment on a
                                       traders.            monthly basis
                                      New public reports   rather than
                                       include:            quarterly.
                                         Disaggregated
                                          Commitment of
                                          Trader Reports.
                                         Supplemental
                                          Report on
                                          Commodity
                                          Index Traders.
                                         Swap Dealer
                                          Reports.

               ENFORCEMENT

    The Commission's enforcement      Appropriations      Future initiatives
     program reached an all-time low   increases have      include:
     of 109 as recently as in fiscal   permitted the         Pursuing all
     year 2008. The financial crisis   Commission to          potential
     revealed fraudulent schemes       enhance                fraud cases
     that could only stay afloat       Enforcement            reported to
     during periods of rising asset    staffing and           the
     values. The downturn exposed      resources              Commission;
     more leads than the Commission    committed.            Keeping pace
     can thoroughly and effectively      Staffing             with the
     investigate. This is true both       increased by        proliferation
     as it relates to fraud and           more than 50        in trading and
     Ponzi schemes as well as staff-      percent in 2        the emergence
     intensive manipulation               years.              of new
     investigations.                     Leads and            electronic
                                          investigations      trading
                                          increased by        facilities.
                                          more than 100       Effective
                                          percent over 2      enforcement
                                          years.              requires
                                         New                  looking beyond
                                          investigations      the exchanges
                                          will exceed         to multi-level
                                          250, which is       platforms and
                                          the highest         bilateral
                                          level in 10         trading, which
                                          years.              is very
                                         The Enforcement      resource
                                          division filed      intensive;
                                          31 civil           Enhancing the
                                          actions             Commission's
                                          involving           ability to
                                          Ponzi type          respond
                                          schemes in          efficiently to
                                          fiscal year         major market
                                          2009, which         movement or
                                          was more than       major collapse
                                          twice the           of an entity
                                          amount in           without
                                          fiscal year         adversely
                                          2008.               affecting
                                         New tools and        other on-going
                                          competencies        investigations
                                          are being           and
                                          developed to        litigation;
                                          address and         and
                                          identify           Rebuilding
                                          trends,             bench strength
                                          analyze data        and succession
                                          and explore         planning.
                                          resources
                                          previously
                                          unavailable to
                                          the Commission.

        INCREASED AUDIT OVERSIGHT

    The Commission does not conduct:  The Commission      Future initiatives
     annual compliance audits of       currently           include:
     every designated contract         assesses or           annual reviews
     market (DCM). Audits occur        conducts:              of DCOs, which
     every 3 years, on average;        financial              is critical as
     annual compliance audits of       surveillance           the volume of
     every derivatives clearing        programs of SROs;      positions
     organization (DCO). Periodic      certain                cleared by
     reviews on selected core          regulatory             DCOs and the
     principles occur every 3 years;   functions              complexity of
     or routine examinations of        performed by the       positions
     CPOs, CTAs, & FCMs, which are     NFA; other self-       grow;
     currently performed by self       regulatory            annual
     regulatory organizations.         organizations          compliance
                                       such as DCM SRO        reviews of
                                       functions; and         DCMs;
                                       examinations of       examination of
                                       FCMs for               the books and
                                       compliance with        records of
                                       the CEA and            additional
                                       Commission             FCMs on a
                                       regulations.           ``for-cause''
                                                              basis and
                                                              expand the
                                                              reviews of
                                                              certain
                                                              compliance
                                                              areas, such as
                                                              sales
                                                              practices and
                                                              foreign
                                                              currency
                                                              trading; and
                                                             additional
                                                              examinations
                                                              of CPOs and
                                                              other
                                                              registrants to
                                                              ensure a
                                                              better
                                                              understanding
                                                              of firms'
                                                              operations,
                                                              trading
                                                              strategies,
                                                              back office
                                                              procedures and
                                                              other factors
                                                              integral to
                                                              firms'
                                                              compliance.
    ------------------------------------------------------------------------

                                   TECHNOLOGY

        Senator Durbin. Thanks a lot, Mr. Chairman. And there are
    so many questions to ask, and I know we will not likely have
    time to ask all of them today.
        But I do want to reiterate what was said by Senator
    Collins. There are substantially greater investments in the
    resources that your agency and the SEC have to work with. I
    think it calls for substantially more oversight from our side
    of the table because there is a certain level of absorption
    which you can add to your staff in a professional manner and
    increase the workload. And then I have found, in the time that
    I have been around Congress, there reaches a tipping point
    where perhaps they cannot be absorbed effectively. There should
    be a committee of Congress watching this, following this,
    making certain that we are moving toward the same goal and that
    you are achieving that goal.
        Let me ask you in a specific way about technology. My
    impression, having worked with Senator Collins on this issue
    since 9/11 when we were both on the Homeland Security
    Committee, is that the Federal Government is like the last to
    pick up on new technology. We create rules and obstacles for
    purchasing and acquisition and all sorts of security questions,
    and we fall far behind the private sector. Do you feel that
    your technology improvements parallel or are consistent with
    the technology available in the private sector for similar
    functions?
        Mr. Gensler. Well, first, let me say I welcome the
    oversight of this subcommittee and our authorizing committee as
    well and working with Marianne and Dale and all the staffs that
    are with you.
        In terms of technology, we have had, with your help, an
    ability to get the data resources. We can actually take in all
    the transactions on the next day. We can take in all the
    positions at the end of the day. That is very helpful. We also
    rely on the exchanges because they have a lot of the technology
    as well.
        But what we are trying to build is 21st century software to
    actually do automated surveillance--consider it sort of flags
    and alerts so that our staff can then see whether it is a wash
    sale, whether it is a position limit concern, and then go back
    to the exchanges, work to see if there is a violation, work
    with the Division of Enforcement if something has to be
    followed up on. With hundreds of thousands of trades a day, we
    need to do that.
        I think, Senator, we are probably not there yet. I mean,
    think of algorithmic trading experts--we need to get some of
    that expertise into Government.
        Senator Durbin. What I am asking you, is there any built-in
    obstacles to your acquiring the technology that you believe is
    available and that you need?
        Mr. Gensler. The good news is we have the legal abilities.
    We do it through procurement laws and so forth, but we do have
    the legal ability to acquire it. It is usually just resources.
    In the past, we actually did not even have the hardware to
    store all the data. We have taken care of the storage side, but
    now we have to build some of that software.
        Senator Durbin. Is the answer no? I am asking if there are
    obstacles to your----
        Mr. Gensler. I am not aware of obstacles other than dollars
    and then the human time to actually do this.

                                  TRANSPARENCY

        Senator Durbin. One other aspect of this is how much of
    this is being made available to the public to review your work
    and the activities that are not proprietary, obviously, of the
    exchanges which you monitor.
        Mr. Gensler. Well, there is a great deal of information
    that we make available in the aggregate data, and then Senator
    Bond asked about derivatives reform. If derivatives reform were
    to move forward, there would be a lot of information about that
    market as well on real-time reporting. I think that answers
    your question.
        Senator Durbin. I am just wondering if there is more and
    more of this information that is being made available to the
    public.
        Mr. Gensler. Well, we have had success in the last year. We
    have actually made more information available about index
    investments in the market. For years, we have put out reports
    on every Friday about the markets, and we have broken that down
    between commercial and noncommercial traders. Now people can
    see what swap dealers and money managers or hedge funds are
    doing in the market in aggregate. Again, we do not break out
    the individuals.
        Senator Durbin. I see.
        I am going to yield now to Senator Collins.
        Senator Collins. Thank you, Mr. Chairman.

                             ENERGY POSITION LIMITS

        Chairman Gensler, as you know, I have had a great interest
    in seeing the Commission establish position limits to apply to
    the energy markets. Senator Lieberman and I held hearings
    looking at the price spikes in the energy markets a couple of
    years ago, and position limits can potentially help prevent
    those kinds of abrupt price movements or market disruptions.
    Could you update us on what is being done by the Commission to
    establish position limits for energy markets?
        Mr. Gensler. I thank you, Senator, for your leadership on
    this issue.
        We published proposed rules in January and asked for public
    comment--that comment period actually closed yesterday--to
    reestablish position limits. There were position limits in the
    energy markets with the exchanges through 2001. So we were
    looking to possibly reestablish them. We have over 8,000
    comments. So what we will do as an agency is review those--the
    staff is just embarking on that--and then bring those
    recommendations and review up to the five Commissioners and we
    will see how best to proceed based on those recommendations.

                    OVER THE COUNTER DERIVATIVES LEGISLATION

        Senator Collins. The second issue that I want to talk to
    you about in this first round has to do with the regulation of
    derivatives. This is such a complex and important issue. We
    clearly need more transparency. One of the debates, however, is
    the extent to which end-user manufacturers or grocery stores,
    like Hannaford's in my State, should face increased costs for
    investing in commodities essential to their products. And they
    will face increased costs if, in fact, they have to go through
    the clearinghouses.
        Help us understand the debate on derivatives and whether
    there should be exemptions for end-users, whether you see the
    Agricultural Committee's bill providing exemptions. There is a
    dispute over whether or not they do. Educate us a bit on this
    issue.
        Mr. Gensler. Well, I thank you.
        One of the key ways to lower risk in the derivatives
    marketplace is something called a clearinghouse. They have
    existed since the 1890s. They have been well regulated since
    the 1930s by us for exchange traded derivatives, and then there
    are other clearinghouses by the SEC. And they stand as
    middlemen or middlewomen, if I could say, between two parties.
    So if one of the parties fails, then they stand behind the
    contract. So that fundamentally lowers risk, and those
    clearinghouses have been very strong.
        They, by the way, have not had access to the discount
    window. I think we probably should keep it that way. We should
    not expand the safety net to them. But they stand between the
    two parties.
        So what we are recommending and what the bills do say is
    there would be clearing on those products that are standard
    enough to be brought into a clearinghouse. Some people think
    that may be three-quarters of the market.
        But the Senate Agriculture bill, as merged into the Senate
    Banking bill, will have an exemption. The exemption would be
    for nonfinancial entities, if I might call them commercial
    entities, hedgers. It could be Hannaford Brothers in your State
    or it could be some of the commercial entities that Senator
    Bond referred to. They, if they are hedging whether it is for
    corn or wheat or it is an interest rate or a currency they are
    hedging, if they are not a financial entity--now, on the other
    hand, if it is an insurance company or a bank or a hedge fund,
    they would have to use the clearinghouse for their standard
    product. Their customized things they could still do.
        Senator Collins. Thank you, Mr. Chairman.
        Senator Durbin. Senator Bond.

                                   END USERS

        Senator Bond. Thank you very much, Mr. Chairman.
        Mr. Gensler, I am delighted you said they would not require
    an end-user to clear hedging.
        If a community bank had a large portfolio of loans and
    wanted to offset part of that risk by going short or buying
    some form of put, who would be the appropriate person to
    regulate that? Would it be the bank regulator? Would it be the
    CFTC?
        Mr. Gensler. The bank regulator would regulate those banks.
        Senator Bond. The CFTC would not be involved in it.
        Mr. Gensler. They would not regulate the bank. We would
    regulate the exchanges. If it was so standard that it was
    bought or sold on an exchange, we would regulate the exchange
    as we do now. That community bank might buy a future right now
    in the Chicago Mercantile Exchanges to hedge an interest rate.
    We do not regulate the bank. We regulate just the exchanges in
    that example or the clearinghouse, of course.
        Senator Bond. So they would not have to pay a separate fee
    if they were doing that. They would pay the fees that are
    already built in through the existing exchanges?
        Mr. Gensler. Well, I believe that is correct. That
    community bank could do a customized, tailored transaction. It
    might not even come to a clearinghouse. But if it is so
    standard that the clearinghouse is there, they would bring it
    there.
        Senator Bond. Now, do I understand that you and the
    Secretary of the Treasury should say that where there are
    customized transactions, two parties that have worked together
    have adopted a customized derivative or hedging operation where
    it cannot be cleared--do you agree that there is no reason for
    two parties who have developed a complex contract be cleared or
    have margin?
        Mr. Gensler. Well, one, if it is customized, it would not
    be brought to a clearinghouse, and that is the recommendation.
    We are recommending that the swap dealers themselves, the
    dealers, the large banks be regulated, and that the banking
    regulators be able to lower risks to the American public by
    setting capital and margin requirements for those big financial
    houses that are the swap dealers themselves. But the customized
    transactions could occur and not be brought to the
    clearinghouses.

                                     MARGIN

        Senator Bond. Would they have to post margins on that?
        Mr. Gensler. What we have recommended is that the banking
    regulators, what is called prudential regulators, would have
    the authority to ask for those large swap dealers to either
    post or receive margin.
        Margin also protects the other parties. What we need in our
    society, I believe, is that the large swap dealers should be
    able to fail. The terrible place that our Secretaries of the
    Treasury have been, Republicans and Democrats alike--they sit
    in the office, an ornate office. They get all the phone calls,
    and they say, can I let this company fail? And one of the
    problems is they are saying, well, if I let it fail, it is
    going to bring down the community banking system or it is going
    to bring down the farm credit system. So part is to have them
    post margin as well.
        Senator Bond. But requiring margins, if a small bank hedges
    its risk, would it have to put up a margin or would that be up
    to the prudential regulator to determine whether it was
    appropriate to make that transaction?
        Mr. Gensler. If it is a custom-tailored product as you say,
    it would really be up to the banking regulators to say whether
    the big swap dealer--it is the regulator regulating the swap
    dealer would have that authority if the bill were to go through
    Congress.

                                 SWAPS DEALERS

        Senator Bond. If you are a major energy producer that has
    lots of contracts with a lot of--say, it is a coal or a natural
    gas company that has lots of contracts with lots of energy
    companies. Would these be major swap dealers who would be under
    the new regulations?
        Mr. Gensler. Senator, I think that the important thing is
    if they present themselves to the public dealing in swaps, they
    would be regulated.
        Senator Bond. Not to the public but present themselves to
    their customers.
        Mr. Gensler. Well, what we want to guard against is the
    next AIG. We would not want to have an exemption or a loophole
    that the regulation is only regulating some swap dealers and
    not other swap dealers. Most energy companies are not swap
    dealers. Most energy companies are just hedging their own
    business.
        Senator Bond. That was the question, whether by doing that,
    that would fall in a major swap dealer category.
        Mr. Gensler. I do not think most of them will. Some are
    swap dealers. Some do that. They actually have registered
    trading entities and so forth.
        Senator Bond. Thank you, Mr. Chairman. Thank you, Mr.
    Gensler.

                                OTC MARKET SIZE

        Senator Durbin. Chairman Gensler, this whole conversation
    we are having about the future of derivatives, what will be
    regulated, what will not be regulated, what is standard, what
    will be custom--do you have any projection if we move into this
    new world of the volume that we would be talking about? You
    talked earlier about the number of contracts versus the size of
    the contracts. Could you give us some estimation of what we are
    looking at?
        Mr. Gensler. Mr. Chairman, I wish I had. This is such a
    dark market. It is hard to estimate. But the size of the market
    worldwide is about $600 trillion, which is about 12 times the
    world economy. It is estimated about one-half of that is in the
    United States, which is about 20 times our economy. We
    Americans use them more than overseas.
        But in terms of the numbers of transactions, we do not have
    an actual estimate. It is probably not a multiple. The market
    we oversee now is--I think the numbers were about $34 trillion
    in futures. So you can see that is the 9 to 1 or something. But
    the numbers of transactions probably are less. The futures
    transactions are in the hundreds of thousands of trades a day.
    This new market is smaller than that in terms of numbers of
    trades a day, but we do not have an exact number. I wish I did.
        Senator Durbin. So if we embark on this brave new world, do
    you see a demand for more staffing and more activity at your
    agency?

                          ADDITIONAL RESOURCES NEEDED

        Mr. Gensler. I do. I mean, our best estimate--the
    Congressional Budget Office (CBO) asked us for 2011, and we
    forwarded these 238 people. What the President's budget did is
    said let us fund one-half of those people, or 119, in 2011
    because we would be sort of growing during the course of the
    year. And I know the Securities and Exchange Commission has
    their numbers as well. We both do envision that this is a
    really important market to the American public, but it means
    little if Congress just authorizes it and we do not marry it
    with the appropriations.
        Senator Durbin. You talked about audits. What funding level
    would allow the CFTC to perform annual reviews of every DSRO
    and derivatives clearing organization, as well as annual
    examinations of commodity pool operators, trading advisors, and
    the futures commission merchants.
        Mr. Gensler. We believe, in the funding we have asked for
    this $216 million, that we can do much of what you just said,
    the annual reviews of the clearing organizations, the trading
    organizations, and so forth. I may have not even listened
    closely. Some of those reviews that you mentioned are actually
    done by the self-regulatory organizations, but the ones we do
    we think that is the level.

                                STAFF EXPERTISE

        Senator Durbin. So my last question is kind of historic.
    When I first visited the Board of Trade and Mercantile Exchange
    over 25 years ago, they were still clinging to their early
    image as protectors of the agriculture sector in terms of the
    trading that was going on on the floor, and they were just
    starting to branch out into new worlds of futures.
        And now I see, when I take a look at the activities that
    you are watching closely, that the financial commodity futures
    and option contracts make up approximately 79 percent of the
    trades that you regulate and other contracts like metals and
    energy products, about 13 percent. Only 8 percent can really be
    characterized as agricultural in nature.
        What kind of challenges does this present to your agency to
    have this kind of mix which is moving toward much different
    objects that are at the soul and heart of the futures trading
    markets?
        Mr. Gensler. Well, I think you are right. It is actually a
    development that has happened over those 25 years. I think
    there is a uniformity and consistency of derivatives. They are
    all based upon some underlying commodity. We call a Euro dollar
    actually a commodity in the law.
        But what we have to do as an agency is we have experts who
    have expertise in corn and wheat. We have some other experts in
    our Division of Market Oversight that have expertise in the
    financial products. So as these products continue, we try to
    build separate expertises that have a uniform expertise around
    derivatives but then have some product expertise. This is a
    little bit different. We have problems in the wheat market
    still about wheat convergence. That is very different than what
    goes on in the Euro dollar market, but we build the expertise
    across the product sets, as we will have to in the future as we
    take on more responsibilities possibly in what is now called
    the swaps market.
        Senator Durbin. Let me ask you about that. Are those going
    to be so unique by contract that they are going to put a
    special burden on your regulators to try to understand the real
    heart and nature of the transaction?
        Mr. Gensler. Well, I think humility suggests that there is
    going to be a lot we are going to learn along the way because
    we have not as a Nation regulated these products in the past.
    We do not have the authority. But I do think, for instance,
    interest rate derivatives where the CFTC will take the lead--we
    will share a lot with the SEC--that that has a lot of
    similarities to what we do overseeing the Euro dollar contracts
    for now. Of course, the commodity derivatives have a lot of
    similarities, but there will be things that we are going to be
    learning along the way. We will be, hopefully, sharing that
    with you.
        Senator Durbin. Thank you.
        Senator Collins.
        Senator Collins. Thank you.

                         PROPOSED COUNCIL OF REGULATORS

        Chairman Gensler, I think you said in response to Chairman
    Durbin's question that the futures market was something like
    $34 trillion. That raises the question in my mind. Under
    Senator Dodd's bill, is the CFTC a member of the Systemic Risk
    Council of Regulators?
        Mr. Gensler. I believe the answer is yes.
        Senator Collins. Let me ask the next question. Should you
    be a member?
        Mr. Gensler. I think so. I think so. Thank you.
        Senator Collins. And if you are not a member of the
    council, I am going to offer an amendment to put the Commodity
    Futures Trading Commission Chairman on that council. I think it
    is really important that we try to be as inclusive----
        Mr. Gensler. The only reason I hesitated, I could not
    remember what it was called. I know there is a council. It may
    have different names in different bills.
        Senator Collins. It does.
        But they are in. Okay. The Chairman confirms it.

                           TOO INTERCONNECTED TO FAIL

        Let me ask you a question then. How do you plan to help
    monitor and mitigate the potential for systemic risk arising
    from the concentrations or interconnectedness of risks that are
    related to derivative products?
        Mr. Gensler. Well, derivatives do weave sort of a spider's
    web between the financial system, and one of the reasons that
    we have been fighting to lower risk for the American public is
    to bring the derivatives into clearinghouses. Clearinghouses,
    again, stand between buyers and sellers, and that is one of the
    ways that we lower interconnectedness. Our system today does
    not just have ``too big to fail.'' When Continental Illinois
    Bank--because I know it is in your State--that was thought
    years ago to be too big to fail in a sense, but now we have
    banks that are too interconnected to fail. If we let it go, it
    is going to pull down everything else. That was the central
    lesson of AIG. And tens of billions of dollars of our money,
    taxpayer--all of it went through AIG to other financial
    institutions.
        So I believe we really need to, hopefully, stand--there
    will be some stress and pressures. There will be amendments
    probably offered to have another exemption here, another
    exemption there. And I hope--I would advocate we not have those
    exemptions for financial entities. We have an exemption for the
    commercial entities, but hopefully, we do not for the financial
    entities.

                                  TRANSPARENCY

        Senator Collins. Could you give us an example of the kind
    of transparency that would be helpful to you that would come
    about because of moving derivative trades to a clearinghouse?
    Let me ask this in a better way.
        What would you know that you do not know now if more of the
    trades go through a clearinghouse?
        Mr. Gensler. There are two types of transparency, one to
    the regulators and one to the public. Clearinghouses and
    something called trade repositories will give transparency to
    the regulators and we will know a lot. We will be able to--and
    I know the SEC will be able to--better enforce and police the
    markets for manipulation and fraud because so much can be now
    just transferred. We can currently look at wheat futures. We
    can look at Euro dollar futures. Somebody can just move the
    same trade over into an over-the-counter interest rate or a
    complex credit default swap. So as enforcement agencies, we get
    to follow it across to those other markets.
        But there is also public market transparency, and public
    market transparency only comes really from reporting the
    transactions on a real-time basis. And for that, every end-
    user, Hannaford Brothers and others alike, will actually
    benefit because transparency leads to lower cost, lower bid
    spreads. It does shift the information advantage away from Wall
    Street. Wall Street is not happy with the proposals the
    administration has made, but public market transparency does
    that.
        It also lowers risk. Remember we were all debating about
    toxic assets. The more transparency we bring, it lowers risk as
    well to the public.
        Senator Collins. That is very helpful.

                               END USER EXEMPTION

        My final question to you is one that I raised with you in
    my office but I want to raise for the record as well, and that
    is, I have been hearing from some home heating oil companies in
    Maine that are worried that if they have to go through
    clearinghouses, that they will jeopardize their ability to
    enter into contracts with their customers that would be fixed
    price contracts for the upcoming winter. Do you see any
    problems created for them in this area?
        Mr. Gensler. I think you have heard from them because there
    have been a variety of bills, and even I as an advocate--I have
    advocated for no exceptions. But I think where Senator Lincoln
    and Senator Dodd and all the people that have worked on those
    two committee bills have come out, there would be an exception
    for commercial parties hedging as long as they were not
    financial. So the home heating oil companies would be exempted
    from having their transactions coming to a clearinghouse, as
    long as they were not speculating, which I do not think that is
    what they are doing.
        Senator Collins. No, they are not.
        Mr. Gensler. So I think the bill accommodates that
    interest.
        Commercial entities make up maybe, on worldwide statistics,
    about 9 or 10 percent of the market. We do not know precisely
    what it is in each and every market, but the exemption that is
    in the Senate Agriculture and the Senate Banking bill is a
    balancing of interests, and it has exempted that 9 or 10
    percent. But it is the commercial enterprises like the home
    heating oil companies in Maine.
        Senator Collins. Thank you.
        Senator Durbin. Senator Cochran.
        Senator Cochran. Mr. Chairman, thank you.

                      BUDGET IMPACT OF PENDING LEGISLATION

        Chairman Gensler, I am curious to know about the new
    authorities which you are suggesting the CFTC should have. What
    is the status of the legislative authority that you are talking
    about? Has that been enacted into law, or is it just a proposal
    at this point?
        Mr. Gensler. It is a proposal. And the reason it came up
    here is, in terms of if it went through, the funding levels
    would be different. But right now the House of Representatives
    has passed a strong bill, but then the Senate hopefully in the
    next few days, you would tell me better.
        Senator Cochran. I am not the chairman anymore. You forgot
    they had an election.
        Mr. Gensler. But I think that the Agricultural Committee
    and the Banking Committee have merged their product. They have
    a very strong derivatives portion that I believe is getting
    merged into the overall financial reform bill. I am hopeful,
    with Congress' deliberations, that we will get something to the
    President's desk.
        Senator Cochran. This has a budgetary impact, does it not?
    Because it is going to cost more to enforce the new
    authorities. I assume there will be new hires required.
        What are the other funds that you expect to be needed to be
    used for?
        Mr. Gensler. We have estimated to the Congressional Budget
    Office that in 2011 that we would need about 240 more people
    and about $18 million more in technology budget. There is an
    awful lot of information that will be stored and will have to
    be assessed and so forth. That is included in the President's
    budget request in sort of a conditional way if Congress were to
    adopt financial reform.
        Senator Cochran. Okay. Thank you very much.
        Mr. Gensler. Thank you.
        Senator Durbin. Chairman Gensler, thank you. There are
    plenty of other questions which we would like to share with you
    in writing and hope that you might be able to respond in a
    timely way. Other members of the subcommittee may have some
    questions. But we thank you for being here today and we will
    continue to work with your agency.
        Mr. Gensler. I thank the chairman and Senator Collins.
    Thank you.
        Now you get Chairman Schapiro. Do I stay or do I leave? All
    right. Good luck, Mary.

                       SECURITIES AND EXCHANGE COMMISSION

    STATEMENT OF HON. MARY SCHAPIRO, CHAIRMAN
        Senator Durbin. We now will hear from the Securities and
    Exchange Commission Chairman, Mary Schapiro, and following her
    presentation, we will proceed with question rounds of 5
    minutes.
        Chairman Schapiro, thank you for joining us today. We
    welcome your staff as well. Please proceed.
        Ms. Schapiro. Thank you very much, Mr. Chairman.
        Chairman Durbin, Ranking Member Collins, Senator Cochran,
    thank you for the opportunity to describe how the President's
    fiscal year 2011 budget request would allow the SEC to better
    pursue our mission of protecting investors, regulating markets,
    and facilitating capital formation.
        When I joined the Commission only last year, we were just
    emerging from an extraordinary economic crisis. The markets
    were still trying to regain a firm footing and confidence in
    the institutions of Government generally--and the SEC
    specifically--was badly shaken.
        Thanks to the strong support that this subcommittee has
    provided, the SEC has begun to rebuild that confidence by
    making needed and significant changes to virtually every aspect
    of our operations. We brought in new leadership throughout the
    agency, streamlined procedures, and reformed operations. We
    began putting new technology in place, and we initiated one of
    the most significant investor-focused rulemaking agendas in
    decades. Our Enforcement Division undertook a top-to-bottom
    review, leading to a complete restructuring. Silos inhibiting
    internal communications were torn down. A layer of management
    was eliminated, freeing up professionals for front-line duty.
    And we created specialized units that will bring a deeper focus
    to critical areas such as market abuse and structured products.
        These efforts are already paying dividends. Thanks to the
    support of this subcommittee, among the highlights of my first
    year we sought more than twice as many temporary restraining
    orders and asset freezes in 2009 as in 2008. We issued well
    over twice as many formal orders of investigation. We won $540
    million more in disgorgement orders. Penalty orders more than
    doubled. And we filed nearly 10 percent more actions overall,
    including nearly twice as many involving Ponzi schemes.
        Our Office of Compliance, Inspections, and Examinations is
    undergoing a similar review which we expect to yield
    significant restructuring and improvements.
        And to get ahead of the next financial challenge we may
    face, we created a new Division of Risk, Strategy, and
    Financial Innovation and are staffing it with people who bring
    us new and different perspectives and expertise.
        We have made real progress, but restoring investor
    confidence and rebuilding the trustworthiness of financial
    institutions and markets will require a sustained regulatory
    commitment. Fiscal year 2011 will be a critical year in
    continuing our efforts to reinvigorate the Commission and its
    programs. The challenge we face grows every day. Since 2003,
    the number of registered investment advisors has increased by
    nearly 50 percent and their assets under management have grown
    by $12 trillion. Today we rely on fewer than 4,000 individuals
    to monitor more than 35,000 regulated entities. And yet, it was
    only this year that the SEC staff members returned to the level
    last seen in 2005, and in the intervening years tight budgets
    forced us to cut investments in new information technology by
    more than one-half. This subcommittee's support has allowed us
    to reverse those harmful trends, and I thank you deeply for
    that.
        And the President's fiscal year 2011 budget will allow us
    to continue on this new path. More staff will mean a deeper
    pool of institutional expertise, as we hire specialists with
    deep experience with today's markets and products. More staff
    will also mean more investigations and trials and a smaller gap
    between the number of examiners and the firms they examine and
    greater capacity to respond to emerging trends.
        The President's budget will also provide a much-needed $12
    million increase in information technology (IT). Our top IT
    priority is completion of a new system for reviewing
    complaints, tips, and investigative leads provided by
    whistleblowers or other sources. The initial phase is done,
    creation of a single searchable database for existing tips and
    complaints. To this we will add risk analytics that help us
    quickly and efficiently identify high-value tips and search for
    trends and patterns across the data.
        We are also enhancing collection, analysis, and
    distribution of the disclosure documents filed with the
    Commission. This will allow us to monitor macro trends, search
    for hidden risks, and track systemic changes.
        We also plan to complete improvements to the case and exam
    management tools available to our enforcement and examination
    programs. While we will never match the technology available to
    the financial institutions we regulate and the big law firms we
    face, the ability to search and use the vast mountains of data
    we collect will make our team much more competitive. New
    technology will be accompanied by comprehensive training,
    allowing staff to navigate the constantly evolving financial
    environment they monitor.
        And in the year ahead, we will also continue our pursuit of
    rulemaking that looks after the interests of investors and
    responds to changes in the American financial marketplace. Key
    goals include a thorough review, already underway, of the
    rapidly evolving equity market structure, helping shareholders
    more effectively exercise their rights, and giving investors
    better information to make sound decisions regarding
    investments in municipal and other securities.

                               PREPARED STATEMENT

        I am pleased with the progress we have made, but we
    recognize that much work remains to be done to continue to
    restore investor confidence in our markets. The funding level
    of the President's budget request is critical for us if we are
    to continue to improve our performance in an increasingly
    complex financial world.
        Thank you and I would be happy to answer your questions.
        [The statement follows:]

                      Prepared Statement of Mary Schapiro

        Chairman Durbin, Ranking Member Collins, Members of the
    Subcommittee: Thank you for the opportunity to testify today in support
    of the President's fiscal year 2011 budget request for the Securities
    and Exchange Commission.\1\ I am grateful for the support that you and
    this Subcommittee have provided to the Commission. I welcome this
    opportunity to answer your questions and provide you with additional
    information on how the SEC would make effective use of the $1.258
    billion that the President has requested for the coming fiscal year.
    ---------------------------------------------------------------------------
        \1\ The views expressed in this testimony are those of the Chairman
    of the Securities and Exchange Commission and do not necessarily
    represent the views of the President.
    ---------------------------------------------------------------------------
        When I joined the Commission early last year, we were just emerging
    from an economic crisis that threatened our financial system and the
    entire American economy. The markets were still trying to regain a firm
    footing, and confidence in the institutions of government generally--
    and the SEC specifically--was badly shaken.
        Since then, we have taken significant steps to make the SEC more
    vigilant, sharp, and responsive--and focus the agency squarely on its
    mission to protect investors, maintain orderly markets, and facilitate
    capital formation. We brought in new leaders across the agency. We
    streamlined our procedures. We worked to reform the ways we operate. We
    began modernizing our systems. We set out to regulate more effectively.
    We fully engaged in the debate on regulatory reform, and we initiated
    one of the most significant investor-focused rulemaking agendas in
    decades.
        While we made real progress over the past year, restoring investor
    confidence and rebuilding the trustworthiness of financial institutions
    and markets will require a sustained regulatory commitment. Fiscal year
    2011 will be a critical year in our continuing efforts to reinvigorate
    the Commission and its programs.
        My testimony will provide an overview of the actions and
    initiatives that we began over the past year thanks to the support that
    this Subcommittee has provided. I will then discuss the President's
    fiscal year 2011 request and the important work which these resources
    would make possible.

