    [House Hearing, 112 Congress]
    [From the U.S. Government Publishing Office]

       FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR 2012
    =======================================================================

                                    HEARINGS

                                    BEFORE A

                               SUBCOMMITTEE OF THE

                           COMMITTEE ON APPROPRIATIONS

                             HOUSE OF REPRESENTATIVES

                          ONE HUNDRED TWELFTH CONGRESS
                                  FIRST SESSION
                                    ________

           SUBCOMMITTEE ON FINANCIAL SERVICES AND GENERAL GOVERNMENT
                                 APPROPRIATIONS

                         JO ANN EMERSON, Missouri, Chair
     RODNEY ALEXANDER, Louisiana             JOSE E. SERRANO, New York
     JO BONNER, Alabama                      BARBARA LEE, California
     MARIO DIAZ-BALART, Florida              PETER J. VISCLOSKY, Indiana
     TOM GRAVES, Georgia                     ED PASTOR, Arizona
     KEVIN YODER, Kansas
     STEVE WOMACK, Arkansas

     NOTE: Under Committee Rules, Mr. Rogers, as Chairman of the Full
    Committee, and Mr. Dicks, as Ranking Minority Member of the Full
    Committee, are authorized to sit as Members of all Subcommittees.
            John Martens, Winnie Chang, Kelly Shea, and Ariana Sarar,
                               Subcommittee Staff

                                    ________

                                     PART 7
                                                                       Page
     Federal Communications Commission................................    1
     Securities and Exchange Commission...............................  105
     Securities and Exchange Commission--Inspector General............  177
     General Services Administration..................................  233
     Internal Revenue Service.........................................  313
     Treasury Inspector General for Tax Administration................  375
     Department of the Treasury.......................................  475

                                       S

                                    ________

             Printed for the use of the Committee on Appropriations

                                     Part 7

       FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR 2012

       FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR 2012
    =======================================================================

                                    HEARINGS

                                    BEFORE A

                               SUBCOMMITTEE OF THE

                           COMMITTEE ON APPROPRIATIONS

                             HOUSE OF REPRESENTATIVES

                          ONE HUNDRED TWELFTH CONGRESS
                                  FIRST SESSION

                                    ________

           SUBCOMMITTEE ON FINANCIAL SERVICES AND GENERAL GOVERNMENT
                                 APPROPRIATIONS

                         JO ANN EMERSON, Missouri, Chair
     RODNEY ALEXANDER, Louisiana         JOSE E. SERRANO, New York
     JO BONNER, Alabama                  BARBARA LEE, California
     MARIO DIAZ-BALART, Florida          PETER J. VISCLOSKY, Indiana
     TOM GRAVES, Georgia                 ED PASTOR, Arizona
     KEVIN YODER, Kansas
     STEVE WOMACK, Arkansas

     NOTE: Under Committee Rules, Mr. Rogers, as Chairman of the Full
    Committee, and Mr. Dicks, as Ranking Minority Member of the Full
    Committee, are authorized to sit as Members of all Subcommittees.
            John Martens, Winnie Chang, Kelly Shea, and Ariana Sarar,
                               Subcommittee Staff

                                    ________

                                     PART 7
                                                                       Page
     Federal Communications Commission................................    1
     Securities and Exchange Commission...............................  105
     Securities and Exchange Commission--Inspector General............  177
     General Services Administration..................................  233
     Internal Revenue Service.........................................  313
     Treasury Inspector General for Tax Administration................  375
     Department of the Treasury.......................................  475

