[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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \2\ The Commission currently enforces or otherwise implements more 
than 60 laws.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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).
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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\
---------------------------------------------------------------------------
    \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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \22\ Sears Holdings Mgmt. Corp., FTC File No. 082-3099 (final order 
Aug. 31, 2009).
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
            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\
---------------------------------------------------------------------------
    \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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
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    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.
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    \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).
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    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).
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    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.
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    \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.
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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\
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    \51\ See Gasoline and Diesel Price Monitoring, www.ftc.gov/ftc/
oilgas/gas_price.htm.
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    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.
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    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\
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    \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).
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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).
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    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\
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    \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).
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    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\
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    \60\ PepsiCo, Inc. FTC File No. 091-0133 (proposed order accepted 
for public comment Feb. 26, 2010).
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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\
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    \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).
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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.
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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 [email protected] 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\
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    \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.
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    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\
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    \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\
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    \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).
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    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).
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    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\
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    \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.
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    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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