            NEW LEADERSHIP, ORGANIZATIONAL STRUCTURES, AND EXPERTISE

        Without a doubt, the most critical element to success in improving
    the Commission's operations is the agency's talented and capable staff.
    During the past year, I am pleased to have been able to bring on board
    new senior managers who are playing a vital role in our efforts to
    transform the agency.
        We brought in new leadership to run the agency's four largest
    operating units--the Division of Enforcement, the Office of Compliance
    Inspections and Examinations, the Division of Corporation Finance, and
    the Division of Trading and Markets. We also selected a new General
    Counsel, Chief Accountant, head of the Office of Investor Education and
    Advocacy, and directors for the New York, Miami, and Atlanta regional
    offices. The efforts of these new senior managers, together with the
    efforts of other leaders who are continuing their service, are already
    making the SEC a more agile, responsive and intelligent agency.
        This new leadership team is committed to a culture of
    collaboration--sharing information and sharing ideas. To encourage that
    culture, I established several cross-functional teams to focus on
    issues such as life settlements and the development of a consolidated
    audit trail. We have begun integrating our broker-dealer and investment
    adviser examinations and are moving to consolidate our multi-office
    oversight of clearing agencies.
        Significantly, we've created and staffed a new division--the
    Division of Risk, Strategy, and Financial Innovation--to bore through
    the silos that for too long have compartmentalized and limited the
    impact of our institutional expertise. A principal lesson learned from
    the financial crisis is that, because today's financial markets and
    their participants are dynamic, fast-moving, and innovative, the
    regulators who oversee them must continue to improve their knowledge
    and skills in order to regulate effectively. The Division of Risk,
    Strategy, and Financial Innovation will help to re-focus the agency's
    attention on and response to new products, trading practices, and
    risks. Already, this new Division has attracted renowned experts in the
    financial, economic, and legal implications of the financial
    innovations being crafted on Wall Street.
        In addition, we are working to establish a deeper reservoir of
    experts throughout the agency to conduct risk analysis, spot emerging
    trends and practices, and reduce the likelihood that a problem might
    grow into a more potent risk.
        We also are committed to improved training and education of agency
    staff in order to close competency gaps and expand knowledge of
    industry activities and trends. Training needs to be current,
    continuous, and mandatory--and it needs to equip the SEC's workforce
    with the tools they need to enforce the Federal securities laws and
    protect investors.
        Last year, we launched an effort to ensure that employees
    throughout the agency receive timely and relevant training which will
    allow them to fulfill the agency's mission. This agency-wide initiative
    includes a new integrated structure to identify training needs and to
    approve professional education and leadership development programs. The
    new training initiative also seeks to improve collaboration with other
    regulators and has enabled hundreds of employees to take advantage of
    external professional certification programs. While it will take time
    to fully implement all the components of our new training initiative,
    we are already seeing good results from this increased focus on staff
    development.

                     REINVIGORATING THE ENFORCEMENT PROGRAM

        Enforcement of the securities laws is the foundation of the SEC's
    mission. Swift and vigorous prosecution of those who have broken the
    law is at the heart of the agency's efforts to restore investor
    confidence. But in recent years, the SEC's enforcement program had
    suffered under a variety of procedural, structural, and budgetary
    constraints.
        Over the past year, we have improved our law enforcement
    capabilities and sent a clear signal to our staff that we value
    toughness and speed by removing procedural roadblocks impeding their
    investigations. For example, we delegated to senior staff the authority
    to issue subpoenas, so investigations can be launched without the
    prior--and time-consuming--approval of the Commission. We also
    abolished the requirement that staff obtain Commission approval before
    entering into settlement talks involving civil monetary penalties
    against public issuers.
        We added a host of measures to encourage corporate insiders and
    others to come forward with evidence of wrongdoing. These new
    cooperation initiatives establish incentives for individuals and
    companies to fully and truthfully cooperate and assist with SEC
    investigations and enforcement actions, and they provide new tools to
    help investigators develop first-hand evidence to build the strongest
    possible cases as quickly as possible.
        Last year, I hired as the Director of the Enforcement Division,
    Robert Khuzami, a longtime Federal prosecutor who had served as Chief
    of the Securities and Commodities Fraud Task Force of the U.S.
    Attorney's Office for the Southern District of New York. Under his
    leadership, we are undertaking the most significant structural reforms
    of the enforcement program since 1972--reforms designed to maximize
    resources and enable us to move swiftly and vigorously against
    securities fraud. Highlights of the initiatives currently being
    implemented include:
      --Specialization.--The Division has created five new national
            specialized investigative groups dedicated to high-priority
            areas of enforcement, including Asset Management (hedge funds
            and investment advisers), Market Abuse (large-scale insider
            trading and market manipulation), Structured and New Products
            (various derivative products), Foreign Corrupt Practices Act
            violations, and Municipal Securities and Public Pensions. The
            specialized units will utilize enhanced training, specialized
            industry experience and skills, and targeted investigative
            approaches to better detect links and patterns suggesting
            wrongdoing--and ultimately to conduct more efficient and
            effective investigations.
      --Management Restructuring.--The Division has adopted a flatter, more
            streamlined organizational structure under which it has
            reallocated a number of staff who were first line managers to
            the mission-critical work of conducting front-line
            investigations. While a layer of management has been
            eliminated, the Division is maintaining staff-to-manager ratios
            that will allow for close substantive consultation and
            collaboration, resulting in a management structure that
            facilitates timeliness, quality, and staff development. The
            Division also has hired its first-ever Managing Executive, who
            is focusing on the Division's administrative, operational, and
            infrastructure functions, thus freeing up valuable
            investigative resources for mission-critical work.
      --Office of Market Intelligence.--The Enforcement Division has
            established an Office of Market Intelligence, which will serve
            as a central office for the handling of complaints, tips, and
            referrals that come to the attention of the Division;
            coordinate the Division's risk assessment activities; and
            support the Division's strategic planning activities. In short,
            this office will allow the Division to have a unified,
            coherent, coordinated response to the huge volume of
            complaints, tips, and referrals we receive every day, thereby
            enhancing the Division's ability to open the right
            investigations, bring solid cases, and effectively protect
            investors.
        In my first year, compared to the previous year, the SECs
    enforcement activity increased significantly. We sought more than twice
    as many temporary restraining orders and asset freezes; we issued well
    over twice as many formal orders of investigation; we won $540 million
    more in disgorgement orders while penalty orders more than doubled; and
    we filed nearly 10 percent more actions overall, including nearly twice
    as many involving Ponzi schemes.
        Of course, numbers alone don't capture the complexity and range--or
    the importance--of the actions we brought. For example, we have brought
    a number of cases involving issues surrounding the financial crisis,
    including cases alleging accounting fraud at subprime lenders,
    misrepresentation of complex investments as appropriate for retail
    investors seeking safe financial products, fraud in connection with CDO
    marketing materials, and misleading investors about exposure to
    subprime investments. Our cases have included actions against Goldman
    Sachs and Co., American Home, Countrywide, New Century, Brookstreet
    Securities, and Morgan Keegan.
        Examples of where the SEC's actions have benefitted investors
    include:
      --Charging Boston-based State Street Bank and Trust Company with
            misleading investors about their exposure to subprime
            investments while selectively disclosing more complete
            information only to certain favored investors. As a result of
            this one action, more than $300 million will be distributed to
            investors who lost money during the subprime market meltdown.
      --Charging the investment adviser for the Reserve Primary Fund with
            failing to properly disclose to investors and trustees material
            facts relating to the value of the fund's investments in
            Lehman-backed paper. We also charged the adviser with
            misrepresenting that it would provide the credit support
            necessary to protect the $1 net asset value of the Primary Fund
            when, according to our complaint, the adviser had no such
            intention. In bringing the enforcement action, the SEC also
            sought to expedite the distribution of the fund's remaining
            assets to investors by proposing a pro-rata distribution plan,
            which the Court has approved. To date, investors have been
            provided with recovery of more than 98 cents on the dollar,
            with a Court-ordered distribution to be effected in the coming
            days that will bring their recovery to over 99 cents on the
            dollar.
        In addition to the significant cases we have brought arising out of
    the financial crisis, we have continued to bring cases in many other
    important areas.
      --In a pension fund pay-to-play case, we filed a settled action
            against a private investment firm, Quadrangle Group LLC, and
            one of its affiliated entities, charging them with
            participating in a widespread kickback scheme to obtain
            investments from New York's largest pension fund.
      --In the municipal securities arena, we settled fraud charges with
            J.P. Morgan Securities for its alleged role in an unlawful pay-
            to-play scheme in Jefferson County, Alabama. J.P. Morgan paid
            $50 million directly to Jefferson County, forfeited more than
            $647 million in claimed termination fees, and paid a penalty of
            $25 million. At the same time, the SEC also charged two of J.P.
            Morgan's former managing directors with fraud arising out of
            this scheme and had previously charged others, including the
            former Birmingham mayor--who last month was sentenced to 15
            years in prison and fined $360,000--a JP Morgan banker, and the
            local operative who served as go-between.
      --In the area of accounting and financial fraud, auditor Ernst &
            Young LLP paid an $8.5 million settlement--one of the largest
            ever paid by an accounting firm--and six current and former
            partners were sanctioned for their conduct in the audit of
            Bally Total Fitness Holding Corporation. We charged that they
            abdicated their responsibility to function as gatekeepers while
            their audit client engaged in fraudulent accounting.
      --Finally, in the Galleon and Cutillo cases, we charged more than a
            dozen hedge fund managers, lawyers and investment professionals
            in two overlapping serial insider trading rings that
            collectively constitute one of the largest insider trading
            prosecutions in Commission history. In the parallel criminal
            prosecutions, ten individuals have already pled guilty and nine
            additional individuals have been indicted.

                    STRENGTHENING EXAMINATIONS AND OVERSIGHT

        Strong regulation is essential to the fair, orderly, and efficient
    operation of markets. A vigorous examination program cannot only reduce
    the opportunities for wrongdoing and fraud, but also provide early
    warning about emerging trends and potential weaknesses in compliance
    programs. Over the past year, we have begun reforming the Office of
    Compliance Inspections and Examinations in response to ever-changing
    Wall Street practices and lessons learned from the Madoff fraud.
    Reforms include:
      --Placing greater reliance on risk assessment procedures and
            techniques to better identify areas of risk to investors.
      --Requiring examiners to routinely verify the existence of client
            assets with third party custodians, counterparties, and
            customers, and have developed procedures to ensure compliance
            with the Commission's new rules to strengthen custody controls
            of an investment adviser's client assets.
      --More rigorously reviewing information about firms before sending
            examiners out to the field, so that we can use our limited
            resources more effectively and to target those firms with the
            greatest risks.
      --Enhancing the training of examiners and re-focusing on basics such
            as exam planning, tracking, and accountability.
        We also plan to make significantly greater progress during the
    current year under the leadership of our new OCIE director, Carlo di
    Florio, who came to the SEC from PricewaterhouseCoopers, where he was a
    national leader in corporate governance, enterprise risk management and
    regulatory compliance and ethics. He also has extensive experience
    investigating corporate fraud, corruption, conflicts of interest and
    money laundering. At my request, he is undertaking a top-to-bottom
    assessment of the Office's operations to determine where additional
    opportunities exist to strengthen our exam program. As I will discuss
    later, there is such a huge disparity between the number of examiners
    and the number of entities that we must examine that we must ensure
    that we are using our limited resources wisely.

                    IMPROVING AGENCY SYSTEMS AND MANAGEMENT

        A key priority for me as Chairman is to ensure that our staff has
    the tools they need to conduct oversight of vast financial markets.
    Between fiscal year 2005 and fiscal year 2009, investments in new
    information technology systems dropped by more than half, resulting in
    a growing gap between our mission and the ability of our systems to
    help us accomplish it. Thanks to the resources provided by this
    Subcommittee, this fiscal year we have been able to begin investing in
    several new or improved IT projects and systems.
        One of the first initiatives I launched was a strategic review of
    the agency's systems for reviewing complaints, tips, and investigative
    leads provided by whistleblowers or other sources. Having an effective
    process to identify the most important tips can give the agency an
    early jump on frauds and other violations of securities laws, help
    guide compliance exams, and provide important information across the
    agency to aid staff working to protect investors and maintain market
    integrity. The absence of such a system directly contributed to past
    failures by the agency.
        We have completed the first phase of this effort, which was to
    centralize into a single, searchable database all our existing tips and
    complaints that were previously in multiple databases. This means that
    complaints we receive in Chicago are now downloaded into the same
    database as complaints received in Miami or any of our other offices,
    and the information investors share with our investor assistance
    hotline can be searched alongside complaints received by our markets
    hotline in our Division of Trading and Markets. Additionally, we
    released for the first time a set of agency-wide policies and
    procedures to govern how employees should handle the tips they receive.
        Simultaneously, we have been working on a new intake system that
    will allow us to capture more information about tips and complaints.
    The new system will provide more robust search capabilities so that
    tips can be better assessed or triaged. In addition, this new system
    will add enhanced workflow abilities so we can track how tips and
    complaints are being used throughout the agency. We expect to deploy
    this system later this year. Meanwhile, we also are in the early stages
    of designing the third phase of this system, which will add risk
    analytics tools to help us quickly and efficiently identify high value
    tips and search for trends and patterns across the data.
        In addition, we are enhancing the collection, internal analysis,
    and subsequent distribution of disclosures filed with the SEC, so that
    this unique set of data can be aggregated both across firms and over
    time--allowing us to monitor macro trends, search for hidden risks, and
    track systemic changes in filings.
        During my first year, I also focused much attention on improving
    the agency's basic internal operations--the processes that guide our
    work, support the agency's infrastructure, and determine how we are
    organized. The public appropriately holds the SEC to a very high
    standard for integrity and professionalism, and we must hold ourselves
    to that very high standard as well. In the past year, we took major
    steps to implement a compliance program to guard against inappropriate
    securities trading by SEC staff. We have acquired and deployed a
    computer compliance system to track, audit, and oversee employee
    securities trading and financial disclosures in real time, and have
    hired a new Chief Compliance Officer to oversee these efforts. We also
    are strengthening internal rules governing employee securities trading
    and, in May 2009, we submitted proposed rules to the Office of
    Government Ethics (``OGE'') 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 the preclearance of all trades.
        Also during the past year we hired a new Chief Freedom of
    Information Act (FOIA) Officer and have undertaken a comprehensive
    overhaul aimed at strengthening our FOIA program and our commitment to
    open government.
        Within the next few weeks, we will also have on board a Chief
    Operating Officer. As I mentioned to the subcommittee last year, this
    is a new position that we are creating to help us manage our
    significant rebuilding projects. Our COO will provide executive
    leadership in the areas of information technology, financial
    management, and records management (including FOIA).
        I have approved a new internal audit follow-up rule that sets forth
    roles, responsibilities, and procedures to ensure that SEC staff take
    timely and appropriate corrective action to address recommendations by
    the Government Accountability Office or the SEC's Office of Inspector
    General.
        In addition, we are undertaking significant efforts to eliminate
    the material weakness in our internal controls over financial
    reporting, including automating the numerous processes that have been
    performed manually and strengthening our core financial system.
          engaging in a significant investor-focused rulemaking agenda
        Of course, the changes we have initiated have not just been
    internal. The past year has witnessed one of the Commission's most
    significant rulemaking agendas in years. Here are some highlights:
        Adopted:
      --Custody controls.--We adopted a rule in the wake of the Madoff
            fraud designed to provide greater protections to investors who
            entrust their assets to investment advisers. The rule leverages
            our own resources by relying on independent, third-party
            accountants serving as a ``second set of eyes'' to confirm
            client assets and review custody controls in situations where
            the possibility for misappropriation of client assets is most
            acute because of the adviser's possession of, or control over,
            client assets.
      --Proxy enhancements.--We adopted rules that require companies to
            provide investors with more meaningful information about the
            leadership structure of boards, the qualifications of board
            nominees and the relationship between a company's overall
            compensation policies and risk taking.
      --Discretionary voting by brokers for directors.--We approved a New
            York Stock Exchange rule to eliminate broker discretionary
            voting for all elections of directors, whether contested or
            not. This helps to ensure that director elections are
            determined by investors with an economic interest in the
            company.
      --Short selling/Fails-to-deliver.--We adopted a rule that will
            restrict short selling when a stock is experiencing significant
            downward price pressure. This rule will also enable long
            sellers to stand in the front of the line and sell their shares
            before any short sellers once a circuit breaker is triggered.
            In addition, we addressed the potentially harmful effects of
            abusive ``naked'' short selling, adopting rules that require
            that fails-to-deliver resulting from short sales be closed out
            immediately after they occur. Since this rule was adopted, the
            number of failures to deliver securities has dropped
            significantly.
      --Money market funds.--We adopted new rules that will help avoid a
            recurrence of the serious problems exposed in 2008, when the
            Reserve Primary Fund ``broke the buck.'' The rules will
            strengthen the oversight and resiliency of these funds by,
            among other things, increasing credit quality, improving
            liquidity, shortening maturity limits, and requiring stress
            testing of money market fund portfolios and the disclosure of
            the funds' actual ``mark-to-market'' net asset value.
      --Central Clearing of Credit Default Swaps.--We took action to
            address counterparty risk and improve transparency in the
            multi-trillion dollar credit default swap market by approving
            conditional exemptions that allowed certain clearinghouses to
            operate as a central counterparty for clearing credit default
            swaps.
      --Credit Rating Agencies.--We adopted rules, and proposed others, to
            create a stronger, more robust regulatory framework for credit
            rating agencies--including measures designed to improve the
            quality of ratings by requiring greater disclosure, fostering
            competition, addressing conflicts of interest, shedding light
            on the practice of rating ``shopping,'' and promoting
            accountability.
        Proposed:
      --Asset-backed securities.--We proposed rules to fundamentally revise
            the regulatory regime for asset-backed securities. This
            comprehensive proposal would revise the disclosure, reporting,
            and offering process for asset-backed securities to better
            protect investors in the securitization market and promote
            efficient capital formation.
      --Proxy access.--We proposed rules to facilitate the effective
            exercise of the rights of shareholders to nominate directors to
            the boards of the companies they own. If adopted, this rule
            would increase shareholders' ability to hold boards
            accountable.
      --Large Trader Reporting.--We proposed rules to create a large trader
            reporting system that, if adopted, would strengthen our
            oversight of the markets by enhancing our ability to identify
            large market participants and collect information on their
            trades so we can better analyze the data and investigate
            potentially illegal trading activity.
      --Flash orders.--We proposed rules that would effectively prohibit
            all markets from displaying marketable flash orders.
      --Sponsored Access.--We proposed a new rule that would effectively
            prohibit broker-dealers from providing customers with
            ``unfiltered'' or ``naked'' access to an exchange or ATS.
      --Dark pools.--We proposed rules to generally require that
            information about an investor's interest in buying or selling a
            stock be made publicly available, instead of available only to
            a select group operating within a dark pool.
      --Pay-to-Play.--We proposed rules to address pay-to-play practices
            where investment advisers are managing or seeking to manage
            public monies that fund state and local pension plans and other
            important public programs.
      --Municipal Securities Disclosure.--We proposed rules to improve the
            quality and timeliness of disclosure of material events related
            to municipal securities, such as payment defaults, rating
            changes and tender offers.
        Our rulemaking agenda makes it clear that the Commission is now
    willing to address challenging issues and make tough choices.

                                 SEC RESOURCES

        The financial crisis reminded us just how large, complex, and
    critical to our economy the securities markets have become. Over the
    last 20 years, the dollar value of the average daily trading volume in
    stocks, exchange-traded options, and security futures has grown by over
    25 times, reaching approximately $245 billion a day. The number and
    size of market participants have grown as well. For example, since
    2003, the number of registered investment advisers has increased by 49
    percent, and their assets under management have jumped by over 57
    percent, to $33 trillion.
        Yet, while the markets were growing exponentially in size and
    complexity, the SEC's workforce was getting smaller and its technology
    was falling further behind. We are only just now returning to the
    staffing levels of 5 years ago. As you know, between fiscal year 2005
    and fiscal year 2007, the agency experienced 3 years of flat or
    declining budgets, losing 10 percent of its employees, which severely
    hampered our enforcement and examination programs. In the context of
    rapidly expanding markets, limited SEC staffing levels hindered the
    agency's ability to effectively oversee the markets and pursue
    violations of the securities laws.
        Fortunately, thanks to support from the members of this
    Subcommittee, we have begun to rebuild our workforce and to invest in
    needed new technologies. Yet, the SEC is still responsible for
    overseeing more than 35,000 entities with just over 3,800 staff.
    Additional resources are essential if we hope to make the SEC a dynamic
    and effective regulator of our financial markets.
        The President is requesting a total of $1.258 billion for the
    agency in fiscal year 2011, a 12 percent increase over the fiscal year
    2010 funding level. If enacted, this request would permit us to hire an
    additional 374 professionals, a 10 percent increase over fiscal year
    2010. That would bring the total number of staff to about 4,200. The
    request also will permit us to continue expanding our investments in
    surveillance, risk analysis, and other technology, as well as in better
    training for SEC staff.
        Of this total request, $24 million would be contingent upon the
    enactment of financial reform--so that if reform is passed, we would
    have the resources to begin implementing our enhanced authorities.
        It is important to note that the proposed increase in spending
    would be fully offset by the fees we collect on transactions and
    registrations. In fiscal year 2011, we estimate that we will collect
    $1.7 billion--an increase of $220 million over fiscal year 2010.
        If we were to receive the proposed increase in spending, we
    anticipate it would be broken out as described below.
        In the Enforcement Division, the budget request would enable us to
    add about 130 new full time employees so we can reinforce our
    investigations process, support more cases, and strengthen the
    intelligence analysis function. With these new staff resources--along
    with the Division restructuring and initiatives outlined above that
    will make the Division more efficient and effective--the Division
    projects that we will be able to open 75 more inquiries than the
    previous year, open 130 more formal investigations, and file charges in
    70 more civil or administrative cases.
        In addition to fully staffing the new Office of Market Intelligence
    and its critical risk assessment and strategic planning functions, we
    plan to use additional Enforcement Division resources in the following
    ways:
      --Hire Individuals with Specialized Industry Experience.--One of the
            SEC's priorities is to seek persons with specialized financial
            industry experience. We intend to hire enforcement staff with
            specialized expertise in financial products, including
            structured products and hedge funds, trading strategies, risk,
            and financial analysis. Building upon the existing strengths of
            the Division, specialists will increase the Division's depth of
            understanding of the patterns, links, trends, and motives of
            wrongdoers. Moreover, the specialists can utilize their unique
            experience to more quickly target, analyze, and bring to light
            unlawful activities.
      --Hire Additional Trial Attorneys.--It is essential that the SEC be
            able to act decisively on its growing caseload and that the
            Division has the resources to present effective cases at trial
            and to negotiate potential settlements from a position of
            strength. We intend to hire additional experienced trial
            counsel, not only to enable the Division to carry a caseload
            that includes increasingly complex cases, but also to allow the
            SEC and the Division to demand tough but appropriate sanctions
            with the confidence that we have the resources to litigate if
            necessary. It is critical that the Division convey to
            defendants that we are prepared to go to trial and to win. With
            our increased case load, our trial unit needs to expand to
            ensure that we are able to maintain a program of rigorous
            enforcement for the protection of investors.
      --Increase Administrative Staff.--Division lawyers spend too much
            time on tasks more efficiently handled by support and
            paraprofessional staff. We can leverage our resources by
            transferring document management, case filings, and other
            administrative tasks to support staff with the appropriate
            expertise, thereby freeing up our attorneys to tackle critical
            front-line work of investigating cases, bringing enforcement
            actions and allowing all levels of the staff to leverage their
            specialized knowledge.
      --Train Strategically.--It is critical that the Division invest in
            employee development to prepare its staff to respond to
            continuing changes in the securities industry, sophisticated
            new products and novel trading strategies. In addition, the
            Division needs to ensure that all staff has access to training
            to improve on the competencies and skills required for their
            jobs and to maximize individual potential.
      --Information Technology.--Information technology is also a priority
            for the Division. We are spending significant resources on a
            number of ongoing projects--improving the Division's case
            management system, managing ever-increasing amounts of
            electronic evidence with sophisticated new tools, and
            establishing a more centralized system for reviewing and
            analyzing tips, complaints, and referrals. We intend to commit
            whatever resources are necessary and available to ensure a
            timely conclusion to these upgrades. We also anticipate major
            future projects, including a new IT Forensics Lab, enhanced
            data and trading analytics, and improved document and knowledge
            management to further enhance efficiency and consistency across
            the Division.
        In our Examinations unit, the budget request would allow us to add
    about 70 staff to help us begin closing the gap between the number of
    examiners and the growing number of registered firms we oversee. With
    these new resources, OCIE expects to be able to expand the scope and
    coverage of adviser and fund examinations and to staff fully the
    oversight function for credit rating agencies, allowing us to examine
    half of the rating agencies in fiscal year 2011. If the financial
    regulatory reform legislation now under consideration requires hedge
    fund advisers to register, we will expand our inspection program to
    include these new registrants.
        It is important to note, however, that even with an increase in the
    number of exams these additional resources will enable us to conduct,
    we anticipate examining only nine percent of SEC registered investment
    advisers and 17 percent of investment company complexes in fiscal year
    2011.
        In the newly created Division of Risk, Strategy, and Financial
    Innovation, the budget request would enable us to add about 20 new
    professionals. The new staff would allow the Division to establish a
    deeper reservoir of experts who can conduct risk and economic analysis
    and spot emerging trends and practices in support of rulemaking and
    enforcement activities. We anticipate hiring professionals with
    significant knowledge and expertise in financial markets and products,
    including economists, academics, lawyers, and financial market
    professionals.
        Among the other divisions, the budget request would permit us to
    add almost 50 staff to the Divisions of Investment Management and
    Trading and Markets. These personnel will help us enhance oversight of
    money market funds, clearing agencies, broker-dealers, credit rating
    agencies, and, if brought under the agency's jurisdiction, hedge fund
    advisers and OTC derivatives. The Division of Corporation Finance would
    add about 25 professionals to allow it to focus more, and with greater
    frequency, on the financial statements and other disclosures of large
    and financially significant companies.
        Finally, the fiscal year 2011 budget request proposes to spend an
    additional $12 million on information technology investments, focused
    on several key projects. Our top priority, as I described earlier, will
    be the third phase of our new system for analyzing tips, complaints,
    and referrals.
        We also intend to continue our efforts to build a suite of
    surveillance and risk analysis tools that will substantially improve
    the agency's ability to find connections, patterns, or trends in the
    data we collect. The agency has numerous internal information
    repositories which result from disclosure filings, examinations,
    investigations, economic research, and other ongoing activities. With
    better tools, we will be able to mine this data, link it together, and
    combine it with data sources from outside the Commission. This will
    enable staff to more effectively identify risks to investors, trends in
    the markets, and to identify patterns of activities meriting further
    examination or investigation.
        We also plan to complete improvements to the case and exam
    management tools available to our enforcement and examination programs.
    We intend to modernize our financial systems and implement a new system
    to handle the significant increase in the volume and complexity of
    evidentiary material obtained during the course of investigations. We
    also need tools to significantly improve the efficiency of loading,
    storing, and archiving the roughly three terabytes of data received per
    month during the course of investigations in order to improve
    turnaround time to staff and to contain costs.

                             MANAGING AGENCY GROWTH

        While the budget request anticipates significant growth in the size
    of the SEC, the agency is properly positioned to implement this
    spending plan. To accomplish the hiring of hundreds of new staff during
    the course of fiscal year 2011, the SEC is enhancing its human
    resources staff and, consistent with its current authorities,
    streamlining its hiring process. Improvements include simplifying the
    application process and maintaining a searchable database of
    applicants, so that it is possible to interview for a vacancy as soon
    as it appears rather than having to go through the lengthy posting
    process each time. Being able to better tailor, target and speed
    recruiting will enhance the quality of applicants and help the agency
    acquire the necessary talent to perform effectively in an increasingly
    complex financial environment.

                                   CONCLUSION

        Thank you, again, for your past support, and for allowing me to be
    here today to present the President's budget request.
        While the SEC is a relatively small agency, we are charged with
    protecting millions of investors every day, including the nearly one-
    half of all households that own securities. I am pleased with the
    progress that we have made to date, but recognize that much work
    remains to be done to continue to reinvigorate the SEC and restore
    investor confidence in our securities markets. The funding level in the
    President's budget request is critical for us if we are to succeed in
    these efforts, and continue to improve our performance in an
    increasingly complex financial world.
        I am happy to answer any questions that you might have.
            sec staff levels have not kept pace with industry growth
        The SEC's staff of 3,816 FTE (estimate for fiscal year 2010)
    oversees more than 35,000 entities. These include: 11,500 investment
    advisers; 5,400 broker-dealers; 7,800 mutual funds; about 600 transfer
    agents; clearance and settlement systems; 12 securities exchanges;
    10,000 public companies; 10 credit rating agencies; and FINRA, MSRB, &
    PCAOB.
        The following charts provide examples of how various aspects of the
    markets have grown since 2003, relative to the SEC's staff:

                      OVERSIGHT OF CREDIT RATING AGENCIES

        Senator Durbin. Thank you, Chairman Schapiro.
        I have joined a lot of other people in just finishing
    Michael Lewis' book, ``The Big Short'', and it is really an
    eye-opener of what was going on at the time that this real
    estate bubble was created. One of the areas that I had heard
    about many times that he made reference to was the work of
    credit rating agencies and the fact that some of the credit
    ratings that were given were misleading, to say the least.
        Now, since the beginning of the credit crunch in early
    2007, these agencies have come under fire for inflated ratings
    of mortgage-backed securities that did not reflect the
    financial stability of the borrowers. At our hearing last June,
    I asked you some questions about what the SEC was doing to
    restore confidence in these credit rating agencies, what
    improvements were needed.
        In your budget justification materials submitted to the
    subcommittee in February, you indicate on page 4 that the
    fiscal year 2011 budget will enable the SEC to carry out a more
    robust oversight function for credit rating agencies and
    conduct examinations at one-half of the registered, nationally
    recognized statistical rating organizations next year.
    Underlined, ``next year.'' You explained that in 2006, the SEC
    took on a major new responsibility with the Credit Rating
    Agency Reform Act, which gave the agency authority to regulate
    internal processes of nationally recognized statistical rating
    organizations, such as recordkeeping and policies to guard
    against conflicts of interest. You contend ``The SEC never
    received any increased or dedicated funding to carry out these
    new responsibilities, and it has been forced to divert
    positions from other programs in order to staff this vital
    function.''.
        I am puzzled by that statement. In fiscal year 2009,
    Congress provided the SEC with $970 million in budget
    authority, $57 million above the President's request of $913
    million. And in fiscal year 2010, this current year, Congress
    provided $1.1 billion, $85 billion above the President's
    request.
        If the SEC regards its obligation to oversee credit rating
    agencies as a high priority, why were you not able to devote
    some of the increased funds we provided for this function in
    fiscal year 2009 and 2010?
        Ms. Schapiro. Senator, we have. I do not have the statement
    right in front of me. But let me assure you we are very
    committed to aggressive oversight of credit rating agencies. We
    have, in fact, created a new examination branch for credit
    rating agencies, and our goal would be to try to examine all
    the credit rating agencies on a regular basis. So we are quite
    committed to solving the problems that we have seen with
    respect to credit rating agencies.
        In addition----
        Senator Durbin. Is this a typo where it says that you are
    going to start this work next year?
        Ms. Schapiro. We have already begun this work, and I will--
    --
        Senator Durbin. This was in the budget justification
    materials given to this oversight committee.
        Ms. Schapiro. I can assure you this work has begun. We have
    a new head of our Office of Compliance, Inspections, and
    Examinations. Credit rating agencies are a focus of that
    office.
        Senator Durbin. We have the justification materials, and I
    would like to share them with you because what you have just
    said is not consistent with what was given to the subcommittee.
        [The information follows:]

        As a follow up to your question during the hearing, I
    wanted to offer clarification regarding the SEC's examinations
    of credit rating agencies. As we discussed, page 4 of the SEC's
    fiscal year 2011 Congressional Justification says: ``. . . the
    SEC never received any increased or dedicated funding to carry
    out these new responsibilities, and it has been forced to
    divert positions from other programs in order to staff this
    vital function.'' I understand that, in the months immediately
    following the passage of the Credit Rating Agency Reform Act of
    2006, the SEC did not receive additional funds to handle these
    responsibilities, and the SEC during this period was in the
    middle of a 10 percent cutback in its overall staffing levels.
    However, this statement leaves the incorrect impression that
    the SEC has not received budget increases since that time.
    Accordingly, I have asked that this sentence be stricken from
    the version of the document that appears on the SEC website. As
    I mentioned in my testimony, your subcommittee's support has in
    fact resulted in significant budget increases since I became
    Chairman and is allowing us to rebuild the agency's workforce.
    In fiscal year 2009 the SEC was able to create a team of staff
    dedicated to examining credit rating agencies, and the fiscal
    year 2011 budget request asks for additional staff resources to
    expand the program.
        I hope this information helps clarify the state of the
    SEC's program to examine credit rating agencies.