                                       S

                                    ________

                         U.S. GOVERNMENT PRINTING OFFICE

     66-999                     WASHINGTON : 2011

                            COMMITTEE ON APPROPRIATIONS

                        HAROLD ROGERS, Kentucky, Chairman

     C. W. BILL YOUNG, Florida \1\        NORMAN D. DICKS, Washington
     JERRY LEWIS, California \1\          MARCY KAPTUR, Ohio
     FRANK R. WOLF, Virginia              PETER J. VISCLOSKY, Indiana
     JACK KINGSTON, Georgia               NITA M. LOWEY, New York
     RODNEY P. FRELINGHUYSEN, New Jersey  JOSE E. SERRANO, New York
     TOM LATHAM, Iowa                     ROSA L. DeLAURO, Connecticut
     ROBERT B. ADERHOLT, Alabama          JAMES P. MORAN, Virginia
     JO ANN EMERSON, Missouri             JOHN W. OLVER, Massachusetts
     KAY GRANGER, Texas                   ED PASTOR, Arizona
     MICHAEL K. SIMPSON, Idaho            DAVID E. PRICE, North Carolina
     JOHN ABNEY CULBERSON, Texas          MAURICE D. HINCHEY, New York
     ANDER CRENSHAW, Florida              LUCILLE ROYBAL-ALLARD, California
     DENNY REHBERG, Montana               SAM FARR, California
     JOHN R. CARTER, Texas                JESSE L. JACKSON, Jr., Illinois
     RODNEY ALEXANDER, Louisiana          CHAKA FATTAH, Pennsylvania
     KEN CALVERT, California              STEVEN R. ROTHMAN, New Jersey
     JO BONNER, Alabama                   SANFORD D. BISHOP, Jr., Georgia
     STEVEN C. LaTOURETTE, Ohio           BARBARA LEE, California
     TOM COLE, Oklahoma                   ADAM B. SCHIFF, California
     JEFF FLAKE, Arizona                  MICHAEL M. HONDA, California
     MARIO DIAZ-BALART, Florida           BETTY McCOLLUM, Minnesota
     CHARLES W. DENT, Pennsylvania
     STEVE AUSTRIA, Ohio
     CYNTHIA M. LUMMIS, Wyoming
     TOM GRAVES, Georgia
     KEVIN YODER, Kansas
     STEVE WOMACK, Arkansas
     ALAN NUNNELEE, Mississippi

     ----------
     1}}Chairman Emeritus

                   William B. Inglee, Clerk and Staff Director

                                      (ii)

       FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR 2012

                                     -------
                                             Wednesday, March 30, 2011.

                       FEDERAL COMMUNICATIONS COMMISSION

                                    WITNESS

    JULIUS GENACHOWSKI, CHAIRMAN, FEDERAL COMMUNICATIONS COMMISSION
        Mrs. Emerson. The hearing will come to order. Thank you so
    much, Chairman Genachowski, for being here. I really do want to
    thank you for being here today and talking about the fiscal
    year 2012 Budget Request for the Federal Communications
    Commission.
        Your agency plays quite an important role in this country's
    telecommunications, television, radio, internet, and cable
    industries. And probably almost every American citizen,
    business, or even non-citizens, are touched by something that
    you regulate.
        The changes that we are seeing in the industry, just with
    the blink of an eye, something is new. When did we get our
    iPads, Joe? We got them last fall, and suddenly we need a new
    one. Technology keeps changing, and it is important for us, and
    certainly important for you, to be able to strike a balance
    between regulating all of these industries, but at the same
    time, not hindering competition or innovation. Among all of the
    jobs in the government, I think yours is probably one of the
    most challenging, with many business technology and consumer
    groups watching every single move you make, along with
    Congress, as well.
        While the FCC is funded by fees, congressional oversight
    over your budget is an important check on agency activities,
    and our committee is committed to fiscal responsibility and
    oversight of the agencies under our jurisdiction. The American
    people have tightened their belts, and it is important that the
    government do the same thing.
        We in Congress consistently hear from our constituents
    about the cost of government regulations, whether it is health
    care, greenhouse gases, financial institutions, or the
    telecommunications industry. The administration's new
    regulatory proposals are providing great uncertainty for
    businesses, and in particular, small businesses. The
    regulations, in many respects, are hurting the economy, and I
    have to say that I personally have very strong concerns with
    the FCC's Net Neutrality Rule, and I am sure you are prepared
    to get into discussion on that.
        You passed this rule even though you knew it would be
    opposed by a majority of members of Congress, and it was quite
    obvious that this played out in consideration of H.R. 1, when
    the House overwhelmingly rejected your proposed rules. I do not
    think the issue is going to go away any time soon, and I hope
    that, because of the controversy that it has created, that you
    would be willing to work a little more closely with the
    Congress on these types of proposed regulations. Once again,
    thank you so much for being here. I look forward to your
    testimony. I would now like to recognize my friend and
    colleague, Joe Serrano.
        Mr. Serrano. Thank you so much. And I also want to welcome
    the Chairman to this hearing. The Commission's request for
    Fiscal Year 2012 is $354 million in new budget authority, and I
    look forward to discussing the request with you during our
    questions.
        High-speed internet access is critical to helping people
    find and participate in education and employment opportunities.
    I am pleased to see that, in the request, the FCC is moving
    forward with your broadband plan to increase access across the
    country. One way to increase access is to improve wireless
    service, and I am encouraged by your continuing efforts to open
    up more spectrum for broadband services. Doing so will help to
    encourage innovation and improve competition among broadband
    services.
        As you move forward with all of your plans, I would urge
    you to remember one of my main concerns; that the people in the
    territories are not forgotten, and that they are treated
    equally. In addition, as we embrace these technologies, it is
    important that we do not destroy existing successful programs.
    PEG channels are one such program. Arising from a previous
    technological leap to cable television, we should make sure
    that they continue to thrive as telecommunication systems
    continue to change.
        Finally, you provide an important check to make sure that
    consumer interests are being served, and that there is a level
    playing field in telecommunications. And I look forward to
    hearing more from you about your important work, and I welcome
    you again.
        Mrs. Emerson. Thank you, Mr. Serrano.
        Mr. Serrano. Thank you.
        Mrs. Emerson. And thanks to our colleagues Mr. Diaz-Balart
    and Mr. Graves for being here today. Please go ahead, Mr.
    Genachowski.
        Mr. Genachowski. Thank you, I will be brief. I have
    submitted a longer statement for the record, and I will do an
    edited version here, if that is okay. First of all, thank you,
    Chairwoman Emerson, Congressman Serrano, for the opportunity to
    be here before the subcommittee. Thank you, Congressman Graves
    and Congressman Diaz-Balart, for joining.
        A year ago this month, a unanimous FCC approved a joint
    bipartisan statement of principles which said, ``Broadband
    service can be an indispensable engine for unleashing
    innovation and investment, spurring job creation and economic
    growth, and ensuring our country's global competitiveness.''
    That statement continued, ``Working to make sure that America