                          WHISTLEBLOWER BOUNTY PROGRAM

        Senator Durbin. Let me ask about another issue. In the wake
    of the massive Ponzi scheme perpetrated by Bernie Madoff, the
    SEC has undertaken an array of reforms to reduce similar frauds
    and the fact that they would go undetected. Among the actions
    cited in SEC materials is, ``advocating for a whistleblower
    program,'' as part of the financial reform legislation. The SEC
    has requested expanded authority from Congress to reward
    whistleblowers who bring forward substantial evidence about
    Federal securities violations. Current law permits the SEC to
    award a bounty to a person who provides such information,
    leading to the recovery of a civil penalty from an inside
    trader, from a person who tipped information to an inside
    trader, or from a person who directly or indirectly controlled
    an inside trader.
        Now, a few weeks ago on March 29, the SEC's inspector
    general issued a report on how the bounty program is working at
    your agency. The SEC inspector general noted that while the SEC
    has had a bounty program in place for more than 20 years for
    rewarding whistleblowers for insider trading tips, there have
    been very few payments under the program. Likewise, the SEC has
    not received a large number of applications from individuals
    seeking a bounty over this 20-year period. The inspector
    general also found the program is not widely recognized either
    inside or outside your agency.
        The inspector general indicated that although the SEC is
    seeking expanded authority to reward whistleblowers who bring
    forward substantial evidence about other significant Federal
    security law violation, the current SEC bounty program is not
    fundamentally well-designed to be successful.
        They called for a long list of improvements by your
    inspector general. Make the application more user-friendly.
    Establish internal policies and procedures to assist staff in
    assessing contributions made by whistleblowers in making bounty
    award determinations. Routinely provide status reports to
    whistleblowers regarding their bounty applications. Track the
    applications to ensure timely and adequate review.
        The inspector general acknowledged that the SEC has begun
    to take steps to correct the deficiencies identified in this
    whistleblower bounty program, including consultation with the
    Department of Justice, the Internal Revenue Service, and other
    agencies.
        After the embarrassment of Bernie Madoff, this inspector
    general report about your whistleblower program is troubling to
    me. It indicates that the level of energy which we expected in
    response to Madoff and the embarrassment he brought to your
    agency and to our Government would create a whistleblower
    program to try to save some of those investors and savers who
    could be exploited by people like him.
        Ms. Schapiro. Senator, I would very much like to address
    that.
        First of all, when I arrived, I asked that we build a more
    robust, effective whistleblower program simply because the
    insider trading program has not been effective. And that is in
    part because insider trading rarely is brought to the attention
    of the SEC by tips. It is generally discovered as a result of
    surveillance done by the exchanges or surveillance that is done
    by the SEC itself. So we needed a program that was far more
    effective and covered much more than insider trading, which is
    a small proportion of the cases that we bring every year.
        So the SEC staff, in fact, crafted the whistleblower
    legislation that we believe would be far more effective,
    addresses the issues that are raised in the inspector general's
    report, and we think will allow us to really leverage the
    information that whistleblowers bring to the SEC on a broad
    range of potential violations.
        Senator Durbin. But you are asking for expanded authority
    to reward whistleblowers. If you were discounting what they
    could do, why would you ask for expanded authority in that
    program?
        Ms. Schapiro. But I am not discounting what they do. I
    believe we can make tremendous use of tips and complaints from
    whistleblowers.
        In the narrow context of insider trading, which is the only
    place the existing program can be applied, it has not been an
    effective program. So we need legislative authority to craft a
    program that will allow us to give whistleblowers more
    meaningful recovery on their claims and that will cover more
    than simply insider trading which, as I said, frequently is not
    the result of a whistleblower coming to us because insider
    trading tends to be detected from abnormal trading activity in
    a stock prior to the announcement of a merger or an acquisition
    that is detected by exchange surveillance systems referred to
    the SEC and then prosecuted by us. So the program was flawed in
    many ways, which is why we asked to expand the program, make it
    more robust, and have the legislative authority to do that.
        Senator Durbin. So is the inspector general's report on the
    right track of what you need to do within your own agency about
    this program?
        Ms. Schapiro. I think the inspector general's report is on
    the right track, and in fact, many of the recommendations he
    made are really a result of talking extensively with our staff
    about how to make this program better.
        Senator Durbin. Senator Collins.

                              ENFORCEMENT ACTIONS

        Senator Collins. Chairman Schapiro, there have been three
    issues in the press lately that affect the SEC that I
    particularly want to ask you about today to get your answers on
    the record and perhaps put an end to some of the speculation
    about one of these issues and that is the first one that I am
    going to begin with.
        There has been speculation reported in the financial press
    that the SEC's case against Goldman Sachs was somehow motivated
    by the timing of the financial reform bill that the Senate will
    shortly consider. For the record, was the timing of the SEC's
    enforcement action against Goldman in any way connected to the
    Senate's actions on financial reform?
        Ms. Schapiro. Absolutely not, and I put out a statement to
    try and make that quite clear that we do not time our
    enforcement actions by the legislative calendar or by anybody
    else's wishes. We bring our cases when we have the law and the
    facts that we believe support bringing our cases, and that is
    exactly what happened here, as has happened in the more than a
    dozen other financial crisis cases that we have brought in the
    past year.
        Senator Collins. I share your view on that issue, but I
    think it is important for me to ask you for the record.
        Ms. Schapiro. I appreciate the opportunity to answer it.

                          EMPLOYEE MISUSE OF COMPUTERS

        Senator Collins. The second question I want to ask you has
    to do with the disciplining of SEC employees who were involved
    in the porn case.
        I really am so appalled at those findings by the inspector
    general because it was not just one or two people. According to
    the inspector general's report, 33 staffers at the agency were
    found to have looked at porn on their computers at work over
    the past 5 years, and 17 of them were highly paid employees
    that were earning between $99,000 and $222,000 a year.
        An unrelated issue but another issue that causes me to ask
    what your process is and what are you doing to discipline
    employees has to do with the inspector general's criticisms of
    the SEC's failure to uncover the Madoff Ponzi scheme. Has the
    SEC taken any disciplinary actions against employees as a
    result of the inspector general's findings in the Madoff case?
        Ms. Schapiro. Senator, I am happy to respond to both of
    those.
        In the first instance, let me say that it was the agency's
    own filters that detected the activity that was reported by us
    to the inspector general, and there were 33 persons, as you
    point out, cited in the inspector general's report over a 5-
    year period. And a number of those, in fact, were outside
    consultants.
        That said, I completely share your disgust with this
    conduct. It is unacceptable at the Securities and Exchange
    Commission or anywhere else. We will deal very swiftly and very
    severely within the limits of the Federal employment rules and
    laws with anybody who abuses SEC resources. In fact, last week,
    I put out a message to all employees making it clear that
    anyone who abuses SEC resources in this manner or misuses them
    will be subject to termination. So we will deal with this very
    swiftly and severely, and all employees are clearly on notice
    with respect to that.
        Many of these actions were a number of years ago, and
    disciplinary actions have already been taken at one level or
    another. We have significantly ramped up the potential
    penalties.
        With respect to your last question regarding Madoff, as a
    result of the inspector general's investigation of the agency's
    failure to detect the Madoff fraud, there was a recommendation
    that we consider whether discipline is appropriate with respect
    to employees. I should say that, for example, in the
    Enforcement Division, of the 20 employees who were involved
    with Madoff investigations or examinations, 15 have already
    left the agency. With respect to those who are left, we have
    put in place a disciplinary process in accordance with the
    Federal rules that apply to all Federal workers in all
    situations like this. That process is intended to be fair and
    deliberative but appropriate, and we are going through that
    right now. It is well underway, and I cannot really comment on
    any specific actions, but I can assure you that a disciplinary
    process is underway.
        Senator Collins. Thank you.
        Senator Durbin. Senator Cochran.
        Senator Cochran. Mr. Chairman, thank you.

                      CORRECTIVE AND DISCIPLINARY ACTIONS

        May I ask whether or not any of the findings and
    recommendations of the inspector general in the case that
    Senator Collins raised have been implemented, or have those who
    were found to have violated regulations or laws in this
    connection been punished? You mentioned that five are still
    working there, and there were others who resigned, as I
    understand it.
        Ms. Schapiro. The inspector general, Senator, issued his
    reports in August and October, and between them, they included
    about 69 different recommendations for the staff. As a result
    of that, very promptly, the offices that were involved,
    primarily our inspections group and our enforcement group,
    issued corrective action plans, which under Federal law
    generally require that corrective actions in response to an
    inspector general report be taken within 1 year. As of March
    31--so between 4\1/2\ and 6 months after those reports were
    issued--the offices have completed corrective actions on 35 of
    the 69 recommendations. We are awaiting the inspector general's
    concurrence on 19 of those. The rest are substantially well
    underway and I think we are making very significant progress.
        With respect to the employees, as I mentioned, a number of
    them have already left. We are looking at whether personnel
    action should be taken. There is, as I said, an established
    process that we are legally required to follow, as we would in
    any employment issue involving a Federal worker. And that
    process is well underway, and we will be happy, upon its
    completion, to report back to the subcommittee.

                             STANFORD PONZI SCHEME

        Senator Cochran. I have several constituents from
    Mississippi who called and came up to Washington to visit with
    me and other Members of Congress and the Senate to tell us
    about their experiences in the really serious financial
    dislocations that have been caused by this scheme. It is really
    heartbreaking to realize that these people were really innocent
    victims of somebody's greed and corruption, and I want to be
    sure that whatever can be put in place to prevent this kind of
    thing from happening in the future is acted on and done
    quickly.
        Can you assure the subcommittee that that is the step and
    that is the intent of the SEC in this case?
        Ms. Schapiro. Senator, absolutely. As soon as I arrived
    last January, I put into motion a number of things that we hope
    will reduce the chances of a tragedy like this ever happening
    again. So we changed leadership across the agency. We
    restructured our Enforcement Division. We are in the process of
    restructuring our examinations group. We are bringing in people
    who have new skills that are better able to understand some of
    the information that Mr. Madoff managed to so expertly fool the
    staff with. We are doing much better training. We have over 500
    employees who have gone through either certified fraud examiner
    training or chartered financial analyst training.
        We have put in place new rules that will allow us to
    leverage the work of accounting firms when an investment
    adviser custodies assets with an affiliate, which is what
    happened in this situation. They are now required to have a
    surprise audit by a PCAOB registered accounting firm and allow
    us to have access to that information immediately so we can
    look for suspicious activity.
        And as I mentioned in my statement, we have put in place a
    system to try to better track tips and complaints and referrals
    so that the kind of information that the staff had about Madoff
    will have far less chance of slipping through the cracks.
        We have worked day and night to do everything we can think
    of to try to minimize the chances of a horrific event like this
    ever happening again. I share your deep concern about it.
        Senator Cochran. I appreciate your response and the obvious
    interest you have in helping to change things so that it will
    be less likely, we hope not likely at all, for something like
    this to happen in the future.
        I wish there was some way that we could provide some kind
    of restitution, or through a request from the administration,
    Congress could provide you with some authorities to help do
    something to compensate these victims for this terrible scheme.
        Ms. Schapiro. Through the SIPC program, Madoff victims are
    entitled to recovery. It will not come anywhere close to
    replenishing the funds that many of them have lost or thought
    they had earned over many years of this Ponzi scheme. But I
    believe at this point, the SIPC trustee has paid out somewhere
    around $680 million, and the trustee has gathered about $1.5
    billion for distribution to victims. It is a long and difficult
    process, but it is well underway.
        Senator Cochran. Well, thank you very much.
        Senator Durbin. Senator Lautenberg.
        Senator Lautenberg. Welcome, Ms. Schapiro.
        Ms. Schapiro. Nice to see you again.
        Senator Lautenberg. Congratulations on the earnestness with
    which you have taken over this assignment. That was desperately
    needed because not only did people lose lots of money, but they
    lost faith in Government at the same time.
        Ms. Schapiro. Absolutely.

                              TIPS AND COMPLAINTS

        Senator Lautenberg. It is a subject of interest of mine
    over some years. I still sit on the board of the Columbia
    Business School, my alma mater, and in 2001 I was able to
    establish a chair at Columbia that called for better business
    ethics in corporate governance in 2001. And while I claim some
    clairvoyance, the fact of the matter is that to me, having come
    from the corporate world, I saw a situation developing that I
    found very discouraging. And we have seen it in the last years
    when looking back at the testimony given the people who served
    earlier, without direct criticism, that there were responses to
    questions that said, well, we just did not know. We were not
    aware with whistleblowers presenting fairly significant
    evidence of failures on the part of the SEC.
        Is that still a source of information? Do we still get that
    kind of information? What happens when you get something?
        Ms. Schapiro. Senator, we do in fact. We get hundreds of
    thousands of tips and complaints a year. One of the problems I
    discovered when I arrived last year was that they came in from
    many different sources, investors, other regulators, companies,
    other regulated entities, and they came in all over the SEC.
    And there was no mechanism to centralize this information,
    connect the dots that might provide useful information about a
    trend or a growing problem with a particular product or a
    trading strategy or a particular firm.
        So we spent the money that this subcommittee very
    generously gave this agency last year in technology dollars to
    begin to build a centralized repository for all the tips and
    complaints and referrals that come into the agency. That phase
    one is completed. The next phase is to add risk analytics to
    that, and we have created an Office of Market Intelligence in
    our Enforcement Division that is charged with the
    responsibility for knowing the data that is in there,
    understanding what creates the highest level of risk for the
    investing public, following up on those leads, triaging them,
    following up on them, tracking them, and making sure that we
    act on them as responsibly as we can.
        There are hundreds of thousands, and I would not sit here
    and tell you we will never miss another one. But we have done
    everything we can think to do.
        Senator Lautenberg. That is important. Could it be
    considered a fairly reliable source of inquiry that the SEC
    will look to these things? Because there was a pathetic
    response to why action was not taken in one case.
        Ms. Schapiro. Absolutely.
        Senator Lautenberg. I see that your budget request clearly
    identifies enforcement as SEC's top priority, and obviously, it
    is brought about by the years of neglect that preceded this.
        How do you stimulate your people to go after these things
    when the culture before was so neglectful? Are you able to keep
    track of what is going on there?

                           IMPROVING SEC ENFORCEMENT

        Ms. Schapiro. It is a great question. And I will tell you
    that I think--and I do not mean to sound Pollyannaish about
    this, but that the culture of the agency was maybe submerged a
    little bit over the last several years, but there is tremendous
    enthusiasm again for our enforcement role. We took the
    handcuffs off our Enforcement Division within 1 week after I
    arrived at the end of January last year. We told the
    enforcement staff that they could issue subpoenas without
    waiting for the five Commissioners to sit in a meeting and vote
    on it. It took months off the investigative process.
        We enabled our staff to go ahead and negotiate corporate
    penalties with public companies in enforcement cases instead of
    getting permission in advance from the Commission, again
    speeding up the process, empowering them to do their jobs.
        We created five specialized units of people with deep
    expertise and we are having tremendous success in recruiting
    people that will focus on specific areas and get deep and
    knowledgeable about structured products, asset management,
    insider trading, and market abuse, Foreign Corrupt Practices
    Act, and so forth. So we have these specialized units that are
    going to be far more efficient, I believe, in bringing cases.
        We took a layer of management out of the Enforcement
    Division and put hundreds of really talented people back on the
    front lines of doing the investigations and bringing cases.
        We have done the most significant restructuring of the
    enforcement program in 30 years, and I think we are already
    seeing it pay dividends in the level of complexity of cases
    that we are bringing. If you look at the major cases over the
    last year, they are quite extraordinary. And, also the number
    of cases. For example, in 2009 over 2008, we shut down twice as
    many Ponzi schemes far earlier than the Madoff scheme would
    ever have been shut down.

                        CORPORATE COMPENSATION PROGRAMS

        Senator Lautenberg. I would just ask the chairman, if I
    might take a moment from using and say that as you look at
    executive compensation, which I know is one of the things that
    you see--I ran a pretty good-sized company before coming here
    and was very conscious of things that we did to stimulate
    attitudes within the working population of the company, and
    when we put any money into the outside world to try and help
    us, we have effectively.
        To me, a year-end--a termination bonus, what not to be the
    mark--a mark based on the stock price, but based on what good
    the individual did for the company, and instead of paying a
    bonus immediately, trail it out over maybe a 5-year period and
    say if the company achieved certain marks after you have been
    here, that is when the big bonuses ought to come. And I do not
    know what right you have at the SEC to make the recommendations
    on that basis or even to think about it.
        Ms. Schapiro. Senator, while I do not think we can dictate
    the terms of compensation arrangements, we did approve new
    rules in January that are in effect for this current proxy
    season that require the board of directors to explain to
    shareholders how they compensate risk-taking within the
    corporation and whether their compensation programs broadly,
    for all employees, not just the top five, might incentivize
    short-term risk-taking, how the board handles risk within the
    organization more broadly, as well as some others that we call
    proxy enhancements.
        It is disclosure based, as much of our rules are, but I
    think it is forcing boards to really think about what do they
    want to say about their compensation programs and how do they
    want to explain the linkage between compensation and risk which
    we have seen over the financial crisis to be a strong link and
    one that had very deleterious effects at the end of the day.
        Senator Lautenberg. I am glad to see that there is some
    fire in the belly over there.
        Ms. Schapiro. There is much fire.

                CHIEF COMPLIANCE OFFICER WITHIN SEC ORGANIZATION

        Senator Durbin. Chairman Schapiro, you announced the
    appointment of a new chief compliance officer to serve as the
    internal watch dog to monitor security holdings and
    transactions by your own employees and, in your own words, said
    that this had to be a world-class compliance program just as we
    expect from those we regulate.
        There was an article that followed that decision, once they
    found out where this compliance officer would be standing on
    the pecking order or the administrative stair steps of your
    agency. There was a concern that this person really did not
    report--was in a post buried within the Office of Ethics
    Council, did not have an independent status, and did not report
    to you or another high-ranking official. The question was
    raised as to whether or not this really was a world-class
    attempt to deal with a serious problem that might involve some
    conflict of interest within your own agency.
        Ms. Schapiro. Senator, let me address this because I think
    the article was actually quite off the mark.
        When I arrived at the SEC, I was surprised, I will say, to
    learn that there was not a system for monitoring employees'
    stock transactions, and I had come from an organization where
    we had quite a rigorous one. So I immediately brought in a
    contractor to help us develop a system that requires every
    employee to enter all of their stock holdings and all of their
    securities accounts into a centralized system. It enables
    employees to pre-clear any trades and ultimately will receive
    directly from brokerage firms duplicate copies of employees'
    statements.
        At the same time, we are working with the Office of
    Government Ethics to bolster the existing rules that apply
    across the Government and no employee will be permitted to
    trade in the stock of any company under investigation by the
    SEC, whether or not they have any knowledge of it at all. That
    will also require preclearance and certification that they have
    access to no nonpublic material information about those
    companies. We are negotiating those rules out with the Office
    of Government Ethics right now.
        The person we hired is responsible for that system. We have
    an entire Office of Ethics within the SEC. I meet with them
    regularly. In fact, I met with the new compliance officer this
    morning. But her responsibility is with respect to that system.
    It is not a chief compliance officer in the sense of one in a
    brokerage firm, which I think that article was trying to
    equate.
        Senator Durbin. So can this person report directly to you?
        Ms. Schapiro. She could. In fact, I met with her yesterday,
    and she knows my door is open to her at any time.
        Because she is responsible for managing the system within
    the context of the many other ethical reviews that go on within
    the agency, it made sense to put her in the Office of the
    General Counsel. I would have no problem changing the reporting
    line. I think she will actually get more attention, though, and
    more focus there, and she knows she can come to me anytime,
    frankly, as every employee does on any issue that is of concern
    to them.

                             STANFORD PONZI SCHEME

        Senator Durbin. Let me ask you about the report that was
    released on April 16 from the Inspector General's Office about
    the Stanford case and the fact that this case was--Allen
    Stanford was indicted last year by the SEC in a $7 billion
    fraud case, accused of fleecing more than 21,000 people,
    primarily through the sale of a prized investment,
    certification of deposits issued by his bank headquarters in
    Antigua, and then sold at a brokerage.
        The SEC's Fort Worth office was aware since 1997 that
    Robert Allen Stanford was likely operating a Ponzi scheme. But
    as the inspector general report states, no meaningful effort
    was made by enforcement to investigate. SEC agents began
    looking at Stanford's companies in 1998, 2002, and 2004, but
    dropped their efforts. The inspector general report also said
    SEC supervisors were more interested in quicker turnaround
    cases at the time, not the kind of examinations needed to look
    into a complex entity like Stanford. And to make it worse, the
    former chief of enforcement at SEC's Fort Worth office who
    helped quash the inquiries later went to work for Stanford in
    2006 before he was told by the SEC to stop because it ``was
    improper to do so.''
        Like the case of Madoff, the scathing report offers another
    reminder of potential breakdowns in regulatory oversight. I
    recognize that these circumstances like the Madoff situation
    preceded your arrival. Yet, cases like this can fester and then
    bubble up to surface years later.
        What controls does the SEC have in place now that would
    ensure that a disturbing mess like the Madoff and Stanford
    cases do not reoccur? What else should be done to make sure
    that they do not?
        Ms. Schapiro. Senator, let me speak specifically to
    Stanford because I have talked quite a bit about all the
    changes that we have put in place with respect to Madoff,
    although I am happy to discuss those in much more detail.
        With respect to the conduct that was discussed by the
    inspector general in the Stanford case, there were many missed
    opportunities, without a doubt, in that 1997 to 2005 period
    before the agency took Stanford up seriously and earnestly to
    have done something. I was not there, so I do not truly
    understand what happened.
        I will tell you that we have new leadership across the
    board in this agency, in the inspections program, as well as in
    the enforcement program. We have created escalation committees
    so that if an examiner believes that they have found something
    that is a real problem and they are not getting the response
    when they refer it over to the Enforcement Division that they
    want, they take it to an escalation committee and that will go
    all the way up into the senior ranks of the organization.
        We have new management reporting metrics that have been put
    in place in the Enforcement Division and regular review of open
    matters in both the examinations group and the enforcement
    group so that we can be sure things are not sitting for a long
    time.
        Decisions will be made sometimes to shut down a matter
    because there is not sufficient evidence, and we could miss
    something by doing that. But it has to be a conscious decision
    based on the evidence that is in front of people at the time.
    It cannot be because of neglect that something has not been
    pursued.
        So I think between the leadership changes, the structural
    changes within enforcement, the structural changes that I
    anticipate we will be announcing in the inspections group
    before very long, the creation of the escalation committees,
    and the new reporting mechanisms within the divisions, I am
    hopeful that we will never have a repeat of that incident.

                     OVERSIGHT BY APPROPRIATIONS COMMITTEE

        Senator Durbin. Let me say in closing, before turning it
    over to Senator Collins, the questions I have asked you today
    have been pointed. They have involved issues that are important
    and controversial. It is part of our responsibility on this
    side of the table with the oversight of your agency to ask
    those questions. There are some in the Senate now who want us
    to be taken out of this process. They do not want these
    questions to be asked, and I think that is wrong. We have a
    responsibility to make sure that you do your job and do it well
    and provide you with the resources to accomplish your goals,
    and the notion that the oversight of the Appropriations
    Committee is unnecessary for an agency as important as the
    Securities and Exchange Commission is just plain wrong. And I
    hope that we can continue a positive, constructive relationship
    providing you the resources and support you need, but you can
    count on this. As long as this Appropriations Committee is
    involved, each year you will face questions that get to the
    heart of your activities and be held accountable as we are held
    accountable.
        Ms. Schapiro. Senator, I appreciate that. I always endeavor
    to be completely transparent about what is happening at the
    SEC, what I see that is wrong, and how I am trying to fix it.
    This is an institution that must always learn from its
    mistakes, and that is my commitment to you. I will answer your
    questions.
        Senator Durbin. Make no mistake. I still have confidence in
    your leadership, but we have a responsibility on our side of
    the table as well.
        Ms. Schapiro. I understand.
        Senator Durbin. Senator Collins.
        Senator Collins. Mr. Chairman, let me first wholeheartedly
    agree with the statements that you just made. I am going to
    bring up one of those kinds of questions right now too.

                        GLOBAL SECURITY RISK MANAGEMENT

        In 2004, at the direction of Congress, the SEC established
    the Office of Global Security Risk Management, and this was
    created--and probably the chairman was involved because I know
    this is an issue that has mattered to him for a long time. It
    was created to protect investors from the risk associated with
    investing in companies doing business in nations that are
    designated as state sponsors of terrorism by the Department of
    State.
        But the office within the SEC has failed to vigorously
    carry out its mandate. Its most important mandate is to ensure
    that all companies that are sold on American exchanges that
    operate in those countries are disclosing their activities to
    investors. I know the chairman and I have supported legislation
    that has allowed State pension funds to divest their holdings
    in such cases.
        Why has the SEC not been more aggressive in following
    through by issuing regulations to ensure that corporations do
    disclose the information about their activities in such
    countries to their investors?
        Ms. Schapiro. Senator, the Office of Global Security Risk,
    as you point out, was created in 2004. In that period between
    then and now, that office has reviewed about 800 corporate
    filings that disclose doing business on some level with Iran,
    Syria, Sudan, or Cuba that are on the State Department list.
        The disclosure requirements are based on materiality, and
    that is something we could change. But there is not a separate
    line item disclosure for any level of business with one of
    those countries. So we look at materiality both quantitatively
    and qualitatively--the amount of the business that is done with
    one of those countries relative to the size of the company. Is
    it humanitarian or is it potentially business that could have a
    military application, for example? Is the business continuous
    or isolated? Is there just one instance and so forth? So we do
    this materiality analysis, and if the staff determines that the
    contact with one of these countries is material, then
    disclosure is required.
        We could look at--in fact, I will tell you we are looking
    at whether this should be line item disclosure without regard
    to the materiality of the business conduct between the public
    company and one of these four nations that are currently on the
    list.

                        DISCLOSURE AND MATERIALITY TEST

        Senator Collins. Well, let me follow up on that because I
    am told that in November 2007, the SEC issued a concept release
    seeking comment on whether to develop a better mechanism to
    allow investors to have better disclosures in this area and
    that the comment period ended in January 2008 and that the SEC
    has taken no action since that time.
        Ms. Schapiro. I have asked the staff to----
        Senator Collins. Is that incorrect?
        Ms. Schapiro [continuing]. Go back to that. Again, as I
    said, we are looking at whether line item disclosure here as
    opposed to our normal you must disclose material risks to the
    business or material levels of business in this regard.
        Senator Collins. But why has there been no action for 2
    years since the comment period--more than 2 years?
        Ms. Schapiro. I think there has been a general view that
    our disclosure system is about disclosure that helps people
    make investment decisions and make the right decision about
    purchasing or selling a financial asset, and that if it is a de
    minimis amount of business that is being done with respect to
    one of these countries, does it meet either the qualitative
    materiality or the quantitative materiality standards, that it
    will not be useful disclosure. As I said, we are revisiting
    that issue now.
        Senator Collins. Well, what I would say is I think you have
    a good point about de minimis business, but you ought to
    complete the work on it so that investors do have access to
    that information because there are many investors who will not
    want to do business with a company or will not want to buy
    shares in a company that is doing business with one of these
    countries.
        Ms. Schapiro. And if I could just add one thing because you
    mentioned the law with respect to divestiture. Our very recent
    filing reviews show that two mutual funds, CREF and Old Mutual,
    have actually relied on that safe harbor to divest themselves
    of stocks of companies doing business in the Sudan. So I think
    that is very good news.
        Senator Collins. I do too.

                       FIDUCIARY DUTIES OF BROKER-DEALER

        Yesterday, as you know, at the hearings on Goldman Sachs, I
    asked what I thought was a pretty straightforward question to
    several of the bankers. I asked them whether they considered
    themselves to have a duty to act in the best interests of their
    clients, the kind of fiduciary obligation that investment
    advisors have. And to say that they danced around and evaded
    answering my question would be an understatement. But the fact
    is that the law currently does not impose that kind of
    fiduciary obligation on broker-dealers.
        In your judgment, should the law impose a fiduciary
    obligation on broker-dealers?
        Ms. Schapiro. It absolutely should, and we have been
    strongly advocating for the regulatory reform bill to require
    that both investment advisors--and we have discussed this in a
    retail context, I will say, not with respect to the discussions
    this week about large institutional investors. But at a
    minimum, when you are dealing with the retail public, they are
    entitled to know that the financial services professional
    sitting across the table from them puts their, the customer's,
    interest first ahead of their own in all circumstances. There
    are some conflicts that perhaps can be disclosed. There are
    some conflicts that cannot be disclosed away in my view.
        The duty that exists on the investment advisory side does
    not exist clearly on the broker-dealer side, and we need the
    law to make this a uniform fiduciary duty, and I am very
    hopeful that the Senate bill which does not have that provision
    right now will emerge with that provision in place. Right now
    we are required under the Senate bill to do a study. We are
    happy to study the issue, although I will say the SEC
    contracted with the RAND Corporation several years ago to do a
    study of this issue. So there is lots of work out there.
        We will look at it again, but we would hope that when a
    study is done, it would trigger our ability to write the rules
    that would create a fiduciary duty if the study suggested that
    that is what is necessary. My personal bias, I will tell you
    out of the box, is that that is necessary.
        Senator Collins. In writing this new rule, if we did,
    should we distinguish between individual retail investors for
    whom having that obligation is perhaps even more important
    because they are less sophisticated arguably than most
    institutional investors, or should it apply across the board?
        Ms. Schapiro. I think in the first instance, we have got to
    take care of retail investors. This is really a disgraceful
    situation in many ways.
        But I would also note that in the Senate Agriculture
    Committee bill, there is a fiduciary duty that swap dealers owe
    to pension plans and municipalities, and that seems to me to be
    a very good idea.
        So I think we could step this up over time to be broader,
    but I would start very clearly with retail.
        Senator Collins. Thank you.
        If you would provide me with a copy or provide the
    subcommittee with a copy of the RAND study, that would be
    helpful to us.
        Ms. Schapiro. I would be happy to do that.
        [The information follows:]

        The Rand Report on Investor and Industry Perspectives on
    Investment Advisers and Broker-Dealers can be found at the
    following website address: http://www.rand.org/pubs/
    technical_reports/TR556.html.

        Senator Collins. Mr. Chairman, I apologize for exceeding my
    time.
        I am going to submit a question on Allied Capital, that
    case which was also criticized by the inspector general, for
    the record and some other questions as well.
        But thank you for the additional time.
        Senator Durbin. Senator Collins, thank you very much.
        And let me just also say that I applaud your last line of
    questioning and believe that you have really touched on
    something that is absolutely essential. Maybe we can find some
    bipartisan ground to share here on this. I think I could
    support your effort, and I am glad to hear that the chairman
    believes it is a wise undertaking. So maybe we can build on
    that.