    has world-leading high-speed broadband networks, both wired and
    wireless, lies at the very core of the FCC's mission in the
    21st century.'' I was pleased to give that bipartisan
    statement. And, since issuing that statement, the FCC has been
    focused on harnessing the power of broadband and communications
    technology to drive our economy, improve U.S. competitiveness,
    benefit consumers, and unleash innovation, including in areas
    like education, health, IT, and public safety.
        The benefits of broadband increase every day. Consider
    small businesses. Like no technology since electricity, high-
    speed internet helps new businesses start and small businesses
    grow by expanding their reach to new markets and lowering their
    cost through cloud-based services. Challenges to seizing the
    opportunities of broadband increase every day too, as do the
    costs of exclusion from our digital economy as job postings and
    other essential information move online.
        About 25 million Americans simply cannot get broadband
    where they live. And about 100 million, one-third of our
    population, does not sign up. That is an adoption rate of about
    67 percent in the U.S., which compares to 90 percent in Korea
    or Singapore.
        In recent weeks, several expert reports have been issued
    that confirm concerns raised by earlier studies; for too long,
    the U.S. has been losing ground to our global competitors, and
    leadership in information and communications technology is
    critical for us to stay on top.
        In this context, we submit our fiscal year 2012 budget. As
    in the past, the budget we have prepared is derived entirely
    from fees the FCC collects and auction proceeds. The budget
    will allow the FCC, which currently has its smallest staff in
    10 years, to continue our efforts to boost our economy and
    ensure that more Americans can be full participants in our 21st
    century economy.
        Our budget will support vital new initiatives to improve
    public safety and help first responders communicate with each
    other and protect lives. The FCC's proposed budget will allow
    the agency to pursue its core goals of fostering investment,
    unleashing innovation, promoting competition, and protecting
    and empowering consumers.
        The budget is consistent with our agency's commitment to
    fiscal responsibility, and deriving the most benefit for
    consumers and our economy from public resources. For example,
    the budget will help us unleash Spectrum, the invisible
    infrastructure that sustains our wireless communication, so
    that U.S. companies lead the world in mobile innovation. It
    will help us drive more efficient use of this scarce public
    resource, and free up spectrum for auctions. In the last two
    decades, the FCC has raised $52 billion for tax payers through
    such auctions. Our voluntary incentive auction proposal, a
    market-based proposal, can raise significant money in the $20
    to $30 billion range. The budget will help us transform and
    modernize the universal service funds, so that it focuses on
    broadband deployment and adoption, not old telephone service.
    USF and inter-carrier compensation reforms will eliminate
    waste, improve efficiency, require greater accountability, and
    connect millions of Americans to our digital economy.
        The budget will help us drive forward our broadband
    acceleration initiative, which is cutting red tape and removing
    barriers to broadband build out, lowering the costs of and
    encouraging the massive private investment we need in our
    communications infrastructure. The proposed budget will help us
    improve public safety communications in the United States by
    ensuring interoperability of first responder broadband
    communications, by moving toward next generation 9-1-1, so that
    people can send, and first responders can receive, text
    messages, photos, and videos from mobile phones, and by aiding
    in vital efforts to protect against cyber-threats and other
    illegal activities.
        The proposed budget will help improve the operations and
    efficiency of the FCC, reducing burdens on business and the
    public. For example, the budget will allow us to complete work
    consolidating multiple out-of-date licensing systems into one
    modern and upgradable system, which will save over $35 million
    for tax payers, and provide more efficient licensing services
    to the private sector, including small businesses.
        Finally, the budget will ensure that we can continue our
    efforts to combat waste, fraud, and abuse, including by
    providing necessary funding to the agency's Office of Inspector
    General. These cost-saving enhancements are being built on
    significant progress we have already made from reforming, for
    example, the video-relay service, which will save tax payers
    $250 million annually, to reducing contracting costs of the
    agency by over $2 million a year. The Commission's commitment
    to reforming the agency into a model of excellence was
    recognized when the Office of Personnel Management named the
    FCC the most improved agency in the Federal Government. I look
    forward to working with this committee on initiatives to
    harness information and communications technology to get our
    economy moving and to expand opportunity for all Americans.
    Thank you for the time, and I look forward to your questions.
        [The information follows:]