                         ADDITIONAL COMMITTEE QUESTIONS

        The record of this subcommittee is going to be open until
    next Wednesday, so we may submit some written questions, and
    other members may join us.
        In the meantime, thank you so much for being with us today.
        Ms. Schapiro. Thank you.
        Senator Durbin. Keep up your good work.
        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 Thad Cochran

        Question. There is a proposal in the financial reform bill that
    would make the SEC self-funded through the fees that it recovers. This
    effectively would exempt the SEC from Congressional appropriations and
    budgetary oversight. Before Congress decides to give up its
    constitutional responsibilities for directing Federal spending and
    providing necessary oversight over the Executive branch, we ought to
    know exactly what circumstances justify such an exemption for the SEC.
    What do you think those circumstances are?
        It seems to me that, now more than ever, Congressional oversight is
    needed to ``regulate the regulators'' and to hold accountable those
    regulators who fail to do their jobs correctly. The SEC made many
    mistakes during the financial crisis. Recent reports by the Inspector
    General and others show that these problems were caused by
    mismanagement at the SEC, and not by any funding shortages. Shouldn't
    Congress demand even more accountability of the SEC, rather than
    allowing the SEC to freely spend a greatly expanded budget?
        Answer. As you know, the final Dodd-Frank Act that became law on
    July 21, 2010 did not include the self funding provision. That said,
    the Dodd-Frank Act does contain several funding reforms that I believe
    are very positive for the SEC. These improvements to the funding
    process should ensure appropriate Congressional oversight while
    addressing important issues regarding the agency's funding. In
    particular, I am pleased that the Act will permit the SEC to provide
    information directly to the Committee regarding our funding
    requirements. I believe this enhanced communication will complement the
    ongoing Congressional oversight. I fully support these funding reforms
    and ensuring full transparency by the agency.
        Question. The Office of the Inspector General identified several
    problems at the SEC, following its investigation of Stanford Financial.
    None of these involved inadequate funding or inadequate staffing at the
    SEC. Other recent reports identified senior-level employees using SEC
    computers to view pornography for hours a day when they should be
    protecting investors, and enforcement officials refusing to pursue
    novel or more complicated cases. None of this suggests that if we give
    the SEC more funding, or the ability to fund itself, that the SEC's
    competence would improve as a result. Can you explain why Congress
    should give so much deference to the SEC, when it is plagued by these
    failures and mismanagement?
        I am very troubled by the Inspector General's report on Stanford
    Financial. Many Mississippians and other Americans lost their life
    savings by investing in what were freely marketed as safe, Certificate-
    of-Deposit investments. Dating back to 1997, the SEC's Fort Worth
    Examination Group repeatedly requested that an enforcement action be
    brought against Stanford Financial. That was over 12 years before the
    SEC actually brought an enforcement action. The Inspector General found
    serious managerial, cultural, and performance-based problems at the
    SEC, which led to this terrible failure. First, what are you doing to
    help compensate the victims of the Stanford Financial fraud? And
    second, what steps are you taking to ensure that the performance
    problems identified in the Inspector General's report are corrected at
    the SEC?
        Answer. The SEC is taking the situation of Stanford victims very
    seriously. In addition to working aggressively to maximize recovery to
    investors harmed by the Stanford fraud, Commission staff is studying
    all the facts relating to the Stanford case with respect to whether a
    legal basis exists for a SIPA liquidation of the registered broker-
    dealer, the Stanford Group Company. As part of this review, I have met
    with representatives of the Stanford Victims Coalition, and Commission
    staff also has met with a number of Stanford victims to discuss this
    matter. We continue to review the facts of the case to determine
    whether there is a statutory basis for providing SIPC coverage to the
    victims, and will continue to work with Congress in this regard.
        With respect to the conduct that was discussed by the inspector
    general in the Stanford case, there were clearly many missed
    opportunities in the 1997 to 2005 period covered by the report. Since
    that time, much has changed regarding the agency's leadership, its
    internal procedures and its culture of collaboration. Even before the
    IG's report, the agency had taken a number of steps which address the
    concerns raised in the report. These steps include:
      --Establishing escalation procedures and revamping the process for
            handling tips, complaints and referrals.
      --Changing performance metrics so that quantity does not trump
            quality.
      --Streamlining approval procedures in enforcement investigations.
      --Establishing and consistently applying factors for referring
            matters to others agencies.
      --Making effective use of other resources within the agency, such as
            economic and international experts.
      --Training Enforcement Division staff on potential remedies available
            under the laws applicable to both investment advisers and
            broker-dealers.
      --Sensitizing employees who leave the organization to their ongoing
            restrictions.
                                     ______

                  Questions Submitted by Senator Susan Collins

        Question. An Inspector General report found that the SEC did not
    properly pursue allegations made against Allied Capital, but instead
    went after the hedge fund manager who challenged the value of Allied
    Capital's investments. This allegedly occurred after heavy lobbying by
    Allied, who was represented by a former SEC official. These actions
    raise concerns about how decisions are made at the agency about
    bringing and conducting investigations.
        What procedures and criteria does the Enforcement Division use to
    review and approve new investigations?
        Answer. The Division pursues all information it receives concerning
    potential violations of the Federal securities laws and Commission
    rules. We generate and receive leads for new investigations through a
    variety of efforts, including research, market surveillance,
    examination referrals, and observation by Division staff. We also
    receive tips and other information from outside the Division and
    outside the agency.
        Upon receipt of a Tip, Complaint or Referral (``TCR''), the
    Division's Office of Market Intelligence analyzes TCRs and triages the
    information provided, sometimes in consultation with other Divisions
    and Offices, to determine whether the information provided (along with
    any other similar information already available to the Commission)
    alleges a potential violation of the Federal securities laws or
    Commission Rules such that further review by an investigative group is
    warranted. If the information warrants further review, the Office of
    Market Intelligence assigns the TCR to an investigative group that,
    among other things, analyzes the information to determine programmatic
    significance and resource availability.
        When the investigative staff generates information or receives a
    TCR concerning potential violative conduct, the investigative staff
    determines whether to open a Matter Under Inquiry (``MUI'') based on
    whether a sufficiently credible source or set of facts suggests that a
    MUI could lead to an enforcement action that would address a violation
    of the Federal securities laws. Basic considerations used when making
    this determination may include, but are not limited to:
      --The statutes or rules potentially violated;
      --The egregiousness of the potential violation;
      --The potential magnitude of the violation;
      --The potential losses involved or harm to an investor or investors;
      --Whether the potentially harmed group is particularly vulnerable or
            at risk;
      --Whether the conduct is ongoing;
      --Whether the conduct can be investigated efficiently and within the
            statute of limitations period; and
      --Whether other authorities, including Federal or State agencies or
            regulators, might be better suited to investigate the conduct.
        While the threshold analysis for opening a MUI is relatively low,
    determining whether the MUI should be converted to an investigation or
    whether to open an investigation, is typically a more detailed
    evaluation that is based on additional information. The evaluation for
    whether to convert a MUI to an investigation (or open an investigation)
    turns on whether, and to what extent, the investigation has the
    potential to address violative conduct. Threshold issues for the
    investigative staff to consider when evaluating the facts include: (1)
    Do the facts suggest a possible violation of the Federal securities
    laws involving fraud or other serious misconduct? (2) If yes, is an
    investment of resources by the staff merited by: (a) the magnitude or
    nature of the violation, (b) the size of the victim group, (c) the
    amount of potential or actual losses to investors, (d) for potential
    insider trading, the amount of profits or losses avoided, or (e) for
    potential financial reporting violations, materiality? (3) If yes, is
    the conduct: (a) ongoing, or (b) within the statute of limitations
    period?
        In addition to the threshold issues above, one way to determine
    whether the conduct is serious is to consider the following
    supplemental factors:
      --Is there a need for immediate action to protect investors?
      --Does the conduct undermine the fairness or liquidity? of the U.S.
            securities markets?
      --Does the case involve a recidivist?
      --Has the SEC or Division designated the subject matter to be a
            priority?
      --Does the case fulfill a programmatic goal of the SEC and the
            Division?
      --Does the case involve a possibly widespread industry practice that
            should be addressed?
      --Does the matter give the SEC an opportunity to be visible in a
            community that might not otherwise be familiar with the SEC or
            the protections afforded by the securities laws?
      --Does the case present a good opportunity to cooperate with other
            civil and criminal agencies?
        Both senior management and frontline staff participate in the
    analysis to determine whether to open a MUI, to convert a MUI into an
    investigation, or to open an investigation. Leveraging the skill sets
    and experience of staff and management ensures that Division resources
    are efficiently utilized in the investigation of enforcement matters.
    This process gives the Division the ability to have a unified,
    coherent, coordinated response to the huge volume of information we
    generate or receive every day, thereby enhancing the Division's ability
    to open the right investigations, bring solid cases, and more
    effectively protect investors.
        Question. How does the Commission evaluate the implementation of
    these procedures to ensure that the division is managing its operations
    efficiently?
        Answer. Managing the flow of information into and throughout the
    Division is critical to effective operations within the Division. We
    have established systems and procedures that enable senior management
    to track a host of critical elements including the flow of information
    and the progress of investigations. For example, TCRs are now logged
    into a single, searchable database system. This allows management to
    track TCRs to ensure that each TCR is appropriately referred to the
    investigative staff, or otherwise resolved. The staff has been
    instructed as to procedures for memorializing their resolution
    decisions, which ensures that there is a record that can be audited.
        Simultaneously, we have been working on a new intake and resolution
    system that will allow us to capture even more information about TCRs.
    The new system will provide more robust search capabilities so that
    TCRs can be better assessed or triaged. In addition, this new system
    will add enhanced workflow abilities so we can track how TCRs are being
    used throughout the agency. We expect to deploy this system later this
    year. Meanwhile, we also are in the early stages of designing the third
    phase of this system, which will add risk analytics tools to help us
    quickly and efficiently identify high value tips and search for trends
    and patterns across the data.
        We have also enhanced our ability to manage workflow to improve the
    oversight of our investigations. Senior management tracks all MUIs and
    investigations within the Division to ensure that resources are
    allocated appropriately, MUIs and investigations are conducted
    efficiently, and enforcement recommendations, or other resolutions, are
    completed timely. A bi-weekly report on MUI openings allows senior
    management to closely track new matters. Investigations are reviewed on
    a quarterly basis by senior management and the investigative staff.
    This review process ensures that robust investigative theories are
    developed, potential obstacles are identified early, and investigations
    advance appropriately. The quarterly review process also increases the
    Division's opportunities to coordinate enforcement efforts with other
    agencies.
        Additionally, senior management designates certain investigations
    as National Priority investigations; these include, among others, cases
    of potential programmatic significance, where the alleged misconduct
    occurred in connection with products, markets, transactions or
    practices that pose particularly significant risks for investors or a
    systemically important sector of the market. The Office of the Director
    tracks National Priority investigations on a monthly basis to ensure
    swift and efficient resolution of these matters. The Director routinely
    meets with investigative staff and management assigned to each matter
    designated as a National Priority investigation.
        In addition to the systems and procedures to manage TCRs and the
    progression of MUIs and investigations, the Division has implemented
    several methods to track routine investigative benchmarks such as
    issuing subpoenas, taking testimony, and making recommendations to the
    Commission. We implemented a practice whereby the staff must obtain the
    Director's approval before requesting an extension of a tolling
    agreement. Division management uses a Dashboard metric to continually
    measure the progress of the Division and we compare our progress to
    both our internal goals and past results.

                              SUBCOMMITTEE RECESS

        Senator Durbin. The subcommittee stands in recess.
        [Whereupon, at 4:08 p.m., Wednesday, April 28, the
    subcommittee was recessed, to reconvene subject to the call of
    the Chair.]

      FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR FISCAL
                                   YEAR 2011

                                  ----------

                             THURSDAY, MAY 20, 2010

                                           U.S. Senate,
               Subcommittee of the Committee on Appropriations,
                                                        Washington, DC.
        The subcommittee met at 3:03 p.m., in room SD-192, Dirksen
    Senate Office Building, Hon. Richard J. Durbin (chairman)
    presiding.
        Present: Senators Durbin and Collins.

                            FEDERAL TRADE COMMISSION

    STATEMENT OF HON. JON LEIBOWITZ, CHAIRMAN

                 OPENING STATEMENT OF SENATOR RICHARD J. DURBIN

        Senator Durbin. Good afternoon.
        I am pleased to welcome you to this hearing before the
    Financial Services and General Government Appropriations
    Subcommittee.
        And my apologies for running a few minutes late. We had a
    vote at 2:30 and had to wait until the end to make sure that
    everything turned out just right.
        Today's hearing focuses on the Federal Trade Commission
    (FTC), both in the agency's budget request for fiscal year 2011
    and on oversight.
        Testifying before us this afternoon is the Chairman of the
    FTC, Jon Leibowitz.
        Thank you for being here.
        Mr. Leibowitz. Thank you.
        Senator Durbin. I welcome my distinguished ranking member,
    Senator Susan Collins of Maine.
        Consumers are affected every day by the Federal Trade
    Commission's work. Thanks to the Federal Trade Commission,
    consumers receive fewer telemarketing calls and e-mail spam,
    obtain free credit reports, receive identity theft victim
    assistance, can rely on truthful information on products and
    services, and benefit from competition in the marketplace
    through lower prices, more choice, and higher-quality products
    and services.
        Funding provided to the FTC supports these successful
    outcomes. Over the past 3 years, the Federal Trade Commission
    saved consumers more than $1.4 billion in economic injury by
    stopping illegal practices in the marketplace. Last year alone,
    the FTC took action against mergers likely to harm competition
    in markets, with a total of $22.3 billion in sales. Since 2006,
    the FTC's budget has grown to support a staff of 1,170, a
    cumulative 4-year staffing increase of 16 percent. New staff
    have enhanced the agency's ability to protect consumers and
    preserve competition. The growth of the staff and budget
    reflect a rapidly evolving and sophisticated marketplace. As
    technology continues to transform, consumers are enjoying
    revolutionary services and information unimaginable just a
    short time ago.
        But, unfortunately, the risk from new technology has also
    increased, such as identity theft, privacy violation, and data
    security concerns. Newly hired FTC staff have been assigned to
    respond to these increased risks, not just through enforcement,
    but also through education of consumers and industry.
        Funds provided to the FTC have also allowed the Commission
    to focus on risks from the current economic downturn.
    Unemployment and the foreclosure crisis have created prime
    opportunities for fraudsters to prey on financially vulnerable
    Americans. Since 2009, the FTC, working with States and other
    agencies, has been involved in bringing more than 200 cases
    against firms deceiving homeowners into paying for bogus
    mortgage modifications and foreclosure-avoidance schemes.

                               PREPARED STATEMENT

        I am not going to go through the rest of my statement here,
    but make it part of the record, because I'm anxious to give my
    colleague a chance and then to open it up to questions.
        [The statement follows:]

                Prepared Statement of Senator Richard J. Durbin

        Good afternoon. I am pleased to welcome you to this hearing today
    before the Financial Services and General Government Appropriations
    Subcommittee.
        Today's hearing focuses on the Federal Trade Commission, both on
    the agency's budget request for fiscal year 2011 and on oversight of
    previously appropriated funds.
        Testifying before us this afternoon is the Chairman of the FTC, Jon
    Leibowitz.
        I welcome my distinguished Ranking Member Susan Collins, others who
    join me on the dais today and others who may arrive.
        Consumers are affected every day by the FTC's work. Thanks to the
    FTC, consumers: receive fewer telemarketing calls and e-mail spam;
    obtain free credit reports; receive identity theft victim assistance;
    can rely on truthful information about products and services; and
    benefit from competition in the market through lower prices: more
    choice, and higher quality products and services.
        Funding provided to the FTC supports these successful outcomes for
    consumers.
        Over the past 3 years, the FTC saved consumers more than $1.4
    billion in economic injury by stopping illegal practices in the
    marketplace.
        And last year alone, the FTC took action against mergers likely to
    harm competition in markets with a total of $22.3 billion in sales.
        Since 2006, the FTC's budget has grown to support a staff of 1,170,
    a cumulative 4-year staffing increase of 16 percent.
        New staff have enhanced the agency's ability to protect consumers
    and preserve competition in the marketplace.

               NEW TECHNOLOGIES, FINANCIAL FRAUD SPUR FTC GROWTH

        The growth of FTC's staff and budget reflects a rapidly evolving
    and sophisticated marketplace. As technology continues to transform,
    consumers are enjoying revolutionary services and information
    unimaginable just a decade ago.
        But unfortunately, the risks from new technology and capabilities
    have also increased, such as identity theft, privacy violations, and
    data security concerns. Newly-hired FTC staff have been assigned to
    respond to these increasing risks, not just through enforcement but
    also through education of consumers and industry.
        Funds provided to the FTC have also allowed the FTC to focus on
    risks resulting from the current economic downturn.
        Unemployment and the foreclosure crisis have created prime
    opportunities for fraudsters to prey on financially vulnerable
    Americans.
        Since 2009, the FTC, working with states and other agencies, has
    been involved in bringing more than 200 cases against firms deceiving
    homeowners into paying for bogus mortgage modifications and foreclosure
    avoidance schemes.
        To reduce mortgage-related scams in the long term, the FTC has
    initiated a rulemaking proposing to prohibit companies from charging
    fees in advance of any loan modification services and to require
    specific disclosures so that consumers can make informed decisions.

               MARKET MONITORING AND ANALYSIS PROMPTS FTC GROWTH

        Staffing increases over the last several years have also enhanced
    the FTC's ability to monitor and review the competitiveness of
    increasingly complex industries. One of these is the petroleum market.
    Americans rely on this market for transportation and to heat and light
    our homes and businesses.
        The FTC continuously monitors gas and diesel prices to track trends
    and potential market distortions. Just last year, the FTC created a new
    rule to prohibit fraud and deceit in wholesale petroleum markets. The
    FTC also educated businesses on compliance with the specific directives
    included in the new rules. Together these steps will enhance the
    competitiveness of the petroleum market.

                                 FUTURE FUNDING

        For fiscal year 2011, the FTC requests $314 million. This is an
    increase of 7.6 percent over the fiscal year 2010 enacted level and
    would allow the FTC to hire 40 new staffers in similar growth areas
    from previous years. In particular, the FTC requests to add staff to
    handle the increasing workload related to financial practices, privacy
    and data security, and complex merger transactions.
        I look forward to discussing these and other issues with you.

        Senator Durbin. But, Mr. Chairman, thank you for being
    here.
        My apologies, again, for running late.
        Mr. Leibowitz. No problem.
        Senator Durbin. Senator Collins.

                       STATEMENT OF SENATOR SUSAN COLLINS

        Senator Collins. Thank you, Mr. Chairman.
        I appreciate your holding this hearing on the budget
    request of the Federal Trade Commission.
        As you pointed out, the FTC deals with issues that affect
    the economic life of all Americans. Through its administration
    of a wide variety of consumer protection laws, the FTC protects
    consumers from deceptive practices, such as fraudulent and
    predatory scams, identity theft, and credit fraud. The FTC also
    works to help American consumers by preventing unfair methods
    of competition in the marketplace.
        I've long had an interest in combating consumer fraud. As
    the chairman may recall, when he was a member of what was then
    the Governmental Affairs Committee, we worked together on a lot
    of consumer fraud hearings.
        Unfortunately, today we see that the incidence of fraud and
    predatory scams appears to be on the rise as con artists prey
    on citizens, particularly the elderly, who are facing financial
    hardship. And, unfortunately, in tough economic times, people
    seem to be more vulnerable to scams and schemes because, in
    many cases, they are in desperate financial straits. These con
    artists exploit these tough economic times to lure Americans
    into scams that look and sound legitimate.
        At the Homeland Security Committee, we held hearings at
    which the FTC Chairman testified, looking at the scams
    associated with the stimulus bill last year. These con artists
    not only rob their victims of money, but also of their dignity.
    And that, in many cases, can make senior citizens reluctant to
    come forward and seek the help that they deserve.
        I look forward to hearing from Chairman Leibowitz on the
    FTC's most recent efforts to identify and publicize these types
    of scams and other financial frauds.
        I'm also very interested to learn more about the FTC's
    efforts to address anticompetitive pay-for-delay patent
    settlements, which keep lower-cost generic drugs off the market
    and cost consumers and taxpayers billions of dollars. And,
    judging from the charts before us, I think that the Chairman is
    going to address that issue, and I'm very glad that he is.
        Finally, as I represent a State that borders Canada, I'm
    also interested to hear more about the Commission's effort to
    combat cross-border fraud, which periodically rears its ugly
    head in my State.
        I also look forward to getting into a discussion about
    certain privacy issues, such as whether the FTC is
    investigating allegations against Google violating the privacy
    rights of our citizens as through its street view mapping
    activities. That's the allegation, and I look forward to
    discussing that, as well.
        Thank you, Mr. Chairman.
        Senator Durbin. Thank you, Senator Collins.
        Chairman Leibowitz.

                    SUMMARY STATEMENT OF HON. JON LEIBOWITZ

        Mr. Leibowitz. Thank you so much, Chairman Durbin, Ranking
    Member Collins, for inviting me to testify today, and for those
    very kind words about our agency.
        As you know, the mission of the Federal Trade Commission is
    extraordinarily broad. And we pursue it vigorously, but with a
    very limited number of people.
        For fiscal year 2011, we're requesting $314 million and
    1,207 FTEs. But, to put that into perspective, in 1979, when
    the population of the United States was only 225 million,
    before the Do Not Call list, before Internet scams, actually
    before the Internet, and a host of new statutory
    responsibilities, the FTC had nearly 1,800 FTEs.
        With the active support of this subcommittee, we have been
    aggressive in our efforts to protect consumers from unfair and
    deceptive acts and unfair methods of competition. We look
    forward to doing even more in 2011. And we're going to have to
    do more, because, unfortunately, the recession has meant that
    American consumers are at an even greater risk than usual for
    financial frauds.
        As scams have proliferated, we have tried to step up our
    efforts to stop them. Since the beginning of last year, the FTC
    has brought more than 40 cases against fraud targeting
    financially distressed consumers--and we're partnering more
    with the State attorneys general these days, although we always
    have--we've brought more than 300 cases to shut down
    foreclosure rescue scams, fake job offers, and, as you
    mentioned, Senator Collins, phony access to Federal stimulus
    money.
        These sorts of scams are not new. In the last decade,
    sadly, we've recovered nearly $500 million for consumers who
    lost their money in the financial frauds area alone, which is a
    strikingly large amount of money.
        The Commission has also used the rulemaking authority that
    you provided for us. In February, we proposed the rule that
    would ban advance fees by mortgage modification companies. And
    we expect to complete that rulemaking this summer. As we've
    seen in our law enforcement actions, far too often, consumers
    pay thousands of dollars in advance for these services, but
    they receive nothing in return. And that's often because these
    scams have 95 percent of their employees in sales and 3 percent
    of their employees doing modifications. The Commission has also
    proposed rules in the debt settlement and mortgage servicing
    and advertising areas.
        We continue to prioritize consumer privacy and data
    security. We bring actions against companies that don't
    adequately protect consumers' personal information; we've
    brought 29 cases, to date. And we provide information to 15,000
    consumers a week who call about identity theft.
        Emerging technologies and business models, including social
    networking behavioral advertising, hold significant promise for
    consumer benefits, but also, as you mentioned, risks to
    privacy. So we are examining them closely. We've held a series
    of roundtables. We plan to share what we've learned and make
    recommendations later this year.
        Do Not Call continues to be a success. I was almost going
    to say ``ringing success,'' but I thought that would be a bad
    pun. But, I guess I did, and I guess it was. We anticipate
    that, by the end of June, 200 million numbers will be
    registered. The FTC took action in the past year against eight
    companies making robocalls. We've recovered $40 million in
    fines over the past 5 years for Do Not Call violations. Just
    recently, we shut down one company--and the investigation was
    done out of our Chicago regional office--that alone placed more
    than 1 billion calls offering auto warranties.
        Today, we're announcing a major case against AMS Financial
    for falsely representing that they could lower consumers'
    credit card interest rates and making illegal robocalls. We
    obtained a temporary injunction--or a restraining order in this
    case, freezing the defendant's assets. And we worked with
    several State attorneys general, including the wonderful Lisa
    Madigan, to do it.
        We've also challenged hidden fees in prepaid telephone
    cards. And today we're announcing a $500,000 settlement with
    Diamond Phone Card, which targeted the immigrant community. And
    you can see, this is their ``Hasta la vista'' card. It purports
    to give you a certain number of minutes for $2, but, in fact,
    it gave consumers far less than that.
        Protecting non-English speakers is a task we take very,
    very seriously. We produce most of our consumer educational
    material in both English and Spanish.
        And we make extensive efforts to protect other vulnerable
    populations, including outreach activities to alert senior
    citizens to fraud and reverse mortgages. We've brought multiple
    cases involving senior citizens in the last 1\1/2\ years.
        And we have various initiatives underway to protect
    children. In the last year, we've distributed an online
    Internet safety guide called ``Netcetera'' to school
    districts--you may have copies on your desk; launched a kid-
    friendly campaign to teach kids how to evaluate advertising;
    and released our seventh entertainment-industry marketing
    report. And just as critically, pursuant to this subcommittee's
    direction, we are leading a multiagency task force on marketing
    food to children.
        And, as you know, we also enforce the Federal antitrust
    laws in a wide range of areas, including healthcare,
    technology, energy, consumer goods and services, and the top
    priority, as you mentioned, Senator Collins, of the
    Commission's competition agenda--and we take a greatest-good-
    for-the-greatest-number-of-people approach--is stopping pay-
    for-delay settlements between brand name and generic drug
    makers. To be blunt, these are really sweetheart deals, and we
    estimate that it costs consumers about $3.5 billion a year.
        And here's what really is going on: A brand name drug
    company will sue a generic company. And they claim that the
    generic has violated their patent. And then they turn right
    around and they settle the case, literally by paying off the
    generic not to compete. So, the brand continues to charge
    monopoly prices. The generic companies collect a big fat
    paycheck. And consumers keep paying higher prices for much-
    needed medicines.
        And so, it's win-win for the companies, but it is
    absolutely lose-lose for consumers. And because of a few
    misguided court decisions in 2005, as you can see, the problem
    has only gotten worse. There wasn't a single pay-for-delay deal
    in 2004. The two adverse decisions, which, of course, we
    disagreed with, came down at the end of 2005. And you can see,
    as our chart shows, there were a record 19 deals like this last
    year.
        Every single Commissioner at the Federal Trade Commission
    supports ending these deals. And we're currently litigating two
    cases, with the hope of getting one to the Supreme Court.
    Today, we filed an amicus brief in the second circuit on a pay-
    for-delay case, along with 34 State attorneys general,
    including the State attorneys general of Maine and Illinois;
    they filed a companion brief.
        A much quicker solution, however, would be legislation that
    ends this unconscionable practice. And so, we greatly
    appreciate the cosponsorship of both you, Mr. Chairman, and
    you, Ranking Member Collins, of precisely that legislation. And
    we're hopeful, because the bill passed the Senate Judiciary
    Committee, the full House, and we have the endorsement of the
    President to abolish this practice, that it's possible we can
    get it done this year.
        And I'd like--in my last 4 seconds, I ask unanimous consent
    for 15 additional seconds, just to mention one more----
        Thank you so much, Mr. Chairman.
        I'd like to talk about just one other area of particular
    focus for the Commission, and that's gasoline prices. When the
    price of gasoline hit $4 a gallon in mid-2008, every household
    in the country felt the impact. Everyone in this room did. And
    we realize how important it is that petroleum markets remain
    competitive. So, in the past year, we've added to our arsenal
    by adopting a rule prohibiting manipulation of wholesale
    petroleum markets and allowing us to fine violators.

                               PREPARED STATEMENT

        We're doing a lot of other important work. I would be glad
    to talk about it, but I know I've exceeded my time, so I'm
    happy to answer questions.
        [The statement follows:]

                      Prepared Statement of Jon Leibowitz

                                  INTRODUCTION

        Chairman Durbin, Ranking Member Collins, and Members of the
    Subcommittee, I am Jon Leibowitz, Chairman of the Federal Trade
    Commission (``FTC'' or ``Commission'').\1\ I appreciate the opportunity
    to appear before you today, to testify in support of the Federal Trade
    Commission's fiscal year 2011 appropriation request and to share with
    you some of the work the agency has done and plans to do over the next
    year. The Commission thanks you for this opportunity and looks forward
    to working with you to protect American consumers and promote
    competition.
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        \1\ While the views expressed in this written statement represent
    the views of the Commission, my oral presentation and responses to
    questions are my own and do not necessarily reflect the views of the
    Commission or any other Commissioner.
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        The FTC is the only Federal agency with both consumer protection
    and competition jurisdiction across broad sectors of the economy. It
    enforces the Federal Trade Commission Act, which prohibits
    anticompetitive, deceptive, or unfair business practices, as well as a
    broad range of other laws.\2\ The FTC's Annual Report, released last
    month, is attached to this testimony. The report highlights the
    agency's efforts to protect consumers and promote competition,
    including initiatives to stop fraud targeting financially distressed
    consumers, protect privacy, and prevent anticompetitive practices such
    as ``pay-for-delay'' in the pharmaceutical industry, which costs
    consumers $3.5 billion a year in higher drug costs.
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        \2\ The Commission currently enforces or otherwise implements more
    than 60 laws.
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        This past year, the staff of the FTC has handled a growing
    workload, which includes its strong and effective law enforcement
    program. The additional funding that Congress provided over the past
    fiscal year, for which we are grateful, has enabled us to increase the
    staff who are working to protect consumers from deceptive practices,
    particularly fraudulent schemes that have proliferated during these
    challenging economic times.
        This testimony first describes some of our work under both our
    consumer protection mission and our competition mission and then
    summarizes the FTC's budget request for fiscal year 2011. To meet the
    challenges of the next fiscal year, the FTC requests $314 million which
    will support 1,207 FTE. This request represents an increase of $22.3
    million and 40 FTE over the fiscal year 2010 enacted levels.

                          CONSUMER PROTECTION MISSION

    The FTC Is Protecting Consumers During the Economic Downturn
        With the economic downturn, the Commission has increased its
    emphasis on protecting consumers in financial distress. In the past
    year, the FTC has brought almost 40 law enforcement actions to stop
    scams that prey on consumers suffering from the financial downturn, and
    the agency is also engaged in rulemaking and consumer education efforts
    related to financial services. In the financial services area alone,
    the FTC has filed more than 100 actions against providers of financial
    services over the past 5 years, and obtained nearly $500 million in
    redress for consumers of financial services in the past 10 years. By
    working closely with state attorneys general, we have expanded the
    reach of law enforcement efforts to help consumers in economic distress
    through hundreds of additional cases.
                Helping Distressed Homeowners: Challenging Mortgage
                        Modification and Foreclosure Relief Scams and
                        Writing New Mortgage Rules
        Since 2008, the Commission has filed 28 law enforcement actions
    focused on stopping mortgage loan modification and foreclosure relief
    scams. Companies operating these scams make deceptive claims about
    their abilities to modify the terms of consumers' loans and prevent
    foreclosure. During 2009, as these scams proliferated, we partnered in
    sweeps with Federal and state law enforcement agencies to collectively
    file more than 200 lawsuits to combat these scams.\3\ For example, in
    one case, the FTC obtained a preliminary injunction that prevented
    defendants from falsely representing in Spanish-language radio and
    magazine ads that they would obtain mortgage loan modifications or stop
    foreclosure in all or virtually all instances.\4\ Consumers paid more
    than $3.3 million to these defendants, and the FTC is seeking consumer
    redress.
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        \3\ See FTC Press Release, Federal and State Agencies Target
    Mortgage Relief Scams (Nov. 24, 2009), www.ftc.gov/opa/2009/11/
    stolenhope.shtm; FTC Press Release, Federal and State Agencies Target
    Mortgage Foreclosure Rescue and Loan Modification Scams (July 15,
    2009), www.ftc.gov/opa/2009/07/loanlies.shtm.
        \4\ See FTC v. Dinamica Financiera LLC, No. 09-CV-03554 (C.D. Cal.
    preliminary injunction issued June 3, 2009).
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        To curb deceptive and unfair practices in the mortgage industry,
    the FTC is also considering rules on three mortgage-related topics:
      --Mortgage Assistance Relief Services.--In March 2010, the Commission
            published a notice of proposed rulemaking covering loan
            modification, foreclosure relief, and other mortgage assistance
            relief services.\5\ If adopted, the proposed rule would ban
            providers from collecting fees prior to delivering promised
            results, prohibit misrepresentations in marketing, and require
            affirmative disclosures. The FTC expects to complete this
            rulemaking proceeding within the next 90 days.
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        \5\ Mortgage Assistance Relief Services Notice of Proposed
    Rulemaking, 75 Fed. Reg. 10,707 (Mar. 9, 2010).
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      --Mortgage Servicing Practices.--The Commission published an advance
            notice of proposed rulemaking addressing mortgage servicing
            practices and plans to determine in the near future whether to
            propose such a rule.\6\ Commission cases in this area have
            targeted core servicing issues such as failing to post payments
            upon receipt, charging unauthorized fees, and engaging in
            deceptive or unfair collection tactics. For example, in
            September 2008, the FTC settled charges that EMC Mortgage
            Corporation and its parent, The Bear Stearns Companies, LLC,
            violated Section 5 of the FTC Act and the Fair Debt Collection
            Practices Act in servicing mortgage loans, including debts that
            were in default when EMC obtained them.\7\ The EMC settlement
            required the defendants to pay $28 million in consumer redress,
            and the Commission has sent checks to more than 86,000 consumer
            victims.
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        \6\ Mortgage Acts and Practices Advance Notice of Proposed
    Rulemaking, 74 Fed. Reg. 26,118 (June 1, 2009).
        \7\ FTC v. EMC Mortgage Corp., No. 4:08-CV-338 (E.D. Tex. final
    order Sept. 9, 2008).
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      --Mortgage Advertising Practices.--The Commission published an
            advance notice of proposed rulemaking addressing mortgage
            advertising practices and plans to determine in the near future
            whether to propose such a rule.\8\ FTC cases in this area have
            targeted mortgage lenders and brokers for deceptive marketing
            of loan costs or other key loan terms, such as the existence of
            a prepayment penalty or a large balloon payment due at the end
            of the loan. For example, the Commission announced settlements
            with three mortgage lenders charged with advertising low
            interest rates and low monthly payments, but failing to
            disclose adequately that those rates and payments would
            increase substantially after a short period of time.\9\
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        \8\ Mortgage Acts and Practices Advance Notice of Proposed
    Rulemaking, 74 Fed. Reg. 26,118 (June 1, 2009).
        \9\ See FTC Press Release, Three Home Loan Advertisers Settle FTC
    Charges; Failed to Disclose Key Loan Terms in Ads (Jan. 8, 2009),
    www.ftc.gov/opa/2009/01/anm.shtm.
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                Helping American Workers: Stopping Employment Opportunity
                        Scams, Bogus Government Grants, and Get-Rich-Quick
                        Schemes
        In February 2010, along with state and Federal partners, the
    Commission announced Operation Bottom Dollar, a sweep that involved 69
    civil and criminal actions against organizations making false promises
    of employment or employment placement opportunities.\10\ Last July, the
    FTC announced Operation Short Change, another Federal-state crackdown
    that challenged 120 schemes selling bogus government grant
    opportunities, illusory get-rich-quick plans, job opportunity scams,
    and phony debt-reduction services.\11\
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        \10\ See FTC Press Release, FTC Cracks Down on Con Artists Who
    Target Jobless Americans (Feb. 17, 2010), www.ftc.gov/opa/2010/02/
    bottomdollar.shtm.
        \11\ See FTC Press Release, FTC Cracks Down on Scammers Trying to
    Take Advantage of the Economic Downturn (July 1, 2009), www.ftc.gov/
    opa/2009/07/shortchange.shtm.
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        In addition, in October 2009, MoneyGram paid $18 million to settle
    FTC charges that its money transfer system helped con artists trick
    U.S. consumers into wiring them money in connection with fake lottery
    schemes, secret shopper scams, and bogus guaranteed loans. In April the
    FTC sent more than 34,000 checks to consumers identified as victims in
    these schemes.\12\
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        \12\ See FTC Press Release, MoneyGram to Pay $18 Million to Settle
    FTC Charges That it Allowed its Money Transfer System To Be Used for
    Fraud (Oct. 20, 2009), www.ftc.gov/opa/2009/10/moneygram.shtm; FTC
    Press Release, FTC Mails Redress Checks to Fraud Victims Who Lost Money
    Through MoneyGram's Money Transfer System (Apr. 28, 2010), www.ftc.gov/
    opa/2010/04/moneygram.shtm.
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                Halting Scams Promising to Relieve Consumers of Debt or
                        Repair Their Credit Histories
        Many consumers faced with mounting debt have turned unwittingly to
    scam artists for help. Since 2008, the Commission has brought ten
    lawsuits challenging sham nonprofit credit counseling firms, debt
    settlement services, and debt negotiators. During the same period, the
    FTC filed a dozen lawsuits against credit repair organizations that
    falsely misrepresented their ability to remove negative but accurate
    information from credit reports.\13\
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        \13\ See prepared statement of the Federal Trade Commission on The
    Debt Settlement Industry: The Consumer's Experience, before the Senate
    Committee on Commerce, Science, and Transportation (Apr. 22, 2010),
    www.ftc.gov/os/testimony/100422debtsettlement.pdf; prepared statement
    of the Federal Trade Commission on Financial Services and Products: The
    Role of the Federal Trade Commission in Protecting Consumers, before
    the Senate Committee on Commerce, Science, and Transportation (Feb. 4,
    2010), www.ftc.gov/os/testimony/P064814financial-services.pdf.
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        To curb ongoing abuses in the debt relief industry, in August 2009
    the Commission proposed a rule to, among other things, prohibit debt
    relief service providers from charging consumers a fee until they have
    delivered the promised results.\14\ The FTC expects to complete this
    rulemaking proceeding within the next 60 days.
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        \14\ Telemarketing Sales Rule Proposed Rule, 74 Fed. Reg. 41,988
    (Aug. 19, 2009).
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    Protecting Consumers in the Online World
        The Commission devotes significant resources to protecting
    consumers in a high-tech world by promoting data security, preventing
    identity theft, and protecting online privacy.
        To date, the FTC has brought 29 enforcement actions against
    businesses for failing to protect consumers' personal information. For
    example, in the past 7 months, the Commission has (1) announced a
    settlement with restaurant chain Dave & Buster's arising from a data
    breach that allegedly compromised the credit card numbers and
    expiration dates of approximately 130,000 customers; \15\ (2) in a case
    where a mortgage broker threw out consumer credit reports in a
    dumpster, obtained the first civil penalty for violation of a new
    Commission rule that requires companies to adequately dispose of
    sensitive credit report information;\16\ and (3) obtained a stipulated
    modified order against ChoicePoint after charging that the company
    failed to implement a comprehensive information security program, as
    required by a 2006 Federal court order.\17\
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        \15\ Dave & Busters, Inc., FTC File No. 082-3153 (proposed consent
    order Mar. 25, 2010).
        \16\ FTC v. Navone, No. 2:08-CV-01842 (D. Nev. final order Dec. 29,
    2009).
        \17\ U.S. v. ChoicePoint, Inc., No. 1:06-CV-0198-JTC (N.D. Ga.
    final order Oct. 14, 2009).
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        The FTC also helps consumers avoid identity theft and responds to
    15,000 consumers each week who call the FTC identity theft hotline.
    Under Federal law, consumers have a right to a free credit report to
    help them detect identity theft and errors in their credit reports,
    which are used not only to obtain credit but also for employment,
    housing, and insurance. In recent years, however, companies have
    offered so-called ``free'' credit reports that are conditioned on
    enrollment in a costly plan, often an identity theft protection plan.
    To protect consumers from this confusing and deceptive marketing, the
    FTC amended the Free Credit Report Rule to require prominent
    disclosures for advertising of these supposedly ``free'' credit
    reports.\18\ Now, consumers will be better able to avoid supposedly
    ``free'' offers that actually cost money. In addition, in one of the
    largest FTC-state coordinated actions, the FTC and Illinois Attorney
    General Lisa Madigan jointly announced a settlement with LifeLock,
    Inc., which advertised its identity theft prevention service, claiming
    that it was ``the first company to prevent identity theft from
    occurring.'' \19\ The order requires LifeLock to pay $11 million to the
    FTC for consumer redress and $1 million to 35 state attorneys general
    co-plaintiffs. The order also bars the company from making deceptive
    claims that its services offer absolute prevention against identity
    theft and requires it to take more stringent measures to safeguard the
    personal information it collects from customers.
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        \18\ The Credit Card Accountability Responsibility and Disclosure
    Act of 2009 required the Commission to issue a rule to prevent
    deceptive marketing of ``free credit reports.'' The amended rule went
    into effect on April 2, 2010. See Free Annual File Disclosures Final
    Rule, 75 Fed. Reg. 9,726 (Mar. 3, 2010).
        \19\ FTC v. LifeLock, Inc., No. 2:10-cv-00530-NVW (D. Ariz. final
    order Mar. 15, 2010). See also State of Illinois Press Release, FTC, 35
    States Reach Agreement with LifeLock for Misleading Advertising (Mar.
    9, 2010), www.illinoisattorneygeneral.gov/pressroom/2010_03/
    20100309.html.
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        The FTC also has brought numerous cases to meet the challenges of
    protecting consumers and their privacy while they are using the
    Internet. For example, in June 2009, the FTC moved quickly to shut down
    a rogue Internet Service Provider that knowingly hosted and actively
    participated in the distribution of illegal spam, child pornography,
    and other harmful electronic content.\20\ The FTC complaint alleged
    that the defendant actively recruited and colluded with criminals
    seeking to distribute illegal, malicious, and harmful electronic
    content. After the Commission shut down this ISP, there was a temporary
    30 percent drop in spam worldwide.\21\ Just last month, the court
    ordered the operation to turn over $1.08 million in ill-gotten gains to
    the Commission.
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        \20\ FTC v. Pricewert, LLC, No. 09-CV-2407 (N.D. Cal. final order
    issued Apr. 4, 2010).
        \21\ See Official Google Enterprise Blog, Q2 2009 Spam Trends,
    http://googleenterprise.blogspot.com/2009/07/q2-2009-spam-trends.html.
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        Also last summer, the Commission settled allegations that Sears
    failed to disclose adequately the scope of consumers' personal
    information collected via software that Sears represented would merely
    track their ``online browsing.'' \22\ The FTC charged that the
    software, in fact, monitored consumers' online secure sessions as
    well--including those on third-party websites--and collected
    information such as the contents of shopping carts, online bank
    statements, e-mail headers and subject lines, and other sensitive data.
    Only deep in a lengthy end user license agreement did Sears disclose
    the extent of the tracking.
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        \22\ Sears Holdings Mgmt. Corp., FTC File No. 082-3099 (final order
    Aug. 31, 2009).
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        In an effort to examine privacy issues more broadly, FTC staff
    convened three public roundtables to explore concerns about consumer
    privacy and ensure that the Commission's approach to privacy keeps pace
    with the latest technologies and emerging business models.\23\
    Participants discussed developments in areas such as social networking,
    cloud computing, online behavioral advertising, mobile marketing,
    health privacy, and the collection and use of information by data
    brokers and other businesses. The Commission plans to release
    recommendations for public comment later this year.
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        \23\ See generally FTC Exploring Privacy web page, www.ftc.gov/bcp/
    workshops/privacyroundtables/index.shtml.
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    Enforcement of the National Do Not Call Registry
        The National Do Not Call Registry is an unqualified success. So
    far, there are more than 198 million unique numbers on the Registry. By
    the end of June 2010, the Commission anticipates we will reach 200
    million telephone numbers. To protect these consumers' privacy, the
    Commission strictly enforces the Do Not Call list and fights other
    abusive telemarketing practices.
        During the past year, the Commission filed eight new actions that
    attack the use of harassing ``robocalls''--the automated delivery of
    prerecorded messages--to deliver deceptive telemarketing pitches that
    promised consumers extended auto warranties and credit card interest
    rate reduction services.\24\ In addition, DIRECTV paid a $2.3 million
    civil penalty to settle charges that it placed prerecorded calls to
    consumers who previously had told the company not to call them, and
    Comcast paid $900,000 to settle charges that it called consumers who
    had specifically asked not to be called.\25\
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        \24\ See, e.g., FTC Press Release FTC Sues to Stop Robocalls With
    Deceptive Credit Card Interest-Rate Reduction Claims (Dec. 8, 2009),
    www.ftc.gov/opa/2009/12/robocall.shtm.
        \25\ U.S. v. DIRECTV, Inc., No. 09 2605 MRP FMOx (C.D. Cal. final
    order May 14, 2009); U.S. v. Comcast Corp., No. 2:09-cv-01589-HB (E.D.
    Pa. final order Apr. 16, 2009). Last year, the FTC also charged
    satellite television provider Dish Network with causing telemarketing
    calls--including robocalls--to be made to numerous consumers whose
    numbers are on the National Do Not Call Registry. See U.S. v. Dish
    Network, LLC, No. 3:09-cv-03-73-JES-CHE (C.D. Ill. filed Mar. 25, 2009)
    (action brought jointly with the Attorneys General of California,
    Illinois, Ohio, and North Carolina).
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    Stopping Deceptive Advertising of Prepaid Phone Cards
        The Commission continues to protect consumers from hidden fees and
    false claims about how many minutes prepaid phone cards deliver. This
    type of deception often targets recent immigrants from Latin America,
    Africa, Asia, and elsewhere around the world. This week, the Commission
    announced a settlement with Diamond Phone Card, Inc., which agreed to
    pay $500,000 to settle FTC allegations that it charged hidden fees and
    misrepresented the number of calling minutes delivered by its prepaid
    cards.\26\ In total, the FTC has obtained more than $4 million from
    companies charged with deceptive marketing of prepaid calling cards.
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        \26\ FTC v. Diamond Phone Card, Inc., No. 09-CV-03257-NGG-VVP
    (E.D.N.Y. final order May 14, 2010). In 2009, the FTC resolved similar
    charges in two cases against prepaid phone card companies. See FTC v.
    Clifton Telecard Alliance One LLC, No. 2:08-CV-01480-PGS-ES (D.N.J.
    final order June 12, 2009) (imposing $1.3 million judgment); FTC v.
    Alternatel, Inc., No. 1:08-cv-21433-AJ (S.D. Fla. final order Apr. 1,
    2009) (imposing $2.25 million judgment).
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    Protecting and Educating Children Through New and Innovative
            Initiatives
                Promoting the Marketing of Healthier Foods to Children
        The Commission continues its efforts to combat childhood obesity.
    Since 2005, the FTC has hosted three public forums on food marketing to
    children and childhood obesity. At an event in December 2009, the
    Interagency Working Group on Food Marketed to Children \27\ suggested
    possible voluntary nutrition standards. Experts also presented new
    research on the impact of food advertising on children's food choices,
    discussed the legal ramifications of possible restrictions on food
    advertising to children, and assessed food industry self-regulatory
    efforts to impose nutritional standards on their advertising to
    children.\28\
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        \27\ The Working Group is comprised of the FTC, the U.S. Department
    of Agriculture, the U.S. Food and Drug Administration and the Centers
    for Disease Control, and was established pursuant to Congress' (and
    this Subcommittee's) direction in the 2009 Omnibus Appropriations
    report.
        \28\ See generally Sizing Up Food Marketing and Childhood Obesity
    web page, www.ftc.gov/bcp/workshops/sizingup/index.shtml.
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        FTC staff is working on a follow-up report to the FTC 2008 Report
    on Marketing Food to Children and Adolescents. The 2008 report reviewed
    industry expenditures and activities in marketing foods and beverages,
    including integrated advertising campaigns that combine traditional
    media, such as television, with previously unmeasured forms of
    marketing, including packaging, in-store advertising, sweepstakes,
    Internet, and cross-promotion with movies.\29\ The follow-up report,
    expected in 2011, will analyze marketing activities and expenditures in
    2009 by dozens of food and beverage companies in promoting their
    products to children and teenagers. It will be an important tool to
    track the marketplace's response to childhood obesity and identify
    areas where more action is needed. The report also will examine the
    nutritional quality of those products and compare them to the
    nutritional quality of products marketed to children and teenagers in
    2006.
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        \29\ Marketing Food to Children and Adolescents: A Review of
    Industry Expenditures, Activities, and Self-Regulation (2008),
    www.ftc.gov/os/2008/07/P064504foodmktingreport.pdf.
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                Promoting Children's Internet Safety and Advertising
                        Literacy
        During the past year, the FTC developed additional resources for
    use by children, parents and teachers to stay safe online and learn
    about how advertising works. In response to the Broadband Data
    Improvement Act of 2008, the FTC produced the brochure Net Cetera:
    Chatting With Kids About Being Online to give adults practical tips to
    help children navigate the online world.\30\ Since its release in late
    2009, more than two million copies of Net Cetera in English and Spanish
    have been distributed nationwide.
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        \30\ See FTC Press Release, OnGuardOnline.gov Off to a Fast Start
    with Online Child Safety Campaign (Mar. 31, 2010), www.ftc.gov/opa/
    2010/03/netcetera.shtm.
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        At the end of April 2010, the FTC launched Admongo.gov, a campaign
    designed to help children think critically about online and offline
    advertising, and better understand the ads they see.\31\ Through this
    campaign, children learn to ask: Who is responsible for the ad? What is
    it actually saying? What does it want me to do? The FTC is working with
    schools, libraries, and other organizations to get this important
    education to kids, as well as their parents and teachers.
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        \31\ See FTC Press Release, FTC Helps Prepare Kids for a World
    Where Advertising Is Everywhere (Apr. 28, 2010), www.ftc.gov/opa/2010/
    04/admongo1.shtm.
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                Protecting Children's Online Privacy
        The Commission protects the safety and privacy of children online
    through enforcement and administration of the Children's Online Privacy
    Protection Act of 1998 (``COPPA'') and its implementing rule.\32\ COPPA
    requires operators of websites and online services that target children
    under age 13 to obtain verifiable parental consent before they collect,
    use, or disclose personal information from children. The FTC engages in
    broad business and consumer education to ensure widespread knowledge of
    and adherence to COPPA. In the past 10 years, the Commission has
    brought 14 law enforcement actions alleging COPPA violations and has
    collected more than $3.2 million in civil penalties. In light of
    significant changes to the online environment, including the explosion
    of social networking and the proliferation of mobile web technologies
    and interactive gaming, the Commission recently initiated an
    accelerated review of COPPA's effectiveness.\33\
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        \32\ See Children's Online Privacy Protection Act of 1998, 15
    U.S.C. Sec. Sec. 6501-6508 (2009). The FTC's implementing regulations
    (the ``COPPA Rule'') are found at 16 C.F.R. Part 312 (2009).
        \33\ Although the Commission generally reviews its rules
    approximately every 10 years, the continued rapid-fire pace of
    technological change led the agency to accelerate its COPPA review by 5
    years, to this year. See FTC Press Release, FTC to Host Public
    Roundtable to Review Whether Technology Changes Warrant Changes to the
    Children's Online Privacy Protection Rule (Apr. 19, 2010), www.ftc.gov/
    opa/2010/04/coppa.shtm.
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    Using Aggressive Law Enforcement to Combat Health Fraud
        The FTC continues to protect consumers from false and misleading
    health claims involving products as diverse as cereals and cold
    remedies and claims as significant as cancer cures.
        Last year, the Commission settled a case with Kellogg Company over
    charges that its advertising falsely claimed that Frosted Mini Wheats
    was clinically shown to improve children's attentiveness by nearly 20
    percent.\34\ The Commission also responded to the burgeoning area of
    immunity-boosting and cold and flu prevention and treatment claims when
    it investigated and reached a settlement with Airborne, Inc., the
    leading seller of effervescent tablets that purported to protect
    against exposure to germs in crowded environments. The Commission then
    settled similar charges against three major pharmacy retail chains that
    marketed their own store-brand ``copycat'' cold and flu products, and
    the manufacturer of these copycat products, requiring the companies to
    pay a total of $9.8 million.\35\
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        \34\ Kellogg Co., FTC File No. 082-3245 (final order July 27,
    2009).
        \35\ Walgreens agreed to pay $5,970,000 in consumer redress, CVS
    Pharmacy, Inc. agreed to pay $2,783,047, Rite Aid Corp. agreed to pay
    $500,000, and Improvita Health Products, Inc.'s principals agreed to
    pay $565,000 to settle these matters. See FTC Press Releases, Walgreens
    Will Pay Nearly $6 Million to Settle FTC Deceptive Advertising Charges,
    Suppliers of Airborne-like Cold-and-Flu Supplements Reach Separate
    $565,000 Settlement (Mar. 23, 2010), www.ftc.gov/opa/2010/03/
    walgreens.shtm; CVS to Pay Nearly $2.8 Million in Consumer Refunds to
    Settle FTC Charges of Unsubstantiated Advertising of AirShield ``Immune
    Boosting'' Supplement (Sept. 8, 2009), www.ftc.gov/opa/2009/09/
    cvs.shtm; Rite Aid to Pay $500,000 in Consumer Refunds to Settle FTC
    Charges of False and Deceptive Advertising (July 13, 2009),
    www.ftc.gov/opa/2009/07/riteaide.shtm.
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        Importantly, the FTC also challenges claims that dietary
    supplements and devices treat, cure, or prevent cancer and other
    serious diseases. Last summer, a Federal district court ordered Direct
    Marketing Concepts to pay nearly $70 million for consumer refunds for
    dietary supplements it claimed would treat, cure, or prevent cancer and
    other serious diseases.\36\ In FTC v. Roex, Inc., the FTC alleged that
    the defendants' nationally broadcast, live, call-in radio show made
    claims that an infrared sauna device could treat cancer and that
    various dietary supplements would treat, reduce the risk of, or prevent
    diseases such as cancer, HIV/AIDS, diabetes, strokes and heart attacks,
    Alzheimer's disease, and Parkinson's disease.\37\ The defendants agreed
    to pay more than $3 million for consumer redress and are prohibited
    from making such claims in the future.
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        \36\ FTC v. Direct Marketing Concepts, No. 04-CV-11136-GAO (D.
    Mass. final order Aug. 13, 2009).
        \37\ FTC v. Roex, Inc., No. SACV 09-0266 (C.D. Cal. final order
    Mar. 4, 2009).
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    Protecting Consumers from Cross-Border Fraud and Promoting
            International Consumer Protection
        The FTC plays a leadership role in international consumer
    protection and privacy matters to better protect American consumers in
    a globalized world. The Commission's use of the U.S. SAFE WEB Act--
    which allows the sharing of information with our foreign sister
    agencies when working together to stop global scams--has directly
    benefitted American consumers because many of the foreign agency
    requests involved schemes directed at American victims. In December,
    the FTC submitted a 3-year report to Congress detailing its use of the
    powers Congress gave it to fight cross-border fraud. As explained in
    the report, the FTC has shared information in response to 38 requests
    from 14 foreign law enforcement agencies, resulting in more than 17
    enforcement actions by U.S. and foreign authorities, and issued 26
    civil investigative demands on behalf of 6 foreign agencies in 12
    investigations.\38\ The vast majority of these SAFE WEB information
    sharing requests resulted in actions against companies harming American
    consumers.
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        \38\ See FTC Press Release, FTC Issues Report to Congress on Use of
    Its Enhanced Authority Under the U.S. SAFE WEB Act (Dec. 15, 2009),
    www.ftc.gov/opa/2009/12/safeweb.shtm.
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        On the policy front, the FTC continues to shape international
    policies on issues such as electronic commerce, green marketing claims,
    and consumer economics to provide sound protection for American
    consumers in the global marketplace. This month, the Commission hosted
    a 2-day forum and ``best practices'' training session of the
    International Consumer Protection and Enforcement Network for consumer
    protection officials from over 40 countries. Participants discussed
    global scams, electronic transactions, emerging trends and risks
    associated with social networking sites, and advance-fee fraud.

                              COMPETITION MISSION

        Anticompetitive mergers, collusive behavior, and exclusionary
    conduct by monopolists can harm American consumers in dramatic, if
    sometimes less visible, ways. As our recent enforcement activity
    emphasizes, anticompetitive activity can raise the cost of prescription
    drugs, real estate services, and other consumer products and services,
    and can impede innovation that would bring better and more cost-
    effective products and services to American consumers. During fiscal
    year 2009, the Commission brought 25 competition enforcement actions,
    including filing a record seven merger challenges in Federal district
    court or in an administrative proceeding, and through the first half of
    fiscal year 2010, the Commission has already brought 16 competition
    enforcement actions.\39\
    ---------------------------------------------------------------------------
        \39\ See FTC Competition Enforcement Database, www.ftc.gov/bc/
    caselist/index.shtml.
    ---------------------------------------------------------------------------
    Ending Pay-for Delay Patent Settlements.
        One of the Commission's highest antitrust priorities is stopping
    pay-for-delay patent settlements in the pharmaceutical industry, a
    practice that costs consumers $3.5 billion each year.\40\ In these
    deals (also known as exclusion- or reverse-payment settlements), the
    brand-name drug firm pays its potential generic competitor to abandon a
    patent challenge and delay entering the market with a lower-cost
    generic product. Such settlements limit competition at the expense of
    consumers, whose access to lower-priced, generic drugs is delayed--
    sometimes for many years--and raise the costs of prescription drugs for
    businesses and the government.\41\ We thank you, Mr. Chairman and
    Ranking Member Collins, for co-sponsoring a bill in the Senate to end
    these deals.
    ---------------------------------------------------------------------------
        \40\ See Pay-for-Delay: How Drug Company Pay-Offs Cost Consumers
    Billions, FTC Staff Study (Jan. 2010), www.ftc.gov/os/2010/01/
    100112payfordelayrpt.pdf.
        \41\ In a mature market, generic drugs are 15 percent of their
    brand name equivalent. See id.
    ---------------------------------------------------------------------------
        Since 2005, some court decisions have taken a lenient approach to
    such agreements in drug patent settlements. As a result, it has become
    increasingly difficult to halt pay-for-delay settlements through
    litigation, and such settlements have become a common industry
    strategy.
        Because these settlements cause enormous consumer harm, the
    Commission devotes substantial resources to this problem. For example,
    we are appealing the U.S. District Court for the Northern District of
    Georgia's dismissal of our complaint in a pay-for-delay case against
    Solvay Pharmaceuticals regarding the drug Androgel, a testosterone
    replacement medication.\42\ We continue to conduct new investigations
    into pay-for-delay agreements.
    ---------------------------------------------------------------------------
        \42\ In re Androgel Antitrust Litig. (No. II), 1:09-MD-2084-TWT
    (N.D. Ga. Feb. 22, 2010) (granting defendants' motion to dismiss).
    ---------------------------------------------------------------------------
        Importantly, we have reason to believe that the tide may be
    turning. Just last month, an appellate panel in the Second Circuit,
    which had previously adopted a permissive legal standard on pay-for-
    delay settlements, took the extraordinary step of questioning its own
    standard and explicitly encouraging consumer plaintiffs to request the
    full court's consideration of the pay-for-delay issue.\43\ And just 2
    months ago, in March 2010, a Federal district court judge in
    Philadelphia denied a defense motion to dismiss the FTC's currently
    pending pay-for-delay case against Cephalon, the manufacturer of the
    drug Provigil, a sleep disorder medication with nearly $1 billion in
    annual U.S. sales.\44\
    ---------------------------------------------------------------------------
        \43\ See Ark. Carpenters Health & Welfare Fund v. Bayer AG, Nos.
    05-2851-cv(L), 05-2852-cv(CON) (2d Cir. Apr. 29, 2010) (affirming
    summary judgment for defendants but inviting plaintiffs to petition for
    rehearing en banc).
        \44\ FTC v. Cephalon, Inc., No. 2:08-cv-2141 (E.D. Pa. Mar. 29,
    2010) (denying motion to dismiss), www.ftc.gov/os/caselist/0610182/
    index.shtm.
    ---------------------------------------------------------------------------
        Beyond individual cases, we have employed our full expertise to
    attack pay-for-delay settlements. In the past year, we have issued
    studies measuring the scope of this problem, which found:
      --The number of these agreements is increasing, from zero in fiscal
            year 2004 to 19 in fiscal year 2009;
      --On average, the deals delay the availability of cost-saving
            generics by 17 months; and
      --If not stopped, pay-for-delay deals will, conservatively, cost
            consumers $3.5 billion a year.\45\
    ---------------------------------------------------------------------------
        \45\ Pay-for-Delay: How Drug Company Pay-Offs Cost Consumers
    Billions, supra note 40.
    ---------------------------------------------------------------------------
        Finally, we are continuing our efforts to encourage legislation
    that would more rapidly fix this enormous problem, working closely with
    Congress and the Administration.
    Health Care
        The healthcare system plays an important role in the lives and
    economic security of all Americans and has a significant impact on
    Federal, state, and local government budgets. Accordingly, it is one of
    the Commission's top priorities. Our efforts to protect and promote
    competition in the healthcare system are critical to reduce costs,
    improve quality, and encourage innovation.
        The Commission has acted aggressively to stop anticompetitive
    healthcare mergers. In December 2009, the FTC trial team challenged, in
    Federal court, Ovation's acquisition of a drug for premature infants
    with congenital heart defects, introducing evidence showing that
    Ovation acquired its only competitor and took advantage of its monopoly
    to raise prices by 1,300 percent. The Commission is seeking a
    divestiture to restore competition and consumer recovery of Ovation's
    illegally obtained profits.\46\ The FTC also reviewed several
    pharmaceutical mergers and required divestitures in Watson/Arrow,
    Merck/Schering Plough, and Pfizer/Wyeth to preserve competition that
    otherwise would have been lost.\47\ In the past year, the Commission
    also has sued to block Talecris' acquisition of CSL, which the
    Commission alleged would have raised prices for plasma derivative
    protein therapies used to treat a variety of illnesses, including
    immunodeficiency diseases.\48\ The parties abandoned the deal in the
    face of the FTC's challenge.
    ---------------------------------------------------------------------------
        \46\ FTC v. Ovation Pharm., Inc., No. 08-cv-06379 (D. Minn.
    complaint filed Dec. 16, 2008).
        \47\ Watson Pharm., Inc., FTC File No. 091 0116 (final order Jan.
    7, 2010); Schering Plough Corp., FTC File No. 091-0075 (proposed order
    accepted for public comment Oct. 29, 2009); Pfizer Inc., FTC File No.
    091-0053 (final order Jan. 25, 2010).
        \48\ FTC v. CSL Ltd., No. 09-cv-1000 (D.D.C. complaint filed May
    28, 2009).
    ---------------------------------------------------------------------------
        Merger enforcement also promotes innovation. In medical device
    markets, the Commission blocked Thoratec's proposed acquisition of
    Heartware, its only potential competitor for left ventricular assist
    devices. These devices are surgically implantable blood pumps that
    provide a life-sustaining treatment for patients with advanced heart
    failure.\49\ Blocking the transaction ensures that the two companies
    will continue to compete to develop better devices, which will benefit
    consumers.
    ---------------------------------------------------------------------------
        \49\ Thoratec Corp., FTC File No. 091-0064 (administrative
    complaint dismissed Aug. 11, 2009).
    ---------------------------------------------------------------------------
        Pharmacy Benefit Management (PBM) services are a critical part of
    the healthcare industry, and the Commission has allocated substantial
    resources to enforcement, advocacy, and policy development in this
    area. PBMs can help healthcare plans manage the cost and quality of the
    prescription drug benefits they provide to their enrollees, but many
    have criticized PBMs for a lack of transparency in their operations,
    for improper use and inadequate protection of consumer information, and
    for utilizing their position in the market to undermine competition.
        Last year, the Commission took action against CVS/Caremark, a
    leading PBM, in order to protect the personal information of
    consumers.\50\ As CVS/Caremark has acknowledged, the Commission is
    currently investigating whether certain CVS/Caremark business practices
    may violate the FTC Act. This investigation is ongoing and has been
    structured as a joint effort of the Bureau of Consumer Protection and
    the Bureau of Competition so that the investigation can efficiently and
    effectively address both antitrust and consumer protection issues.
    ---------------------------------------------------------------------------
        \50\ CVS Caremark Corp., FTC File No. 072-3119 (final order Jun.
    18, 2009). Respondent independently agreed to pay $2.25 million to
    resolve Department of Health and Human Services allegations that it
    violated HIPAA, the Health Insurance Portability and Accountability Act
    of 1996.
    ---------------------------------------------------------------------------
    Energy
        The petroleum industry plays a crucial role in our economy, and few
    issues are more important to consumers and businesses than the prices
    they pay for gasoline and energy to heat and light their homes and
    businesses. Accordingly, the Commission carefully monitors energy
    markets and devotes significant resources to maintain and protect
    competition across a wide range of industry activities. This work is
    undertaken by a large number of expert economists and attorneys who
    specialize in the energy sector.
        Merger reviews are an essential part of this effort. In 2009, the
    Commission reviewed proposed acquisitions involving energy products
    under the Hart-Scott-Rodino (``HSR'') Act and also monitored the
    industry for transactions that were not filed under HSR. In particular,
    the Commission investigated acquisitions involving refined petroleum
    products pipelines and terminals, liquefied petroleum gas (propane),
    lubricant oils, natural gas, and natural gas liquids storage and
    transportation.
        In addition, the Commission continues the ``Gas Price Monitoring
    Project'' that began in 2002. The monitoring project is a daily, in-
    depth review of retail and wholesale prices of gasoline and diesel fuel
    in 20 wholesale regions and approximately 360 retail areas across the
    United States. The project provides information that allows the
    Commission to investigate potentially anticompetitive conduct in fuel
    markets and serves as an early-warning system to alert our experts to
    unusual pricing activity.\51\
    ---------------------------------------------------------------------------
        \51\ See Gasoline and Diesel Price Monitoring, www.ftc.gov/ftc/
    oilgas/gas_price.htm.
    ---------------------------------------------------------------------------
        Last November, the Commission added another tool to its arsenal.
    Pursuant to authority granted by Congress under the Energy Independence
    and Security Act of 2007, the Commission issued the Petroleum Market
    Manipulation Rule, which prohibits fraud or deceit in wholesale
    petroleum markets.\52\ The agency conducted an extensive rulemaking
    proceeding to decide whether and how to craft such a rule, holding a
    public workshop with participants representing industry, government
    agencies, academics, and consumers; conducting numerous meetings with
    consumer groups, trade associations, and businesses; and considering
    over 150 written comments from consumers and businesses. The Commission
    worked diligently on this issue for 16 months and now has instituted a
    rule that meets the goal of Congress. Importantly, the rule specifies
    that statements that intentionally omit material information and are
    likely to distort petroleum markets are violations of the rule.
    Commission staff has prepared and made available a compliance guide for
    businesses, which explains the Rule in depth and provides examples of
    the type of actions that would violate it.\53\ These examples include
    descriptions of potential violations, such as false public
    announcements of planned pricing or output decisions, false statistical
    or data reporting, and wash sales intended to disguise the actual
    liquidity of a market or the price of a particular product. The Market
    Manipulation Rule has only been in effect for a short time, and the
    agency plans to aggressively enforce the rule as needed.
    ---------------------------------------------------------------------------
        \52\ See FTC Press Release, New FTC Rule Prohibits Petroleum Market
    Manipulation (Aug. 6, 2009), www.ftc.gov/opa/2009/08/mmr.shtm; 74 Fed.
    Reg. 40686 (Aug. 12, 2009).
        \53\ Guide to Complying with Petroleum Market Manipulation
    Regulations, www.ftc.gov/os/2009/11/091113mmrguide.pdf.
    ---------------------------------------------------------------------------
        In addition to these actions, Commission economists and attorneys
    utilize their expertise to provide reports on energy matters, including
    market statistics and trends for use by Congress and other
    policymakers. For example, the Commission issues semi-annual reports on
    oil and gas activities and an annual report on ethanol. The Commission
    also has submitted multiple comments to the Federal Energy Regulatory
    Commission (FERC) on a broad range of competition-related issues,
    including, among others, ways to assess the competitive effects of
    partial acquisition of electric power providers, efforts to encourage
    consumer price responsiveness, and appropriate metrics to measure the
    performance of electric regional transmission organizations.\54\
    ---------------------------------------------------------------------------
        \54\ See Comment of the Federal Trade Commission on Control and
    Affiliation for Purposes of the Commission's Market-Based Rate
    Requirements Under Section 205 of the Federal Power Act and the
    Requirements of Section 203 of the Federal Power Act, FERC Docket No.
    RM09-16-000 (Mar. 29, 2010); Comment of the Federal Trade Commission on
    Control and Affiliation for Purposes of the Commission's Market-Based
    Rate Requirements Under Section 205 of the Federal Power Act and the
    Requirements of Section 203 of the Federal Power Act, FERC Docket No.
    PL09-3-000 (Apr. 28, 2009); Reply Comment of the Federal Trade
    Commission on Transmission Planning Processes Under Order No. 890, FERC
    Docket No. AD09-8-000 (Dec. 3, 2009).
    ---------------------------------------------------------------------------
    Technology Markets
        Technological advances are critically important to growing our
    economy, creating jobs, and introducing more efficient products and
    processes into the marketplace, and the Commission focuses significant
    resources on promoting competition in technology sectors. In December
    2009, the Commission charged chip manufacturer Intel Corporation with
    illegally using its position to stifle competition, strengthen its
    monopoly, and raise prices to consumers in violation of the FTC
    Act.\55\ Trial is expected to start in September.
    ---------------------------------------------------------------------------
        \55\ Intel, FTC File No. 061-0247 (administrative complaint Dec.
    16, 2009).
    ---------------------------------------------------------------------------
        The Commission also monitors business relationships between firms
    with competing technology products. Section 8 of the Clayton Act
    prohibits, with certain exceptions, the same person from serving as a
    director or officer of two competing corporations. After an FTC
    investigation raised concerns about two individuals serving on the
    boards of both Apple and Google, these individuals each stepped down
    from the boards of one of the companies.
        In addition to its enforcement role, the Commission also has been
    empowered by Congress to provide substantive policy analysis and
    guidance. During 2009, the FTC completed a series of eight hearings to
    explore the competitive dynamics of evolving markets for intellectual
    property, and FTC staff is drafting a report analyzing the competitive
    implications of information gathered at the hearings.
    Consumer Goods and Services
        The Commission works to protect competition in markets for consumer
    goods and services and has taken actions involving a variety of
    products, including recent cases involving real estate services,
    funeral and cemetery services, and soft drinks.
        A home is one of the most important purchases, and usually the most
    expensive purchase, that Americans make. The Commission therefore has
    devoted substantial resources to ensure that home buyers benefit from
    competition. In November 2009, the Commission ruled that Realcomp II,
    Ltd., a real estate Multiple Listing Service (MLS) in Michigan, could
    not impede competition from non-traditional and discount brokers by
    prohibiting them from listing on popular real estate websites.\56\ Such
    hurdles can raise the costs that home buyers pay for real estate
    services. The Commission has been particularly active in this market
    and has obtained consent orders with several other Multiple Listing
    Services throughout the United States (Texas, Pennsylvania, New Jersey,
    Colorado, Wisconsin, and New Hampshire) to protect the competition that
    discount brokers provide.\57\
    ---------------------------------------------------------------------------
        \56\ Realcomp II, Ltd., FTC Dkt. No. 9320 (Opinion of the
    Commission Oct. 30, 2009).
        \57\ See West Penn MLS, FTC File No. 081-0167 (final order Feb. 13,
    2009); Multiple Listing Serv., Inc., FTC File No. 061-0090 (final order
    Mar. 13, 2008); MiRealSource, Inc., FTC File No. 061-0266 (final order
    Mar. 20, 2007); Info. and Real Estate Servs, LLC., FTC File No. 061-
    0087 (final order Nov. 22, 2006); N. New England Real Estate Network,
    Inc., FTC File No. 051-0065 (final order Nov. 22, 2006); Williamsburg
    Area Ass'n of Realtors, Inc., FTC File No. 061-0268 (final order Nov.
    22, 2006); Realtors Ass'n of N. Wisconsin, Inc., FTC File No. 061-0267
    (final order Nov. 22, 2006); Monmouth County Ass'n of Realtors, FTC
    File No. 051-0217 (final order Nov. 22, 2006); Austin Bd. of Realtors,
    FTC File No. 051-0219 (final order Aug. 29, 2006). Indeed, due to
    pressure from the Commission and DOJ, the National Association of
    Realtors dropped its optional rule that prohibited affiliated Multiple
    Listing Services from transmitting prohibiting discount broker listings
    to public web sites.on its web site.
    ---------------------------------------------------------------------------
        The funeral industry is also important to consumers and a focus of
    the Commission. In the past year, the Commission has taken action in
    two matters to preserve competition in cemetery and funeral services.
    When Service Corporation International (SCI) proposed to acquire Palm
    Mortuary, the third-largest provider of cemetery services in Las Vegas,
    Nevada, the Commission required SCI to first divest its existing
    cemetery and funeral home in Las Vegas.\58\ When SCI proposed to
    acquired Keystone North America, the Commission ordered SCI to divest
    22 funeral homes and four cemeteries in 19 areas throughout the country
    to preserve competition that otherwise would have been lost.\59\
    ---------------------------------------------------------------------------
        \58\ Serv. Corp. Int'l, FTC File No. 091-0138 (final order Jan. 6,
    2010).
        \59\ Serv. Corp. Int'l and Keystone N. Am., Inc., FTC File No. 101-
    0013 (final order Apr. 30, 2010).
    ---------------------------------------------------------------------------
        In another consumer sector, the Commission required PepsiCo, Inc.
    to restrict its access to the confidential business information of
    rival Dr Pepper Snapple Group, as a condition for proceeding with a
    proposed $7.8 billion acquisition of Pepsi's two largest bottlers and
    distributors. Those bottlers also distribute Dr Pepper and Snapple
    Group soft drinks, and, without the restrictions, Pepsi would have had
    opportunities to obtain and use that information to reduce competition
    and harm consumers.\60\
    ---------------------------------------------------------------------------
        \60\ PepsiCo, Inc. FTC File No. 091-0133 (proposed order accepted
    for public comment Feb. 26, 2010).
    ---------------------------------------------------------------------------
    Industrial and Chemical Sectors
        The Commission took action this year in several mergers between
    chemical companies that threatened to increase costs to manufacturers,
    state and local governments, and farmers, which might ultimately
    increase costs to end users. Commission staff successfully litigated a
    challenge against Polypore International Inc.'s acquisition of
    Microporous Products, securing an administrative order requiring
    complete divestiture of the acquired assets in order to restore
    competition in the manufacture of battery separators, a key component
    in car batteries, batteries for uninterruptible power supplies, and
    other flooded lead-acid batteries.\61\ The Commission also investigated
    mergers in other chemical markets and required divestitures for high-
    performance chemical pigments, bulk de-icing salt sold to state and
    local governments, and anhydrous ammonia fertilizer used by
    farmers.\62\
    ---------------------------------------------------------------------------
        \61\ Polypore Int'l, Inc., FTC Dkt. No. 9237 (initial decision Mar.
    1, 2010).
        \62\ K+S Aktiengesellschaft, FTC File No. 091-0086 (final order
    Nov. 9, 2009).
    ---------------------------------------------------------------------------
    Promoting Transparency and Process Improvements
        The Commission uses its resources to provide better guidance to
    companies and courts about when mergers are likely to run afoul of the
    antitrust laws and harm consumers. This provides businesses and their
    counsel a clearer understanding of the ``rules of the road'' and helps
    them to avoid anticompetitive conduct without the need for government
    intervention. It also helps judges to develop an appropriate framework
    to interpret and apply the antitrust laws. To this end, senior staff
    have been working with the Antitrust Division of the Department of
    Justice to jointly review, revise, and update the agencies' Horizontal
    Merger Guidelines, which were released for public comment last
    month.\63\ The Guidelines explain, in clear, plain language, how the
    Federal antitrust agencies evaluate the likely competitive impact of
    mergers and when the agencies are likely to challenge proposed mergers.
    The Guidelines were last updated in 1992, and since then advances in
    economic understanding and additional enforcement experience have
    gradually modified the way that the agencies evaluate and investigate
    mergers. The new version is intended to more accurately reflect current
    agency practice.
    ---------------------------------------------------------------------------
        \63\ Horizontal Merger Guidelines For Public Comment (Apr. 20,
    2010), www.ftc.gov/opa/2010/04/hmg.shtm. The proposed revisions are the
    result of a very open and public process, including public comments and
    input received during a series of five joint FTC/DOJ public workshops
    held over the past 6 months. The five workshops were open to the public
    and attended by attorneys, academics, economists, consumer groups, and
    businesses.
    ---------------------------------------------------------------------------
    Policy and Research
        The Commission promotes competition through research, reports, and
    workshops. A recent example is a series of workshops entitled ``How
    Will Journalism Survive the Internet Age?'' \64\ The expansion of
    electronic commerce and media is challenging traditional news
    organizations, and many might not survive. This sea change may have
    implications for competition among media outlets and our democratic
    society. Our workshops have focused attention on this emerging concern,
    assessed the range of economic and policy issues raised by the changes
    in the market, and explored how competition can be used to enhance
    consumer welfare.
    ---------------------------------------------------------------------------
        \64\ Workshop information is available at www.ftc.gov/opp/
    workshops/news/index.shtml.
    ---------------------------------------------------------------------------
        The workshops began in December 2009, and the opening session
    featured contributions from a diverse group of well-informed
    participants. Owners of news organizations, journalists, bloggers,
    technologists, members of Congress, economists, and other academics
    discussed the changing dynamics of the news business and considered
    what new journalism business models might evolve in the future. The
    workshops continued in March 2010, when experts in a variety of fields
    discussed certain proposals to reduce the costs of and increase the
    profitability of journalism. Next month, the Commission will hold a
    final public workshop to compare, contrast, and seek consensus about
    the policy options that have been proposed over the last 6 months.
    After evaluating the various issued raised, the Commission plans to
    issue a report in the fall.
        The Commission also has issued reports studying the pharmaceutical
    industry. Last summer, the Commission released a report entitled
    ``Follow-on Biologic Drug Competition,'' which concluded that providing
    the U.S. Food and Drug Administration (FDA) with the authority to
    approve follow-on biologics would be an efficient way to bring lower-
    priced drugs to market.\65\ Biologics--products manufactured using
    living tissues and microorganisms--are increasingly used to treat
    arthritis, cancer, diabetes, and other diseases.\66\ The Commission
    also released a report analyzing the competitive impact of authorized
    generics, which are drugs approved by the FDA as brand-name drugs but
    that the brand subsequently chooses to market (or have marketed) as
    generic.\67\
    ---------------------------------------------------------------------------
        \65\ Emerging Health Care Issues: Follow-on Biologic Drug
    Competition (June 2009), www.ftc.gov/os/2009/06/
    P083901biologicsreport.pdf.
        \66\ A follow-on biologic (FOB) is a drug that can be prescribed to
    treat the same condition as the branded product. To obtain FDA
    marketing approval the FOB applicant does not have to duplicate the
    safety and efficacy findings of the branded product; rather, it must
    show that it is biosimilar to the branded product.
        \67\ Authorized Generics: An Interim Report (June 2009),
    www.ftc.gov/os/2009/06/P062105authorizedgenericsreport.pdf.
    ---------------------------------------------------------------------------
    International Competition Activities
        The Commission actively develops strong working relationships with
    foreign antitrust agencies, helping to ensure that markets around the
    world, in which U.S. companies compete, are fair and transparent. Now
    that over 100 jurisdictions have competition laws, it is more critical
    than ever that the Commission continue to promote sound antitrust
    policies and practices abroad. The agency uses a wide range of tools to
    accomplish these goals. The FTC promotes coordination and cooperation
    with foreign antitrust agencies to obtain necessary information and
    assistance for our investigations and to avoid divergent outcomes on
    cases that are reviewed in multiple jurisdictions. Over the past year,
    the FTC worked on almost 40 international antitrust investigations,
    including significant mergers such as Pfizer/Wyeth--a case in which
    agency staff worked with staff in the Australian, Canadian and EU
    competition agencies.
        The FTC continues to build a strong network of cooperative
    relationships with our counterparts abroad, ranging from the EU and
    Canada to China and India. For example, the FTC recently signed a
    Memorandum of Understanding with the Russian Federal Antimonopoly
    Service. In addition, with congressional support, the Commission
    expanded its longstanding technical assistance program to help
    competition agencies in new market-based economies. More broadly, the
    Commission is a recognized leader in key multilateral competition fora,
    such as the International Competition Network (ICN), the competition
    committee of the Organisation for Economic Co-operation and
    Development, the experts committee of the United Nations conference on
    Trade, and the Development and Asia-Pacific Economic Cooperation.

                     NEEDED RESOURCES FOR FISCAL YEAR 2011

        The FTC has a small staff to accomplish its consumer protection and
    competition goals. Today, the Commission's fiscal year 2010 budget
    supports 1,167 full-time equivalents (FTEs). This is considerably fewer
    than it had at its peak in 1979, when the Commission had approximately
    1,800 FTEs.\68\ While the U.S. population has increased by 35 percent
    since then, and the gross domestic product (adjusted for inflation) has
    more than doubled, the size of the agency staff has not kept pace. The
    FTC has done and will continue to do more with less, but it needs
    further resources to tackle the critical problems described above. The
    FTC appreciates the strong support it has received from Congress and
    the Appropriations Committees over the last decade. With additional
    funding, we look forward to doing even more to address the needs of
    American consumers and promote vigorous, competitive markets in the
    future.
    ---------------------------------------------------------------------------
        \68\ Commissioner Kovacic believes the Commission will need
    additional resources but he disagrees with certain aspects of the
    analysis in Section IV of this testimony.
    ---------------------------------------------------------------------------
        The fiscal year 2010 enacted appropriation provides the FTC with
    $291,700,000, which supports 1,167 FTE. The fiscal year 2010
    appropriation enables the FTC to protect more consumers in areas
    including financial services, healthcare, and high-tech marketing, and
    to challenge anticompetitive mergers and business practices in the
    technology, healthcare, pharmaceutical, and energy industries. To meet
    these challenges going forward, the FTC requests $314,000,000 which
    will support 1,207 FTE in fiscal year 2011. This request represents an
    increase of $22,300,000 over the fiscal year 2010 enacted level and
    includes:
      --$11,962,000 in mandatory cost increases associated with contract
            expenses (CPI adjustment) and personnel (salaries and within-
            grade increases);
      --$6,164,000 for 40 additional FTE:
        --23 FTE to staff high-priority consumer protection matters in such
                areas as financial practices, fraud targeting vulnerable
                Americans, privacy and data security, health fraud
                advertising, mobile marketing and new media, data analysis,
                forensic accounting services, and domestic and
                international outreach; and otherwise provide support for
                the effective operation of the consumer protection goal.
        --17 FTE to meet the needs of increasingly resource-intensive
                merger investigations and litigation and to challenge
                anticompetitive business practices in the healthcare,
                pharmaceutical, energy, and technology sectors among
                others; promote convergence in competition policy of
                foreign enforcement practices; and otherwise provide
                support for the effective operation of the competition
                goal.
      --$4,174,000 to cover the costs of acquiring and outfitting a new
            building to replace the 601 New Jersey Avenue building upon the
            expiration of the lease in 2012, as well as interim space to
            house anticipated increased staff, which will occur over the
            next several years.
        Offsetting collections will fund a substantial portion of the FTC's
    fiscal year 2011 budget request. HSR filing fees and Do Not Call fees
    will provide the agency with an estimated $129,000,000 in fiscal year
    2011. The General Fund in the U.S. Treasury would make a direct
    appropriation of $185,000,000 to fund the agency's operations.

                                   CONCLUSION

        The FTC very much appreciates the strong support it has received
    from Congress. We hope to continue to earn that support by vigorously
    and aggressively fulfilling our mission to protect American consumers
    and promote a competitive marketplace.

                              BEHAVIORAL MARKETING

        Senator Durbin. Well, Chairman Leibowitz--we can tell
    you're a former Senate staffer; you actually pay attention to
    the red light.
        So, let me start with this ``behavioral marketing,''
    because it appears that what is happening is that many people
    are doing things, joining things, logging on to things, and, in
    the process, they are giving away their identities and their
    activities for people to use in a commercial way--or for other
    purposes, really.
        But, tell me how far along this is, what you're doing about
    it, and how we keep ahead of the game.
        Mr. Leibowitz. Well, it's a great question.
        With behavioral marketing, there are benefits and there are
    concerns. So, on the benefit side, consumers prefer to have
    targeted advertising rather than advertisements that they're
    not interested in. And the advertising supports the free
    content that we've all come to like and to expect.
        On the other hand--imagine you were walking around a
    shopping mall and there was someone behind you. He's following
    you around, and he's taking notes on where you're going, and
    sending it off to where you're going later, saying ``He has a
    platinum card. He's interested in a particular color shorts.''
    It would be a little disturbing to you. And if the person being
    followed was a child, if it was my daughter, I'd want to punch
    that person out.
        And, at some level--I don't mean to make light of this--
    but, at some level, that's exactly what's going on; information
    is being obtained by companies, and consumers don't know
    exactly where it's going. Sometimes those companies will change
    their policies in midstream, and they won't tell consumers
    about it.
        So, we have sort of a two-track approach here--three
    tracks, actually. One is, we bring enforcement actions. And so,
    we brought a major enforcement action last year against Sears
    for illegal data mining. We believe they didn't give consumers
    adequate notice that they were getting a lot of sensitive
    information--bank account records, drug information,
    prescription information, things like that.
        Another is, we try to think these issues through, and try
    to figure out where the marketplace is going, and try to
    understand it better. So, we did a series of workshops in the
    last few months under David Vladeck, our head of the Bureau of
    Consumer Protection, who's sitting right behind me, to look at
    privacy and to look at behavioral marketing. And we had
    stakeholders in from industry, from consumer groups, from
    academia. We held the workshops across the country--two in
    Washington and one on the west coast. And that's helping us
    think through these----
        Senator Durbin. Can I ask----
        Mr. Leibowitz. Yes, sir.
        Senator Durbin. Like just--let me give you a couple
    hypotheticals, and you----
        Mr. Leibowitz. Sure.
        Senator Durbin [continuing]. Tell me if there is a
    legitimate concern there.
        Assuming that I use my credit card, and it's one of the two
    giant credit cards, for my purchases, is that information
    available to others, in terms of where I shop, what I buy, how
    often I pay?
        Mr. Leibowitz. Well, it depends on the terms and conditions
    of your credit card company. Now, my guess----
        Senator Durbin. Which we all pore over the details of----
        Mr. Leibowitz. Well, I mean----
        Senator Durbin [continuing]. Every single----
        Mr. Leibowitz. Look----
        Senator Durbin [continuing]. Month.
        Mr. Leibowitz [continuing]. We held a workshop a couple
    years ago on this issue, and it turned out, according to a
    submission, that people with Ph.D.s, when asked if they
    understood the privacy policies, only about 35 percent of the
    Ph.D.s and Ph.D. candidates knew that. And, of course----
        Senator Durbin. They have a tendency----
        Mr. Leibowitz [continuing]. Not everybody has a Ph.D.
        Senator Durbin. They have a tendency to exaggerate, anyway.
        Mr. Leibowitz. That's exactly right.
        And if you think about how many times you read through the
    privacy policy, or we do. I mean, you're clicking and clicking
    and clicking.
        So, most companies, to protect their brands, and because
    they think it's the right thing to do, won't trade this
    information or sell it--but, it is conceivable that some
    companies do, and that is very, very troubling. And if a
    company says, ``We're not going to do anything with your
    information,'' and then it does, we think that's an unfair and
    deceptive act or practice.
        Senator Durbin. So, is this an opt-in or an opt-out, or
    none of the above, or both?
        Mr. Leibowitz. Well, there is a roiling debate about opt-in
    versus opt-out. It depends. We believe--or, speaking for
    myself--sometimes it's better to use opt-in, particularly when
    you're dealing with more sensitive information, so that the
    default is, you're not giving anyone your personal information.
        But, you can have a good opt-out policy, as well, in which
    consumers understand what information they're giving. And a lot
    of consumers, particularly if the information is kept on the
    Web site you're looking at, and is limited, I think most
    consumers would be fine with that. But, it's very complicated.
        Senator Durbin. So, there's no uniformity----
        Mr. Leibowitz. There's no----
        Senator Durbin [continuing]. No standard.
        Mr. Leibowitz [continuing]. Uniformity. There is no
    uniformity.
        Senator Durbin. And I don't know--aside from my credit
    card, I don't know, if I buy something online, whether that
    information is going to be sold.
        Mr. Leibowitz. Right. I mean--I think the better companies
    will not sell that information. They don't want to do that.
    They want to have a trust relationship with their customers--
    the people who buy from them. But you don't know. And so, we
    brought some cases in this area.
        And of course the other issue, which we haven't talked
    about, is data security. And most companies will have
    reasonably good data security. But, we've seen so many breaches
    over the last few years. And we've brought major cases against
    TJ Maxx and Dave & Buster's for inadvertently allowing
    information to be released to the public or to malefactors, who
    just because they had inadequate security, bad guys go around
    and they try to mine the data. So, it's a very difficult area.
    We're going to try to write something up, particularly on
    social networking, in the fall, to give guidance to businesses.
    And, hopefully, most businesses will try to keep their
    information at a high standard. We go after the ones that
    don't.

                       FEDERAL TRADE COMMISSION BUILDING

        Senator Durbin. For the last minute of my first round, I
    will let you answer another question. A certain Congressman
    came to see me and said that it would be a great idea if you
    moved out of your building. He'd like to use it for the
    National Gallery. It's been a passion of his for a long time.
    So, are you ready to move?
        Mr. Leibowitz. We are not ready to move. And I think we
    left on your desk a copy of the photograph of Franklin Delano
    Roosevelt dedicating our building, the Federal Trade Commission
    building in 1937, in which he proclaimed it the permanent home
    of the FTC--for the FTC for all time.

        No. You know, this has been our home for more than 70
    years. The General Services Administration (GSA) has called it
    ``appropriate.'' We can get you that information. And I've seen
    that Congressman's proposal, and it is baffling where he is
    going to find the money for it. Because, you know, if you move
    us out of the FTC building, we have to go somewhere else. You
    can't just put us on the street. And it costs a lot to buy a
    new building. It's not clear whether the National Gallery would
    pay into the District fund or the Federal fund.
        And so, we are as one, as a Commission, in opposing that.
        Senator Durbin. Senator Collins.
        Senator Collins. Thank you, Mr. Chairman.

                           PAY-FOR-DELAY SETTLEMENTS

        First, I want to commend the FTC for pursuing the pay-for-
    delay settlements. I think that's a huge issue. At a time when
    healthcare costs are spiraling out of sight, and the cost of
    prescription drugs is a major part of that, the idea that
    consumers are paying $35 billion more, over the last--or over
    the next 10 years because of these settlements, is truly
    outrageous.
        Your chart doesn't surprise me, however, because, I believe
    it was in 2002, we passed legislation that I was a cosponsor
    of----
        Mr. Leibowitz. You were.
        Senator Collins [continuing]. With Senator McCain, Senator
    Schumer, and Senator--then-Senator Edwards--and, probably, my
    friend Senator Durbin was a cosponsor, as well--that was an
    attempt to end this practice.
        Mr. Leibowitz. Well, you did. And what we had asked for
    then--I wasn't at the Commission, it was in the Medicare
    Modernization Act--was just to get notice of these agreements.
    Because everyone believed at that time that the deals were per
    se illegal; absolutely illegal. And if we had notice of these
    deals in the same way we have notice of mergers, we would be
    able to go after the anticompetitive arrangements.
        Because, of course, if a brand and a generic want to settle
    their dispute, we have no problem with settlements. We just
    have a problem with settlements where the brand pays the
    generic to sit it out.
        Senator Collins. Exactly.
        Mr. Leibowitz. And so you gave us that authority. We review
    all of these deals. But, what happened after that, in 2005, was
    that two courts ruled that these deals were generally
    permitted; they articulated very permissive rules. And after
    that, it became the new way of doing business, not for every
    pharmaceutical company, but for all too many.
        Senator Collins. Well----
        Mr. Leibowitz. So, we see this as really just an extension
    to make it clear what the antitrust laws mean and what Hatch-
    Waxman was designed to mean, which is early entry of generic
    drugs. As you know, generic drugs cost about 15 percent, on
    average, of brands.
        Senator Collins. Well, that's something that I'm sure we're
    going to continue to work on. Both of us are cosponsors of your
    former boss's bill.
        I wonder where he got the idea for that bill. I just can't
    imagine.

                      GOOGLE COLLECTION OF DATA VIA WI-FI

        Mr. Chairman, I want to turn next to an issue I mentioned
    in my opening statement, and that is: last Friday, Google
    issued a statement that it had engaged in the unauthorized
    collection of user data from Wi-Fi networks in connection with
    Google's street view mapping activities. And this was an
    admission by Google that it had accumulated an enormous amount
    of data; I believe it's some 600 gigabytes of data that was
    accumulated as its street view cars canvassed residential
    neighborhoods.
        Is the FTC investigating this matter?
        Mr. Leibowitz. Well, we don't acknowledge investigations,
    unless the companies do, until those investigations are
    completed. But, I can certainly tell you, we're going to take a
    very, very close look at this.
        And, in fact, Google has already come in to talk to our
    staff about precisely what happened.
        Because, obviously, this is just one example of why
    consumers have very serious privacy concerns about data that's
    being collected. So, we are going to take a look at it,
    absolutely.
        Because, who would have guessed, as those cars were going
    by, taking photographs for Google Maps, that, in fact, they
    were collecting all this personal data. That's just really
    troubling.
        Senator Collins. It has this Big Brother connotation to it
    that is very disturbing.
        Mr. Leibowitz. It does. We've already received some letters
    from Members of Congress. And we will absolutely take a very
    close look at exactly what's going on.
        Thank you.

                                HOSPITAL MERGERS

        Senator Collins. I want to bring up a more local issue that
    has occurred in Maine and--in my State--and it involves
    hospitals attempting to do mergers. I--without naming the
    hospitals, I'm just going to read you the first sentence of
    this newspaper story. And it says that, ``A small hospital and
    a larger hospital said that they expected their proposed merger
    to sail through the Federal Trade Commission. With one hospital
    having only 53 licensed acute-care beds, it is much smaller
    than other hospitals that had merged with the larger hospital,
    and well below the FTC guidelines that abbreviate reviews for
    small facilities. Other Maine hospital mergers have quickly
    gained Federal clearance, but not this time.'' And it goes on.
        I am not taking a position on whether or not this merger
    should be approved, but I am troubled about what happened in
    this case. Because, what happened is, the FTC sent what was
    perceived, at least, as being such a burdensome request for
    data that the two hospitals interpreted that as a signal that
    they should not go forward. The hospitals reported providing an
    additional 2,000 pages of documents required by the FTC. And
    furthermore, the cost of complying with the request from the
    FTC, they felt, would be so prohibitively expensive that they
    abandoned the plans.
        Mr. Leibowitz. Well, it's a fair concern, generally. And
    with respect to this matter, I've talked to the head of the
    Maine Hospital Association. And I think there was maybe a
    little bit of miscommunication, because what we do when we go
    to second request is we try to find out more about a deal.
        So, there is a safe harbor for acquisitions of small
    hospitals, but it's a presumption. And you want to make sure
    that it's within the safe harbor. We had a case in Texas where
    a hospital thought it was in the safe harbor. It turned out not
    to be. We actually let that deal go through anyway.
        And you want to make sure that it won't raise prices for
    payers and ultimately for consumers. And so, if they decide to
    restart this transaction, we will make sure, as we almost
    invariably do, that what we call a ``second request'' is not
    unduly burdensome. And our staff is going to reach out to that
    hospital group directly, to let them know about that.
        Senator Collins. Thank you. That's----
        Mr. Leibowitz. And we're going to send back a letter to the
    Hospital Association. We'll make sure that the subcommittee has
    it.
        Senator Collins. That would be very helpful. Thank you.
        Mr. Leibowitz. Sure.
         [The information follows:]
                                      Federal Trade Commission,
                                       Washington, D.C., June 22, 2010.
    Steven Michaud,
    President, Maine Hospital Association,
    33 Fuller Road, Augusta, Maine 04330.
        Dear Mr. Michaud: Thank you for your letter to the Federal Trade
    Commission regarding the joint FTC/Department of Justice Statements of
    Antitrust Enforcement Policy in Health Care (``Statements'') \1\ as
    they may relate to the Commission investigation of the proposed
    acquisition of Goodall Hospital by MaineHealth.\2\
    ---------------------------------------------------------------------------
        \1\ The Statements are available on the public Commission Website
    at http://www.ftc.gov/bc/healthcare/industryguide/policy/index.htm.
        \2\ I am able to confirm publicly the Commission's investigation of
    the acquisition because at least one of the parties to the transaction
    ``has publicly disclosed the existence of [the] transaction or proposed
    transaction in a press release or in a public filing with a government
    body.'' Federal Trade Commission Notice of Policy of Disclosing
    Investigations of Announced Mergers: Notice of Revised Policy, 62 Fed.
    Reg. 18630 (Apr. 16, 1997); see also Federal Trade Commission Policy
    Concerning Disclosures of Nonmerger Competition and Consumer Protection
    Investigations: Notice of Revised Policy, 63 Fed. Reg. 63477 (Nov. 13,
    1998).
    ---------------------------------------------------------------------------
        In your letter, you raise three questions:
        (1) ``Why did the FTC staff decline to give clearance to the
    MaineHealth-Goodall Hospital transaction, given that Goodall Hospital
    qualified as a small hospital under the 'safety zone' guidelines?''
        (2) ``What was so extraordinary about the circumstances of the
    MaineHealth-Goodall Hospital transaction to warrant a departure from
    the `safety zone' guidelines?''
        (3) ``Will the FTC follow its guidelines for small hospital mergers
    going forward, or is the FTC abandoning its guidelines in practice
    without having yet formally announced that it has done so?''
        With respect to your first two questions, I should note that a
    number of statutory prohibitions and the Rules of the Commission
    prevent me from disclosing the details of any nonpublic Commission
    investigation. As a general matter, of course, Congress has empowered
    the Commission to prevent mergers and acquisitions that may
    substantially lessen competition or tend to create a monopoly, in
    violation of Section 7 of the Clayton Act \3\ or Section 5 of the
    Federal Trade Commission Act.\4\ In carrying out these law enforcement
    responsibilities, the Commission and its staff seek to identify and
    challenge only those mergers or acquisitions which the Commission has a
    reason to believe violate the foregoing statutes.
    ---------------------------------------------------------------------------
        \3\ 15 U.S.C. Sec. 18.
        \4\ 15 U.S.C. Sec. 45.
    ---------------------------------------------------------------------------
        In response to your third question, the Statements remain an
    accurate and current reflection of Commission policy. Of course, any
    determination as to whether a particular transaction falls within the
    ``safety zone'' set forth in the Statements is necessarily a fact-
    intensive inquiry that requires investigation by Commission staff. In
    addition to the Statements, both the Commission and the Department of
    Justice Antitrust Division in certain instances provide more specific
    guidance on particular proposals through the Commission's advisory
    opinion procedure and the Department of Justice's business review
    procedure. Information about the Commission's advisory opinion
    procedure regarding healthcare proposals is posted on the Bureau of
    Competition part of the Commission Website at the following location:
    http://www.ftc.gov/bc/healthcare/industryguide/adv-opinionguidance.pdf.
        I understand that you discussed this subject in a June 2, 2010
    telephone conversation with Matthew Reilly, the Assistant Director
    within our Bureau of Competition whose office is involved with
    antitrust hospital merger reviews. Mr Reilly would be happy to provide
    any additional information on this subject within the above-mentioned
    statutory and regulatory parameters. Mr. Reilly's direct dial telephone
    number is (202) 326-2350. We appreciate your interest in this subject,
    and thank you again for your letter.
                                               Donald S. Clark,
                                           Secretary of the Commission.

                         UNSUBSTANTIATED HEALTH CLAIMS

        Senator Durbin. I'm trying to figure out what you don't
    look at. And I assume that there are some areas where you
    clearly are----
        Mr. Leibowitz. Yes.
        Senator Durbin [continuing]. Precluded, under the law. But,
    one area that you have been involved in are false and
    misleading health claims.
        Mr. Leibowitz. Yes.
        Senator Durbin. And I know Kellogg's was charged with going
    too far in claiming their Frosted Mini-Wheats made kids
    smarter, more attentive. I like Frosted Mini-Wheats, don't get
    me wrong, but it hasn't helped my I.Q.
        Under another case, the FTC charged the company Roex and
    two individuals with making false or unsubstantiated claims for
    advertising products ranging from an infrared sauna for
    treating cancer to nutritional supplements to reduce the risk
    of a variety of medical conditions, like HIV and Alzheimer's.
        What resources do you have, when it comes in areas of
    health claims? How much do you work with other Federal
    agencies, like the Food and Drug Administration (FDA)?
        Mr. Leibowitz. So, our biggest resource is our staff,
    because they're terrific in this area, whether it's phony
    dietary supplements or other sorts of phony healthcare
    products. And the other thing we do--and we're very--I think
    we're very good at it--is, we reach out to other agencies. So,
    we work with the FDA quite a bit. We work with the Department
    of Health and Human Services (HHS). And because--you know, you
    need to aggregate your resources, here. And we work with State
    attorneys general, too, because I don't want to say we're doing
    triage, because that's not the case. But there are many more
    malefactors out there than we have resources to go after. And
    so, we try to prioritize the most important cases. And in the
    House financial reform bill, they gave us easier rulemaking
    authority. And if we get some relief from our very burdensome
    Magnuson-Moss Act--it's a sort of medieval form of rulemaking,
    where rules take 8 to 10 years--unless Congress directs us to
    do standard notice and comment rulemaking, which you've done in
    some instances--then I think we can try to set standards and
    make things more efficient, and try to be even more useful in
    this area.

                              FREE CREDIT REPORTS

        Senator Durbin. So, since the FTC has worked to make
    certain we have access to free credit reports----
        Mr. Leibowitz. Yes?
        Senator Durbin [continuing]. When we see ads on television
    that a company is paying for to advertise free credit reports,
    does that put us on guard?
        Mr. Leibowitz. Well, you know, this has been a very
    complicated area from the beginning. We litigated a case
    against free credit reports. But, we were very supportive, and
    obviously drafted a rule that we recently released to require
    that free credit reports be given to consumers. Because, after
    all, if it says ``free credit report,'' you ought to be able to
    get it. Not every consumer knows that you should go to
    AnnualCreditReport.com.
        Senator Durbin. AnnualCreditReport.com?
        Mr. Leibowitz. Yes. AnnualCreditReport.com--or if you
    happen to go to FreeCreditReport.gov, we have that Web site, or
    that domain name, and we'll send you right to
    AnnualCreditReport.com--free----
        But, we're going to stay on top of this area. We're looking
    to see whether companies are following the new rule that we did
    pursuant to the Credit CARD Act. And if they're not, we'll go
    after them.

                                 IDENTITY THEFT

        Senator Durbin. I've had personal experience with identity
    theft.
        Mr. Leibowitz. I know you have.
        Senator Durbin. And it's an eye-opener, when you get that
    call. And it seems to me that there's quite a strong likelihood
    that most identity thefts go unreported, that people don't
    follow through. Do you have any statistics to indicate how many
    people realize it and do something about it, as opposed to
    those who----
        Mr. Leibowitz. Let me get back to you.
        [The information follows:]

        The Commission's most recent identity theft survey reported
    that 43 percent of victims said that they contacted or were
    contacted by a company where an account was opened in their
    name or where an existing account was misused; 26 percent of
    victims said that they had contacted the police; 21 percent of
    victims reported contacting one or more credit reporting
    agencies; and 4 percent of victims reported contacting the FTC.
    The survey also reported that 38 percent of victims said they
    did not contact anyone. This data, which is based on the
    responses of the 559 individuals surveyed who indicated that
    their personal information had been misused between 2001 and
    the date they were interviewed, includes both new account
    identity theft as well as existing account identity theft. See
    Federal Trade Commission, 2006 Identity Theft Survey Report:
    Prepared for the Commission by Synovate, at 44-45 (November
    2007), available at http://www.ftc.gov/os/2007/11/
    SynovateFinalReportIDTheft2006.pdf.

        Mr. Leibowitz. My instincts are the same as yours. We
    periodically do reports about how many people, annually, are
    victims of identity theft. The number is around 9.5 million
    victims a year--or instances of identity theft a year in
    America.
        And, you know, if it's identity theft with a credit card, a
    lot of times consumers won't go to the police or they won't go
    to law enforcement authorities. They'll call the credit card
    company, of course. We're fortunate to have this identity theft
    hotline, and people use it. And that is a good thing.
        And then, we also try to do things like bring data security
    cases, so companies have better data protection, making it
    harder----
        Senator Durbin. What are the most common sources of a
    person's identity if they're going to have it pilfered and
    exploited?
        Mr. Leibowitz. Yeah.
        Senator Durbin. What are the most common?
        Mr. Leibowitz. What are the most common sources? Probably
    credit cards more than anything else, or data breaches by
    companies, which often involve credit card information.
    Sometimes companies use Social Security numbers. You can buy
    them online. It's often done by people outside of the country
    that have a marketplace going, and they sell data for $1 or
    $5--credit card information, Social Security numbers. It's just
    extraordinary.
        We try to do a lot to leverage our resources with our
    sister law enforcement agencies around the world. But, as you
    know, it is very hard to have extraterritorial reach, and it is
    very hard to tamp down on all instances of identity theft. But,
    we're working very, very hard. And when we see criminal cases,
    we of course give those to the criminal authorities, because
    identity theft is really a kind of fraud or----

                      GASOLINE PRICES AND THE OIL INDUSTRY

        Senator Durbin. I have a----
        Mr. Leibowitz [continuing]. Crime.
        Senator Durbin [continuing]. Standard press release that I
    put out at least once a year complaining that gasoline prices
    have just gone up way too high, not reflected in the price of a
    barrel of oil, and clearly these oil companies, once again, are
    taking advantage of consumers, and I'm calling on the FTC to
    investigate it right now. I issue that at least once or twice a
    year.
        Mr. Leibowitz. We try to be responsive.
        Senator Durbin. I know you do. But, we basically don't come
    up with much. At the end of a long investigation, people throw
    up their hands and say, ``I guess we can't prove it, one way or
    the other.'' Is that about where it stands?
        Mr. Leibowitz. Well, you know, if you want to find an
    antitrust conspiracy you have to have people talking to each
    other. And we have done investigations. We continue to do
    investigations of the oil industry. A lot of the cost of a
    barrel of oil, as you know, is due to OPEC. Now, OPEC engages
    in output restrictions. If American companies did that, they
    would go to jail for an illegal, criminal antitrust cartel. And
    so, that's a part of it.
        But, as for whether the American petroleum companies are
    engaged in anticompetitive behavior, violating antitrust laws,
    it is really hard to prove a criminal conspiracy or any kind of
    conspiracy. But, we will try to stay on top of this.
        And we did pass our market manipulation rulemaking, which
    will give us a little more flexibility going forward.
        Senator Durbin. Senator Collins.
        Senator Collins. Mr. Chairman, I'm glad that you brought up
    that last issue. I can't tell you how often my constituents say
    to me, ``But, wait. Supply is ample. Why are prices going up?''
    And it's not the seasonal change that you see when different
    kinds of gasoline are refined. It seems to them, and I will say
    it seems to me, to be disconnected with supply or demand.
        Mr. Leibowitz. Well this is an issue that resonates with
    consumers. No one would be happier than me to be able to bring
    a case against the oil industry for a violation of the
    antitrust laws. And our staff would be very happy to. And we
    do, again, have some investigations in the pipeline. But, it is
    very hard to prove.
        When my older daughter was 8 years old, or 9 years old, we
    were stopped at--on River Road, in Bethesda, and there were,
    like, four gas stations right around us, and she said, ``Why do
    they all have the same price?''
        And so, I think it is very baffling to many people. The
    truth is, if there's no meeting of the minds, there's no
    antitrust violation, even though the effect is the same on
    consumers.
        Senator Collins. Yeah. It is a source of frustration,
    though, I think also--and this is an issue I've raised with the
    Commodity Futures Trading Commission (CFTC), which also comes
    before us--I also think that the way the futures markets are
    working, where we now have investment funds and pension funds
    chasing the product, when those markets were originally
    designed for producers and end users and not as an investment
    hedge, also has something to do with the fluctuations.
        Mr. Leibowitz. It may very well. And, you know, we
    periodically track prices. And so, we have done, in the last 2
    or 3 years, investigations into anomalous prices in the Pacific
    Northwest, into western New England, and into the price of jet
    fuel, as you know. And it is sometimes hard to find the reasons
    why prices go up.

                               CONSUMER EDUCATION

        Senator Collins. Speaking of the cost of heating oil--home
    heating oil or gasoline, there was a company in my State that
    was recently the victim of cybercrime because, unfortunately,
    the--one of the financial clerks responded to a phony Web site
    that was mimicking the bank that this company used, and, within
    moments, the accounts--the banking account of this company was
    drained, because she, unfortunately and naively, over the Web
    site, gave the password and other information.
        I mention this because this is a fair-sized company in
    Maine, and it's not an unsophisticated business; it's a very
    well-run operation. And yet, it, too, was duped into--to a move
    that led to a loss of tens of thousands of dollars.
        My question to you is, What does the FTC do to try to
    better publicize scams, whether they're via the Internet or
    coming through the mail, and educate small businesses and
    consumers in this area?
        Mr. Leibowitz. Well, we have a number of educational
    materials. I think we put a few of them on your desk. We're
    very proud of the educational work we do here. And to
    distribute educational materials, we often either co-brand with
    companies or community organizations, or we don't brand at all,
    we simply design them and let others distribute. I think you
    might have a copy of ``Deter. Detect. Defend.,'' which is an
    identity theft brochure. So, that's a part of what we do.
        And then when we bring cases--because part of this is
    alerting consumers to be more careful--we try to pair with
    State attorneys general, because if we do a joint announcement,
    very often it gets picked up, people read it in the papers,
    they see it on the television news, and they think a little bit
    more about it. And then we don't have--going back to Senator
    Durbin's earlier question, we don't have jurisdiction over
    banks, but we do try to bring cases involving inadequate data
    security. And that keeps companies on their toes.
        And then, we do workshops and other things where we bring
    stakeholders together and we try to think through how to
    respond.

      ADMINISTRATIVE PROCEDURES ACT RULEMAKING AND ADDITIONAL AUTHORITIES

        Senator Collins. And finally, I'd like to pursue the issue
    that you raised about your rulemaking, because I was surprised
    that you don't use the Administrative Procedures Act (APA).
    Most agencies do. The Securities and Exchange Commission (SEC)
    does. A lot of the agencies that you deal with use the APA.
    Could you provide me with some information on, What is the
    history of why you don't use the APA?
        Mr. Leibowitz. Well, under the Magnuson-Moss Act, which was
    passed in 1974, Congress circumscribed our rulemaking in a way
    to slow it down. I don't think Congress meant to slow it down
    quite as much as they have. We haven't begun to make a new
    rulemaking under Magnuson-Moss since the late 1970s. And the
    reason why is because it can take 8 or 10 years to do a rule.
    And if a company or an entity--if it's within the ambit of the
    proposed rule--feels aggrieved, they can call, essentially,
    regulatory timeouts and ask for independent referees.
        Now, in fairness, Congress has given us APA rulemaking for
    some specific instances. And we've used it in a very thoughtful
    way. In our mortgage modification rulemaking, it will take,
    from the time we put out an advance notice of proposed
    rulemaking (ANPR) to the time we finish it, about 15 months; a
    little slower than we wanted, but you want to do it
    deliberately so you can get it right.
        But, it has been a real impediment for the Commission, and
    one that we're trying to get out from under the restrictions
    of. Because we think we can be more effective, on behalf of the
    consumers that we serve, if we had some degree of relief.
        And the other proposal that's in the House bill that has
    garnered a little bit of attention is civil fining authority
    for violations of section V, or unfair or deceptive act and
    practices rule, and there, I think, more than 40 State
    attorneys general, who have baby FTC acts, have fining
    authority under that. We don't. And we're trying to go after
    real, hardcore malefactors. Because, essentially, sometimes
    we're going after people who are engaged in fraud because the
    criminal authorities don't have the capacity to bring those
    cases. We would like to have fining authority.
        Casper Weinberger, when he was Chairman of the Federal
    Trade Commission in the early 1970s, called for that. And on
    this issue--I wouldn't say on this issue alone--but, on this
    issue, I think the vast majority of the Commission supports the
    Weinberger approach.
        Senator Collins. Is this a problem where the cases that you
    develop may be under the prosecutorial guidelines, as far as
    dollar amount, that they're too----
        Mr. Leibowitz. Yes. Yeah, I mean----
        Senator Collins [continuing]. Small for them to be
    brought----
        Mr. Leibowitz. Look----
        Senator Collins [continuing]. At the U.S.----
        Mr. Leibowitz [continuing]. Criminal authorities--U.S.
    attorney's offices--and we do try to pair with U.S. attorney's
    offices whenever we can. And we have taken some of the worse
    frauds we've gone after and given to the criminal division, for
    example, in the Department of Justice. But, they have other
    priorities. And so, we pick up a lot of the sort of small-
    time--pick up a lot of the fraud against consumers. And, in the
    aggregate, it can be a fairly substantial amount. And it would
    be better if we had fining authority. We believe that we would
    have a more effective deterrent.
        Senator Collins. Thank you.

                       PAYDAY LENDING AND DEBT COLLECTION

        Senator Durbin. Mr. Chairman, one of the things that I was
    disappointed in during the debate on the floor on financial
    reform was that I had hoped that we would be able to offer an
    amendment related to the so-called ``title loans,'' or ``payday
    loans,'' a type of predatory lending. And for reasons which are
    hard to explain to the normal population in America, we have
    not been able to get to that issue. That strikes me as one
    aspect of credit in America that is highly abusive to people in
    low-income categories and desperate situations. And I noticed
    that the number two complaint, second only to identity theft,
    at your agency relates to debt collection.
        So, can you tell me what efforts have been made by the FTC
    to deal with this industry?
        Mr. Leibowitz. Yes. Well, it's a couple of things. With
    respect to payday lenders, we have brought cases. I think we've
    brought at least two in the last year. Usually, they don't
    involve too high a rate. The rates may be very, very high, but
    States have basically set per-State caps on what they can
    charge. And what we found, though, is that sometimes they'll
    charge additional fees but they won't tell the consumers. And
    so, we brought a case in that area.
        We brought another case involving the use of the data. The
    case was called, I think, ``EDebitPay,'' and it was an online
    payday lender. And what they had done was fail to disclose
    certain things to consumers, and garnish wages, without telling
    the consumers that they were going to do that.
        And then, we brought another case against several payday
    lenders who weren't giving the required statutory APR data.
    It's required by statute, under TILA, I think.
        And so, we try to stay active in this area. And it is one
    where I think the complaints that we have gotten tell us that
    there are problems out there.
        And, of course, they prey on the people at the lowest rung
    of the economic totem pole. Congress has--and I think you might
    have been involved in this--has capped the rates on payday
    lending outside of military bases.
        Senator Durbin. Yes, we're protecting military families;
    but not nonmilitary families, we don't protect all families
    when it comes to these bottom-feeders.

                            EMERGING INTERNET SCAMS

        You've made reference to the Internet and services being
    offered. It seems like this adds a new level of challenge and
    complexity, that now certain things can be offered in the
    ether, on the Internet. And really the source of them might be
    hard to find, whether they're actually in the United States,
    North America, Europe, wherever they may come from. So, how do
    you cope with that Internet challenge?
        Mr. Leibowitz. Well, several years ago, you passed
    something called the SAFE WEB Act, which allowed us to do
    confidential investigations with our sister law enforcement
    agencies from around the world. We have to sign agreements with
    them, and we've done this with a number of jurisdictions. So,
    that's been helpful.
        But, as you know, con artists all around the world are
    very, very smart, and they're very nimble. We had a foreclosure
    rescue scam case where the domain name was registered in
    Berlin, but the company was actually operating out of Orange
    County, California. And so sometimes it takes a long time to
    pierce through the corporate veil and find out who these real
    malefactors are. Now, we were fortunate enough to work with
    foreign law enforcement authorities to shut this company down.
    But it's very hard, although it's a challenge that we accept.
    That's what we're supposed to do.
        Senator Durbin. Do you have such an agreement with Nigeria?
        Mr. Leibowitz. We do not believe we have one with Nigeria.
    But, I do believe, at this point, American consumers are on top
    of most Nigerian scams.
        Senator Durbin. Thank you.
        Senator Collins.
        Senator Collins. Thank you.
        Senator Durbin. Chairman Leibowitz, thanks for being here.

                         ADDITIONAL COMMITTEE QUESTIONS

        We'll work hard on your appropriation, try to find some
    more resources. You're doing important work. Thanks.
        Mr. Leibowitz. Thank you so much. Thank you.
        Senator Durbin. We may have some written questions.
        [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

        Question. The Energy Independence and Security Act of 2007 gave the
    Federal Trade Commission (FTC) authority to issue regulations
    prohibiting market manipulation involving wholesale transactions of
    crude oil, gasoline, and petroleum distillates. The FTC issued the
    Final Rule in August 2009 and provided guidelines to industry for
    compliance.
        How does the ``market manipulation'' rule change, expand, or
    enhance the FTC's jurisdiction and enforcement authorities?
        Answer. The market manipulation rule (MMR) is a fraud-based rule.
    The MMR prohibits persons from knowingly engaging in fraudulent or
    deceptive conduct connected with wholesale transactions of petroleum
    products. The MMR also prohibits persons from intentionally omitting
    material facts in statements whenever the omission can be expected to
    distort wholesale petroleum markets. Thus, in addition to the FTC's
    traditional enforcement program focused on anticompetitive conduct,
    including anticompetitive mergers and unfair business practices that
    result in a sustained diminution of competition, the MMR enables the
    Commission to prevent specific instances of fraudulent or deceptive
    conduct, even when that conduct does not have durable competitive
    consequences.
        Question. How will the FTC monitor compliance with the new rule?
        Answer. The Commission has established a dedicated e-mail and
    telephone MMR ``hotline'' to receive complaints from anyone who has
    information about conduct prohibited by the MMR. The Bureau of
    Competition also has a litigating section of approximately 25 attorneys
    who specialize in energy matters that will have the primary
    responsibility for bringing appropriate cases under the MMR. In
    addition, staff from both the Bureau of Competition and the Bureau of
    Economics regularly monitors the petroleum industry to discern any
    anomalous price movements that need further investigation to determine
    whether they are caused by shifts in market conditions or wrongful
    behavior.
        Question. The FTC published an investigation of the increases in
    gas prices occurring in 2006, concluding that rising gas prices could
    be explained entirely by market forces and not illegal anticompetitive
    behavior. Will the new market manipulation rule change the standard for
    how the FTC will evaluate and reach conclusions on behavior in the
    petroleum market?
        Answer. As noted above, the MMR targets fraudulent or deceptive
    practices that might not otherwise be reachable by Section 5 of the FTC
    Act. However, it does not alter the FTC's standard for evaluating
    behavior in the petroleum industry under either Section 5 or Section 7
    of the Clayton Act. The FTC's long-established enforcement aim is to
    protect consumers from unfair methods of competition or unfair or
    deceptive business practices. The issuance of the MMR does not change
    that mission; rather it provides the Commission with an additional tool
    to fulfill it.
        Question. The FTC shares concurrent jurisdiction with other
    agencies such as the Commodity Futures Trading Commission, the
    Securities and Exchange Commission, the Department of Justice, and the
    Food and Drug Administration.
        Please describe the FTC's concurrent jurisdiction with these and
    other agencies and how such jurisdiction is either complementary or
    duplicative.
        Answer. The FTC has concurrent authority with many agencies to a
    greater or lesser extent. The concurrence is broadly complementary; for
    example, the agencies may have generally consistent but different
    missions or goals (e.g., FTC with FDA, EPA, SEC, CFTC, CPSC), or divide
    up primary responsibility (e.g., FTC with FDA, FCC), or share
    enforcement over a very substantial number of entities or acts while
    arranging to avoid duplication (e.g. FTC with DOJ Antitrust Division),
    or aid each other with special expertise in certain areas (e.g. FTC
    with FDA, EPA, FCC), or can apply different remedies to the same or
    similar conduct, such as civil vs. criminal, injunction and restitution
    vs. seizing product (e.g., DOJ, U.S. Postal Inspector, EPA, FDA).
    Attached is a brief summary of the FTC's primary areas of coordination
    with various Federal agencies.
        Question. To curb fraudulent practices in the mortgage industry,
    the FTC plans to issue a rule banning upfront fees for mortgage
    modification or foreclosure rescue assistance. The FTC is also
    contemplating rules on advertising mortgages.
        How would new rules related to mortgage advertising practices
    strengthen the FTC's authorities in the mortgage arena?
        Answer. The Commission currently enforces mortgage advertising
    requirements under the FTC Act, the Truth in Lending Act (TILA),
    including the Home Ownership and Equity Protection Act (HOEPA), and
    Regulation Z rules written by the Federal Reserve Board (Board). The
    Commission lacks authority to obtain civil penalties for violations of
    these statutes and rules, with the exception of certain Regulation Z
    rules promulgated pursuant to HOEPA.
        The Commission has not published a proposed or final mortgage
    advertising rule, so I cannot discuss the specific conduct that a final
    rule might prohibit or restrict. Generally, however, enacting new rules
    in this area would enable the Commission to protect prospective
    borrowers more effectively by establishing clearer standards for
    mortgage advertisers and giving the Commission more effective tools to
    stop and deter violations. As you know, the Commission is conducting
    the mortgage advertising rulemaking using the authority Congress
    granted to it in the Omnibus Appropriations Act of 2009, as clarified
    by the Credit Card Accountability Responsibility and Disclosure Act of
    2009. Those laws authorize the Commission to enact rules with respect
    to unfair or deceptive mortgage practices, and to enforce those rules,
    with the states, through a variety of remedies including civil
    penalties.
        Question. The proposed rule prohibiting upfront fees for mortgage
    modifications is being implemented around the same time as the rule
    prohibiting upfront fees for debt settlement. Does the FTC plan to
    prohibit upfront fees for other financial services, given that these
    fees have been a key tactic for deceiving consumers?
        Answer. The Commission's amendments to the Telemarketing Rule
    governing debt relief services include a ban on the collection of
    advance fees. The FTC proposed rule on mortgage assistance relief
    services also would ban advance fees, but that rule is not yet final.
    With respect to the Telemarketing Rule's debt relief amendments, the
    Commission concluded that the collection of advance fees by debt relief
    providers, which often takes place in the context of transactions
    involving telemarketing that are permeated with deception, is an
    abusive practice under the Telemarketing Act. The record in the debt
    relief proceeding--including the public comments, a study by the
    Government Accountability Office, information gathered at a public
    forum, consumer complaints, and the law enforcement experience of the
    Commission and state enforcers--demonstrated widespread deception and
    substantial consumer injury in the provision of debt relief services.
    Consumers in the midst of financial distress suffer monetary harm--
    often in the hundreds or thousands of dollars--when, following sales
    pitches frequently characterized by high pressure and deception, they
    use their scarce funds to pay in advance for promised results that, in
    most cases, never materialize. In finding this practice abusive, the
    Commission applied the test for an unfair practice in section 5(n) of
    the Federal Trade Commission Act. The Commission found that the
    practice (1) causes or is likely to cause substantial injury to
    consumers, that (2) is not outweighed by countervailing benefits to
    consumers or competition, and (3) is not reasonably avoidable. The
    Commission relied on a similar analysis in prohibiting under the
    Telemarketing Rule the collection of advance fees for credit repair
    services, recovery services, and offers for certain loans.
        At present, there are no other rulemaking proceedings in which the
    Commission has proposed or issued an advance fee ban. The determination
    of whether an advance fee ban is appropriate is very much dependent on
    the specific circumstances, including the extent to which the
    transactions at issue take place in the context of widespread
    deception.
        Question. The FTC reports that Identity Theft was the number one
    consumer complaint during 2009. Consumers are worried that in an
    increasingly high-tech world, their personal data is being collected
    improperly and stored insecurely.
        What responsibilities do Facebook and other companies have to their
    users to disclose their websites' privacy policy? What about changes to
    that policy over time?
        Answer. Although there is no generally applicable requirement for
    social networking companies to disclose their privacy practices, they
    still must satisfy certain responsibilities with respect to privacy
    policy disclosures. First, any claims they make must be truthful. The
    Commission has brought one case against a social networking site--
    Twitter--for making a misrepresentation about the level of security
    provided. See In the Matter of Twitter, Inc., FTC File No. 092 3093
    (June 24, 2010) (consent order approved for public comment). Second, if
    websites collect information from children, they must provide parents
    with notice and an opportunity to consent. The Commission has brought
    several cases against companies for violating the Children's Online
    Privacy Protection Act by not securing the required parental consent
    before collecting information from children through social networking
    websites. See United States v. Xanga.com, Inc., No. 06-CIV-6853(SHS)
    (S.D.N.Y.) (final order Sept. 11, 2006); United States v. Industrious
    Kid, Inc., No. 08-CV-0639 (N.D. Cal.) (final order Mar. 6, 2008);
    United States v. Sony BMG Music Entm't, No. 08-CV-10730 (S.D.N.Y.)
    (final order Dec. 15, 2008); United States v. Iconix Brand Group, Inc.,
    No. 09-CV-8864 (S.D.N.Y.) (final order Nov. 5, 2009). Third, if
    companies change their privacy policies in a way that materially
    affects data that consumers have already provided, they must provide
    clear notice and the opportunity for the consumers to provide their
    affirmative express consent to the change. See In the Matter of Gateway
    Learning Corp., FTC Docket No. C-4120 (Sept. 10, 2004) (consent order).
        Question. If users decide to cancel or restrict their accounts on
    Facebook, photo storage sites, or other sites where they have stored
    personal information, what assurances do they have that their personal
    information is completely removed and deleted from storage?
        Answer. Several companies make specific disclosures to consumers
    about what happens to their data once they leave a site. If the
    disclosures are false, the FTC can bring an enforcement action under
    Section 5 of the FTC Act. In addition, if a website does not honor
    requests from parents to delete information being stored about their
    children, the FTC can bring an enforcement action under the Children's
    Online Privacy Protection Act.
        We have also examined the issue of data retention as part of a
    series of roundtables we hosted on consumer privacy over the last
    several months. A number of roundtable participants and commenters
    emphasized the value of businesses' retaining data only as long as
    necessary to fulfill a specific business purpose. The Commission staff
    will make recommendations on this issue as part of an upcoming report
    on privacy, to be released later this year.
        Question. Net Cetera is a guide published by the FTC to assist
    parents in talking to their children about the Internet.
        How has the FTC distributed the Net Cetera guide?
        What feedback has FTC received on the guide?
        Answer. The FTC is working with outside groups to promote and
    distribute the booklet. For groups and individuals who want to share it
    with their families, friends, and communities, Net Cetera is available
    at OnGuardOnline.gov and in Spanish at AlertaenLinea.gov. People also
    can order free copies through the FTC's bulk order site,
    bulkorder.ftc.gov. Like all the FTC's consumer materials, Net Cetera is
    free and in the public domain. The FTC encourages groups and
    individuals to order as many copies as they can use, include sections
    of it in their newsletters and blogs, and grab the web button from
    OnGuardOnline.gov for use on their own websites.
        Many schools use OnGuardOnline.gov and Net Cetera as part of their
    online safety programs. Because so much computer and other media use
    takes place in the home, pairing teachers and parents in these efforts
    more fully encourages safe and responsible online behavior, and
    reinforces consistent messaging.
        Net Cetera has been available to the public since October 21, 2009.
    To date, the FTC has distributed more than 3,700,000 copies of the
    guide in English and more than 350,000 copies in Spanish. Distribution
    highlights include:
      --Schools or school systems in all 50 states and D.C. have ordered
            copies of Net Cetera. This includes large orders by the Prince
            George's County (MD) Public Schools (150,000), the Cobb County
            School District (120,000), and the Cleveland Metropolitan
            School District (50,000).
      --Illinois schools, police departments, and community groups have
            ordered over 100,000 copies of the guide.
      --Members in both Chambers signed and circulated letters about Net
            Cetera to their Hill colleagues, encouraging them to use the
            guide in their districts and to link to it from their websites.
            The FTC sent copies of the booklet to district offices as well,
            and will continue to work with Congress to spread the word
            about online safety.
      --Companies including Facebook, MySpace, and Sprint are linking to
            Net Cetera from their safety or resources pages.
      --Nonprofits such as the Boys and Girls Clubs of America and the
            Internet Keep Safe Coalition distributed the guide at events
            across the country.
        As the order numbers illustrate, Net Cetera has been very well
    received by parents, educators, police officers, and online safety
    experts. The Online Safety and Technology Working Group highlighted Net
    Cetera as an ``outstanding'' project that should be promoted as an
    opportunity for public-private partnerships in online risk prevention.
    Also, the FTC has secured opportunities to speak about Net Cetera at
    conferences for groups including the International Society for
    Technology in Education and the National Association of School Resource
    Officers.
        Question. To stop advertisements from deceiving consumers into
    paying for so-called ``free'' credit reports, the FTC implemented a
    rule requiring that these advertisements contain a clear disclosure
    that the only authorized free credit report is available at
    AnnualCreditReport.com.
        How is the FTC enforcing the new rule requiring that a disclosure
    is displayed on all commercial ``free credit report'' websites?
        Answer. To determine compliance with the rule, the FTC monitors
    websites offering free credit reports. The FTC recently sent letters to
    18 websites offering free credit reports, warning them that they must
    clearly disclose that a free report is available under Federal law.
    This campaign appears to have been effective: several of the websites
    have changed their practices. The Commission anticipates follow up law
    enforcement action against those companies that do not come into
    compliance.
        Question. What other measures have been taken to inform consumers
    of AnnualCreditReport.com, and how effective have those measures been?
        Answer. The Commission has made extensive outreach efforts to
    educate consumers about their right to a free credit report through the
    authorized source, AnnualCreditReport.com. When the free annual credit
    report program initially took effect in 2004, the FTC issued press
    advisories and radio public service announcements informing consumers
    of their new rights, and published a ``how to'' guide on ordering the
    Federally-mandated free reports. The Commission also has issued public
    warnings about ``imposter'' sites that pose as the official free report
    site, AnnualCreditReport.com. In addition, the FTC has created videos
    that highlight the differences between AnnualCreditReport.com and other
    sites that claim to provide ``free'' credit reports. Moreover, each
    time the FTC announces an enforcement action or new rule in the credit
    reporting area, it publicizes the AnnualCreditReport.com website. Most
    recently, it did so when it announced the warning letters described
    above. We believe these measures have been quite effective. Since 2004,
    consumers have obtained over 150 million free credit reports from the
    nationwide CRAs.
        Question. Experian, the company that ran ``Free Credit Report.com''
    has now shifted its strategy and set up ``Free Credit Score.com.'' Is
    the FTC continuing to monitor these companies to make sure they are
    complying with the new rule? Is there a plan to create a truly free
    credit score website similar to AnnualCreditReport.com?
        Answer. The FTC generally monitors consumer reporting agencies and
    other companies for their compliance with the provisions of the FCRA
    and other applicable rules. The Free Credit Report Rule does not apply
    to credit scores and consumers do not have a general right to a free
    credit score under the FCRA. Instead, the FCRA provides consumers a
    right to purchase a credit score from consumer reporting agencies and
    to obtain a free credit score in specified circumstances, such as when
    they apply for certain home loans. In addition, under the Risk-Based
    Pricing Rules which take effect on January 1, 2011, creditors can
    provide a free credit score, along with information about that score,
    to all consumers, instead of providing risk-based pricing notices to
    specific consumers. Finally, the Consumer Financial Protection Act of
    2010 will allow consumers turned down for credit or offered less
    favorable terms because of their credit report or score to get a free
    credit score disclosure with their adverse action notice. The FTC
    oversees compliance with all of these FCRA requirements for entities
    under its jurisdiction to ensure that consumers are able to obtain
    their credit scores as required by law.
        Question. In April 2010, the FTC launched ``Admongo,'' an online
    video game where kids explore a virtual world filled with commercial
    messages to teach them to think critically about advertisements.
        What was the cost of developing Admongo?
        How does the FTC plan to evaluate the program's effectiveness?
        Are there ongoing costs associated with operating the online game?
        Answer. The Federal Trade Commission has developed an interactive
    campaign to give kids the skills they need to understand how
    advertising works and to interpret the information that ads contain.
    The campaign, targeted to tweens (kids ages 8 to 12), is based on the
    website Admongo.gov, which teaches core ad literacy concepts and
    critical thinking skills through game play. Other elements of the
    campaign include in-school lesson plans, developed in cooperation with
    Scholastic, Inc., that are tied to state standards of learning for
    grades 5-6; sample ads that can be used at home and in the classroom;
    and teacher training videos.
        Advertising literacy funding was approved for up to $2.2 million
    per year for up to 4 years; the full amount was budgeted in the first
    year, but two subsequent years have seen funding set at $2 million.
    Through June 2010, at the end of the second year of funding, the cost
    of creating the website, all related lesson plans and materials, and
    the promotion of the site was approximately $4.2 million. The ongoing
    costs to operate the game will include FTC staff time, web hosting
    fees, and occasional technical support from experts in web programming,
    as needed. The amount of money involved should be minimal.
        Plans are underway now to evaluate the effectiveness of Admongo.
    FTC staff are initiating the Paperwork Reduction Act (PRA) approval
    process to conduct a study of student and teacher use of campaign
    resources. This will supplement the ongoing feedback we receive from
    teachers via the mailbox at admongo@ftc.gov and through conferences and
    meetings.
        Question. The FTC anticipates reaching 200 million numbers on the
    Do Not Call List by this summer.
        Has the FTC received complaints about unwanted text messages? Does
    the FTC need specific authority to create a ``Do Not Text'' list or can
    it bar messages under the Do Not Call List?
        Answer. Since January 1, 2010, the Commission has received
    approximately 1,300 consumer complaints that primarily concern text
    messaging practices, including unsolicited text messages. In addition,
    approximately 5,600 of the more than 1 million Do Not Call complaints
    received during this period mention text messaging and may relate to
    unsolicited text messages. Including both groups, the total number of
    complaints concerning text messaging practices represents less than 1
    percent of all complaints received by the Commission since the start of
    the year.
        The Commission has not taken the position that sending an
    unsolicited text message violates the Telemarketing Sales Rule, which
    prohibits initiating an ``outbound telephone call'' to a person whose
    telephone number has been entered on the National Do Not Call Registry
    (DNC Registry). Moreover, it is not clear whether the rulemaking
    authority provided to the Commission under the Telemarketing and
    Consumer Fraud and Abuse Prevention Act (Telemarketing Act),\1\ which
    was the basis for the DNC Registry, extends to text messages.\2\
    ---------------------------------------------------------------------------
        \1\ Public Law No. 103-297, 108 Stat. 1545 (1994). The Act defines
    telemarketing to mean ``a plan, program, or campaign which is conducted
    to induce purchases of goods or services by use of one or more
    telephones and which involves more than one interstate telephone
    call.'' Telemarketing and Consumer Fraud and Abuse Prevention Act,
    Sec. 7, Public Law No. 103-297, 108 Stat. 1545 (1994).
        \2\ The Commission could seek to promulgate a rule establishing a
    ``Do Not Text'' registry under the rulemaking procedures of Section 18
    of the Federal Trade Commission Act. Section 18 would be an impractical
    tool for addressing a Do Not Text registry, however, as it includes
    numerous burdensome and time-consuming requirements that typically have
    required from 3 to 10 years to complete. See prepared statement of the
    Federal Trade Commission on ``Consumer Credit and Debit: The Role of
    the Federal Trade Commission in Protecting the Public'' before the
    House Comm. on Energy and Commerce, Subcomm. on Commerce, Energy, and
    Consumer Protection at 21-23 (Mar. 24, 2009), available at http://
    www.ftc.gov/os/2009/03/P064814consumercreditdebt.pdf.
    ---------------------------------------------------------------------------
        The question whether a text message may fall within the provisions
    of the Telemarketing Act is muddied, among other reasons, by the facts
    that text messages typically lack an audio component, and that their
    dissemination can take many forms.\3\ Although some unsolicited text
    messages are sent from one phone to another, others are sent over the
    Internet to an e-mail address that has been automatically assigned to
    the subscriber's account by his or her mobile carrier.\4\ For these
    reasons, the FTC's authority under the Telemarketing Act to address
    text messages is uncertain.\5\
    ---------------------------------------------------------------------------
        \3\ The Commission has previously considered the limitations of its
    authority under the Telemarketing Act. For example, when creating the
    Telemarketing Sales Rule (TSR), the Commission considered a definition
    of ``telemarketing'' that would have covered campaigns involving fax
    machines, modems, or ``any other telephonic medium.'' This was
    rejected, however, upon the Commission's conclusion that a narrower
    definition would ``follow[] more closely the statutory definition set
    forth by Congress in the Telemarketing Act.'' 60 Fed. Reg. 30411 (June
    8, 1995). Instead, the statutory definition of telemarketing was
    incorporated almost verbatim into the TSR.
        \4\ Because an effective ``Do Not Text'' registry might involve the
    collection of e-mail addresses, the creation of such a registry would
    raise a number of the same concerns the Commission highlighted in its
    report to Congress regarding a National Do Not E-mail Registry. Federal
    Trade Commission, Report to Congress, National Do Not E-mail Registry
    (June 2004) (detailing security and privacy concerns, including the
    likelihood that an e-mail registry would be misused by spammers,
    thereby increasing rather than reducing the volume of spam emails).
        \5\ We note that the Federal Communications Commission has asserted
    that a text message is a ``call'' within the meaning of the Telephone
    Consumer Protection Act (TCPA), and thereby concluded that the TCPA
    prohibits the use of an automated dialer to send commercial text
    messages to a cellular telephone number without the prior consent of
    the recipient. See Federal Communications Commission, Rule and
    Regulations Implementing the Telephone Consumer Protection Act of 1991,
    69 Fed. Reg. 55765, 55767 (Sept. 16, 2004). The FCC's interpretation of
    the TCPA, however, does not resolve the separate issue of the FTC's
    authority under the Telemarketing Act.
    ---------------------------------------------------------------------------
        Some tools already exist that may minimize concerns about
    unsolicited text messages. Unlike telephone calls, text messages are
    not covered under common carrier regulations and therefore can be
    filtered by mobile carriers, which state that they block hundreds of
    millions of unsolicited messages every month.\6\ Consumers can also
    work with many carriers to block text messages entirely or just those
    messages from a particular unwanted source.\7\ In addition, consumers
    who have received certain types of unsolicited text messages may seek
    damages through a private right of action under the Telephone Consumer
    Protection Act.\8\
    ---------------------------------------------------------------------------
        \6\ Federal Trade Commission, Staff Report, Beyond Voice: Mapping
    the Mobile Marketplace (Apr. 2009).
        \7\ Id.
        \8\ See, e.g., Satterfield v. Simon & Schuster, Inc., 569 F.3d 946
    (9th Cir. 2009).
    ---------------------------------------------------------------------------
        Moreover, to the extent the sending of unsolicited text messages is
    an unfair or deceptive practice, Section 5 of the Federal Trade
    Commission Act provides the agency with a flexible tool for addressing
    commercial practices that are unfair or deceptive. The Commission has
    pursued a vigorous law enforcement program against unfair or deceptive
    unsolicited commercial messages in a variety of contexts \9\ and will
    continue to bring the same resolve to the issue as more of this
    activity migrates to the arena of text messaging.
    ---------------------------------------------------------------------------
        \9\ E.g., FTC v. Spear Systems, Inc., No. 07-5597 (N.D. Ill. 2007)
    ($3.7 million judgment obtained against key players in an international
    spam ring); United States v. ValueClick, Inc., No. 08-1711 (C.D. Cal.
    2008) ($2.9 million civil penalty).
    ---------------------------------------------------------------------------
        In short, while the DNC Registry has proven to be extremely
    effective in curbing unwanted telemarketing calls, it is not clear at
    this point that adopting a similar program for unsolicited text
    messages would be advisable. However, should the Congress determine
    that a Do Not Text registry would help consumers, we will be happy to
    assist you with legislative language.
                                     ______

               Questions Submitted by Senator Frank R. Lautenberg

         Question. Manufacturers and retailers of electronic cigarettes (e-
    cigarettes) claim that they are safe, and even that these products can
    help smokers quit traditional smoking. However, there have been no
    clinical studies to prove these products are effective in helping
    smokers quit, nor have any studies verified the safety of these
    products or their long-term health effects. The World Health
    Organization (WHO) has stated that it has no scientific evidence to
    confirm the products' safety and efficacy.
        What is the FTC doing to police health claims made in e-cigarette
    advertisements?
        Answer. Electronic cigarettes are battery-powered devices that
    usually contain cartridges filled with nicotine and other chemicals.
    The devices are designed to convert the nicotine and other chemicals
    into a vapor to be inhaled by the user.
        Electronic cigarettes are currently the subject of Federal court
    litigation, stemming from the Food and Drug Administration's (FDA)
    detention of certain of these products at ports of entry to the United
    States. Specifically, upon reviewing a number of electronic cigarettes,
    FDA determined that they qualified as both a drug and device under the
    Federal Food, Drug, and Cosmetic Act (FDCA), and that agency approval
    was therefore needed before the products could be marketed in the
    United States. Because such approval had not been obtained, FDA
    determined that their sale would violate the FDCA and denied them entry
    into the country.
        In April 2009, a lawsuit challenging FDA's jurisdiction over
    electronic cigarettes was filed in Federal district court. In January
    2010, the district court granted the plaintiff's motion for a
    preliminary injunction enjoining FDA from detaining or refusing
    admission into the United States of the plaintiff's electronic
    cigarette products on the ground that those products are unapproved
    drugs, devices, or drug-device combinations. Smoking Everywhere, Inc.,
    v. FDA, 680 F. Supp. 2d 62 (D.D.C. 2010). The Department of Health and
    Human Services and the Food and Drug Administration appealed the
    court's order, and oral argument before the U.S. Court of Appeals for
    the D.C. Circuit is scheduled for September 2010.
        Under the FTC Act, the Commission has jurisdiction over deceptive
    or unfair claims made in the marketing of most products, including
    electronic cigarettes, and the Commission has a strong record of
    exercising its enforcement authority to protect the health and safety
    of consumers. If the district court's ruling that FDA lacks
    jurisdiction over electronic cigarettes is sustained on appeal, FTC
    monitoring of the marketing claims made for these products would be
    appropriate. However, if FDA's assertion of jurisdiction over
    electronic cigarettes is ultimately upheld by the courts, sale (and,
    therefore, marketing) of these products will be prohibited pending
    agency approval under the FDCA.
        Question. In 2003, the FTC recommended that the alcohol industry
    abide by a voluntary standard that required alcohol advertisements to
    be placed only in media in which at least 70 percent of the audience
    for each advertisement consisted of adults 21 and over. Since then,
    several reports have indicated that youth exposure to alcohol
    advertising is increasing.
        Despite the reported increase in youth exposure to advertising, the
    FTC's 2008 report entitled ``Self-Regulation in the Alcohol Industry''
    did not increase the advertising standard. I am concerned that the
    report based this conclusion on premises that are not supported by
    research or the public health community, or are contradictory to
    previous statements by the Commission.
        Will you commit to reviewing the FTC's 2008 report, the process by
    which it was created, and any contradictions between the premises upon
    which the Commission relied and its earlier statements and those of the
    public health community?
        How will you evaluate whether the industry should increase its
    advertising standards to reduce advertising exposure to those who are
    not legally permitted to purchase alcohol?
        Answer. Underage drinking is a critical public health issue,
    contributing to risky behavior, injury, and an intolerable 5,000 deaths
    per year. Fortunately, reliable data show long-term, gradual declines
    in underage drinking. According to the Monitoring the Future survey,
    past 30-day alcohol use by 8th, 10th, and 12th graders, combined, has
    fallen by 27 percent over the past 14 years.\10\
    ---------------------------------------------------------------------------
        \10\ Johnston, L.D., et al., Monitoring the Future National Results
    on Adolescent Drug Use: Overview of Key Findings, 2009 (NIH Publication
    No. 10-7583), Table 3.
    ---------------------------------------------------------------------------
        Nonetheless, too many teens still drink. Federal, state, and local
    governments all play a role in reducing teen drinking. The FTC is a
    member of the Interagency Coordinating Committee to Prevent Underage
    Drinking. We have particular responsibility over alcohol marketing, and
    also engage in consumer education designed to help reduce teen access
    to alcohol, as further described below.
        The FTC addresses issues related to underage appeal of alcohol ads
    by pressing for effective industry self-regulation, through studies and
    ongoing monitoring. Our 2008 Alcohol Report evaluated industry
    compliance with the 70 percent standard. It showed that 92.5 percent of
    ads placed during the study period complied with the 70 percent
    placement standard, and that when all audiences for all ads were
    aggregated, more than 85 percent of the audience consisted of adults 21
    and older.
        The 2008 Alcohol Report made a number of recommendations for
    improvement of the industry's voluntary standards. Among other things,
    it announced that industry had agreed to adopt a 70 percent standard,
    with buying guidelines, for Internet advertising; it recommended that
    the beer and wine industries apply a 70 percent standard to sports
    sponsorships (the spirits industry already had done so); it recommended
    application of the 70 percent standard to product placements in movies;
    and it recommended that industry consider the need to maintain an 85
    percent aggregate audience composition when making placements. Although
    it did not recommend an immediate change in the baseline standard, the
    2008 Alcohol Report placed the industry on notice that it will be
    necessary to do so when the 2010 census data are released.
        Since 2008, the Commission has continued to press for additional
    changes in the self-regulatory standards. The staff has advised the
    industry that the baseline placement standard should be raised to 75
    percent. Additionally, the staff has advised industry members that ads
    on sites that have registered users, such as Facebook, MySpace, and
    YouTube, should be delivered only to persons who have registered as
    being 21 and older.
        This January, the Commission will begin the process of seeking
    Office of Management and Budget approval, under the Paperwork Reduction
    Act, to conduct another major study of alcohol marketing and self-
    regulation.\11\ The study will evaluate the advertising practices of
    the major alcohol suppliers and consider the appropriateness of the
    placement standard. In the course of this study, the Commission will
    review the FTC's 2008 Alcohol Report, the process by which it was
    created, and the other issues you raise. Our analysis will be based on
    the record as a whole, including but not limited to public health
    concerns, any comments received during the study, the available
    placement data, and the potential costs and benefits of a modified
    standard.
    ---------------------------------------------------------------------------
        \11\ OMB approval under the PRA is required in cases where the
    Commission sends identical information requests to 10 or more entities.
    See 44 U.S.C. Sec. 3502.
    ---------------------------------------------------------------------------
        The Commission also knows that education is an important consumer
    protection tool. Data show that most teens who drink alcohol obtain it
    from social sources, such as older family members and friends.
    Accordingly, we developed a consumer education program to help parents
    protect their children from alcohol-related harm. The message of the
    ``We Don't Serve Teens'' (WDST) program is, ``Don't Serve Alcohol to
    Teens. It's unsafe. It's illegal. It's irresponsible.'' Components of
    the WDST program include a website, www.DontServeTeens.gov; radio ads;
    and signs. WDST signage is used nationwide by alcohol retailers, police
    departments, schools, and mental health organizations.

                                   ATTACHMENT
     BRIEF SUMMARY OF THE FTC'S PRIMARY AREAS OF COORDINATION WITH VARIOUS
                                FEDERAL AGENCIES

        FDA: concurrent jurisdiction with respect to labeling and marketing
    of foods, OTC drugs, and devices; under a Memorandum of Agreement the
    FDA has primary responsibility for overseeing product labeling and the
    FTC has primary responsibility for non-label advertising; the agencies
    cooperate closely and frequently.
        FCC: (1) broadly concurrent jurisdiction with respect to
    telemarketing; the agencies consulted on rulemaking, developed
    consistent rules; coordinate on enforcement; (2) concurrent
    jurisdiction with respect to advertising in broadcast media; under a
    liaison agreement the FTC has primary responsible for unfair or
    deceptive advertising in media and provides that the FCC will take
    false and misleading advertising into account in licensing and other
    decisions; in this and other areas, the agencies consult and coordinate
    as applicable.
        DOJ: nearly complete concurrent jurisdiction on antitrust matters;
    under a clearance agreement the agencies determine which one will
    examine any particular matter; FTC issues premerger review rules with
    DOJ concurrence; the agencies cooperate closely on these and other
    issues.
        EPA: concurrent jurisdiction with respect to unfair or deceptive
    practices involving the environment, e.g., pesticides; the agencies
    consult and coordinate on scientific issues, such as those involved in
    the FTC Green Guides and business education and in amending the FTC
    Care Labeling Rule, and on enforcement as applicable.
        SEC: concurrent jurisdiction with respect to unfair or deceptive
    practices involving securities and investment advice; FTC generally
    defers to SEC where securities expertise is needed; agencies coordinate
    on enforcement as applicable.
        CFTC: some concurrent jurisdiction with respect to unfair or
    deceptive practices involving commodities futures; agencies consult as
    applicable, such as in the FTC's petroleum market manipulation
    rulemaking.
        Postal Service/DOJ: concurrent jurisdiction with respect to mail
    fraud; agencies cooperate closely on enforcement, sometimes including
    parallel investigations and criminal referrals.
        BATF: concurrent jurisdiction with respect to unfair or deceptive
    practices involving alcohol, tobacco, and firearms; agencies consult on
    matters as applicable.
        CPSC: some concurrent jurisdiction with respect to unfair or
    deceptive practices involving product safety; agencies consult and
    coordinate on enforcement as applicable.
        Depository institution regulators: parallel jurisdiction, and
    limited concurrent jurisdiction, with respect to unfair or deceptive
    practices and a number of consumer financial laws; agencies consult on
    rulemaking, and some has been conducted jointly or in coordination;
    agencies consult or coordinate on enforcement as applicable.
        The new Consumer Financial Protection Bureau: concurrent
    jurisdiction with respect to some financial practices and entities; the
    statute provides for consultation and coordination on rulemaking,
    enforcement, and other matters.

                             CONCLUSION OF HEARINGS

        Senator Durbin. This meeting of the subcommittee will stand
    recessed.
        Thanks, everybody, for attending.
        [Whereupon, at 3:50 p.m., Thursday, May 20, the hearings
    were concluded and the subcommittee was recessed, to reconvene
    subject to the call of the Chair.]

           LIST OF WITNESSES, COMMUNICATIONS, AND PREPARED STATEMENTS

                                  ----------
                                                                       Page

    American Postal Workers Union, AFL-CIO, Prepared Statement of the    37

    Berry, Hon. John, Director, Office of Personnel Management.......    61
        Prepared Statement of........................................    66
        Summary Statement of.........................................    63
    Bond, Senator Christopher S., U.S. Senator From Missouri,
      Statement of...................................................   143

    Cochran, Senator Thad, U.S. Senator From Mississippi, Questions
      Submitted by...................................................   190
    Collins, Senator Susan, U.S. Senator From Maine:
        Questions Submitted by.......................................   191
        Statements of..................................3, 62, 112, 142, 197

    Durbin, Senator Richard J., U.S. Senator From Illinois:
        Opening Statements of..........................1, 61, 111, 141, 195
        Prepared Statement of........................................   196
        Questions Submitted by.................................84, 130, 227

    Gensler, Hon. Gary, Chairman, Commodity Futures Trading
      Commission.....................................................   141
        Prepared Statement of........................................   146
        Summary Statement of.........................................   143
    Goldway, Hon. Ruth Y., Chairman, Postal Regulatory Commission....    39
        Prepared Statement of........................................    41
        Summary Statement of.........................................    40

    Herr, Phillip, Director, Physical Infrastructure Issues,
      Government Accountability Office...............................    45
        Prepared Statement of........................................    46

    Landrieu, Senator Mary L., U.S. Senator From Louisiana, Prepared
      Statement of...................................................   137
    Lautenberg, Senator Frank R., U.S. Senator From New Jersey,
      Questions Submitted by.........................................   232
    Leibowitz, Hon. Jon, Chairman, Federal Trade Commission..........   195
        Prepared Statement of........................................   201
        Summary Statement of.........................................   198

    National Association of Letter Carriers, Prepared Statement of
      the............................................................    26
    National Association of Postal Supervisors, Prepared Statement of
      the............................................................    32
    National Association of Postmasters of the United States,
      Prepared Statement of the......................................    32
    National Postal Mail Handlers Union, Prepared Statement of the...    35
    National Rural Letter Carriers' Association, Prepared Statement
      of the.........................................................    34

    Potter, Hon. John E., Postmaster General, Chief Executive
      Officer, United States Postal Service..........................     1
        Prepared Statement of........................................     7
        Summary Statement of.........................................     5

    Schapiro, Hon. Mary, Chairman, Securities and Exchange Commission   165
        Prepared Statement of........................................   167

    Tenenbaum, Hon. Inez, Chairman, Consumer Product Safety
      Commission.....................................................   111
        Prepared Statement of........................................   115

    Williams, Hon. David C., Inspector General, Office of Inspector
      General, United States Postal Service..........................    43

                                 SUBJECT INDEX

                                  ----------

                      COMMODITY FUTURES TRADING COMMISSION

                                                                       Page

    Additional Resources Needed......................................   160
    Budget Impact of Pending Legislation.............................   164
    CFTC Regulatory Regime...........................................   146
    End User Exemption...............................................   163
    End Users........................................................   158
    Energy Position Limits...........................................   157
    Margin...........................................................   159
    Over the Counter:
        Derivatives Legislation......................................   157
        Market Size..................................................   160
    Proposed Council of Regulators...................................   162
    Regulatory Reform................................................   153
    Staff Expertise..................................................   161
    Swaps Dealers....................................................   159
    Technology.......................................................   156
    The Budget.......................................................   146
    Too Interconnected to Fail.......................................   162
    Transparency...................................................157, 163

                       CONSUMER PRODUCT SAFETY COMMISSION

    Additional Committee Questions...................................   130
    Addressing Harmful Chemicals/Elements in Products................   122
    Beijing Office and Activities....................................   131
    Chinese:
        Drywall Investigation........................................   136
        Products.....................................................   130
    Consumer Education and Outreach..................................   117
    GAO Report on CPSC's Oversight of Imported Products..............   135
    Information Technology Modernization.............................   117
    Laboratory Status................................................   136
    Lead Standards...................................................   118
    Nanotechnology.................................................118, 135
    Other Toxic Substances...........................................   120
    Port Surveillance................................................   134
    Searchable Consumer Product Safety Incident Database.............   137
    Staffing.........................................................   132
        Increases....................................................   118
    The Commission's Compliance Initiative...........................   116
    U.S. Consumer Product Safety Commission Activity on Bisphenol-A
      (BPA)..........................................................   123
    Workload.........................................................   133

                            FEDERAL TRADE COMMISSION

    Additional Committee Questions...................................   227
    Administrative Procedures Act Rulemaking and Additional
      Authorities....................................................   224
    Behavioral Marketing.............................................   213
    Competition Mission..............................................   207
    Consumer:
        Education....................................................   223
        Protection Mission...........................................   201
    Emerging Internet Scams..........................................   226
    Federal Trade Commission Building................................   215
    Free Credit Reports..............................................   221
    Future Funding...................................................   197
    Gasoline Prices and the Oil Industry.............................   222
    Google Collection of Data via Wi-Fi..............................   218
    Hospital Mergers.................................................   218
    Identity Theft...................................................   221
    Market Monitoring and Analysis Prompts FTC Growth................   197
    Needed Resources for Fiscal Year 2011............................   212
    New Technologies, Financial Fraud Spur FTC Growth................   196
    Pay-for-Delay Settlements........................................   217
    Payday Lending and Debt Collection...............................   225
    Unsubstantiated Health Claims....................................   220

                         OFFICE OF PERSONNEL MANAGEMENT

    Additional Committee Questions...................................    84
    Comprehensive National Cybersecurity Initiative..................    94
    Domestic Partner Benefits........................................    74
    Federal:
        Employee:
            Pay......................................................    79
            Recruitment and Retention................................    96
        Employees and Government Procurement.........................   101
        Long-term Care Insurance Program............................81, 107
        Pay and Furloughs............................................   103
    Fiscal Year 2011 Budget Request..................................    67
    Guard and Reservist Differential Payments........................    75
    High Priority Performance Goals..................................    66
    Hiring Individuals With Disabilities.............................    77
    Implementation of Guard and Reservist Pay........................    89
    Lessons From the 2010 Snowstorms/Telework........................    82
    National Council on Federal Labor-Management Relations...........   106
    New Administration Wellness Initiatives..........................    70
    Nursing Shortage and Intergovernmental Personnel Act Mobility
      Program........................................................71, 92
    OPM Reorganization...............................................    67
    OPM's Strategic Plan for 2010-2015...............................   105
    Open Government..................................................   108
    Postal Service Obligation to Retirement Trust Fund...............    73
    Prohibitions on the Hiring of Immigrants.........................    93
    Retirement Systems Modernization.................................    84
    Status of Reservist Differential Payments........................    76
    Technology.......................................................    93
    Telework and Continuity of Operations............................    94
    Work-Life Programs...............................................   100

                       SECURITIES AND EXCHANGE COMMISSION

    Additional Committee Questions...................................   190
    Chief Compliance Officer Within SEC Organization.................   184
    Corporate Compensation Programs..................................   184
    Corrective and Disciplinary Actions..............................   181
    Disclosure and Materiality Test..................................   188
    Employee Misuse of Computers.....................................   180
    Enforcement Actions..............................................   179
    Engaging in a Significant Investor-Focused Rulemaking Agenda.....   171
    Fiduciary Duties of Broker-Dealer................................   189
    Global Security Risk Management..................................   187
    Improving:
        Agency Systems and Management................................   170
        SEC Enforcement..............................................   183
    Managing Agency Growth...........................................   174
    New Leadership, Organizational Structures, and Expertise.........   167
    Oversight:
        By Appropriations Committee..................................   187
        Of Credit Rating Agencies....................................   176
    Reinvigorating the Enforcement Program...........................   168
    SEC:
        Resources....................................................   172
        Staff Levels Have Not Kept Pace With Industry Growth.........   175
    Stanford Ponzi Scheme..........................................181, 185
    Strengthening Examinations and Oversight.........................   170
    Tips and Complaints..............................................   182
    Whistleblower Bounty Program.....................................   178

                          UNITED STATES POSTAL SERVICE

    Civil Service Overpayment........................................    21
    Employee-related Costs...........................................    20
    Financial Crisis Demands Aggressive Action.......................    47
    Five-Day Delivery................................................    15
    Highlights.......................................................    46
    Overpayment......................................................    56
    Postal Service Business Model....................................    13
    Retiree Health Benefits..........................................    24
    USPS and Congress Need to Act Aggressively to Address Financial
      Crisis.........................................................    50
    USPS's Financial Condition Has Deteriorated and its Outlook is
      Poor...........................................................    48

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