        [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Mrs. Emerson. Thank you so much, Chairman Genachowski. And
    again, I apologize for trying to take your opening statement
    time. While your appropriation is offset by fees, we really do
    have to look at all agencies in our bill to find ways for them
    to become more efficient, no matter what their funding source
    is. So can you give me three specific examples of the impact on
    your operations if we were to go back to fiscal year 2008
    levels?
        Mr. Genachowski. Sure. One is it would interfere with our
    ability to unleash spectrum for auctions. We need the engineers
    and the data work to do that. That is one important example. A
    second is it would interfere with our ability to transform the
    Universal Service Fund and inter-carrier compensation. This is
    a complicated endeavor. It will save money; it will make the
    programs more efficient and deliver better broadband to more
    Americans. But we need the resources in order to be able to do
    that work. It would interfere with the operations of our
    Inspector General's Office. The headcount increase in the
    budget is all an IG request, which I support, to make sure that
    they can continue their efforts to root out waste, fraud, and
    abuse. Through their efforts, along with our Enforcement
    Bureau, we have identified fraud in one program that has saved
    over $250 million annually. And finally, just one last point,
    it would interfere with our ongoing efforts to improve the
    internal technology at the FCC, which will save money. I
    mentioned the consolidated licensing system, we are also
    consolidating data centers. These are things that, when I was
    in the private sector, every company did, and you had to do to
    save money. So in each of these areas I feel strongly that
    these are real investments that will have a measurable positive
    return for the American people and the American economy.
        Mrs. Emerson. But you do not have any existing sources that
    could be reprioritized within the agency, as it exists today,
    to do some of this work?
        Mr. Genachowski. The work that we have done in preparing
    the budget took that into account. We brought in, as our
    Managing Director who oversees the budget process, someone who
    had spent 14 years doing budgets and running P&Ls in the
    private sector. And my directive to him was, we are going to
    root out waste and fraud at this agency and run it as
    efficiently as a private company would. And so, we have been
    able to find significant savings, and I have great confidence
    that we are doing as best we can to apply private sector
    budgeting principles to what we are doing. And the budget has
    been tight, and we are doing a lot with the money that we have.
        Mrs. Emerson. In spite of the 15.9 million increase that
    you have asked for?
        Mr. Genachowski. Yes, so one example was the headcount for
    the Inspector General's Office. They have a series of temporary
    employees whose contracts will be up. These are employees who
    have helped root out fraud and literally made sure that we can
    save $250 million in the VRS program. If we cannot fund them,
    they will go. We will lose their expertise and their ability to
    root out waste, fraud, and abuse.
        Mrs. Emerson. You have asked for 19 people in the IG's
    Office at a cost of $3.2 million. That is pretty hefty amount
    for salaries, is it not?
        Mr. Genachowski. Well that figure reflects not only
    salaries, but the work that they do to do their investigations.
    And so there is underlying work, whether it is data-oriented
    work, expert work that they need to do their work and as the
    investigator of waste, fraud, and abuse, they are very
    sensitive to making sure that their budget is as tight as
    possible.
        Mrs. Emerson. Okay. So you really felt, or at least agree
    with the Inspector General, that they are too short-staffed to
    do their jobs?
        Mr. Genachowski. I do. And again, the request here is not
    to increase headcount over what it is. For historical reasons,
    they have had a team of, I believe the number is 17 or 19, I
    cannot remember exactly, that has been working on these issues.
    They have been on a term-contract. We can find out the history
    of why that is so.
        Mrs. Emerson. Why they could not just simply stay on the
    contract.
        Mr. Genachowski. Either way, the money is being spent for
    them.
        Mrs. Emerson. With the exception of all the benefits that
    attach to a permanent employee versus a temporary employee.
        Mr. Genachowski. That may be. These are professionals who I
    think it would be in our interest to keep in government doing
    exactly what they are doing. At what point do they say, if we
    are not wanted here to do this job as a full-time employee,
    maybe we will go find something else to do. I presume we could
    replace them. I do not think we could replace the institutional
    memory and knowledge that they have accumulated in the
    investigations that they have done, which have been very
    successful.
        Mrs. Emerson. Okay. We will talk a little bit more about
    this.
        [The information follows:]

        [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Mrs. Emerson. Thanks. Mr. Serrano.
        Mr. Serrano. Thank you. Thank you so much. Mr. Chairman,
    PEG channels are a valuable part of our communities, providing
    them with local information and learning opportunities for
    people and the communities they serve. The channels were
    originally created along with cable service. However, now that
    we are moving to a new technology, the channels are in danger
    of being left out. In January 2009 the Alliance for Community
    Media filed a petition concerning unfair treatment of PEG
    channels. It has now been more than two years since this
    petition was filed. Can you tell me why it has taken so long
    for there to be a ruling, and when we can expect one?
        Mr. Genachowski. Well, a couple of points, if I may. One
    is, I share your recognition that PEG channels play an
    important role in the landscape, providing a type of
    programming that you would not get in other places. And also
    they face challenges of the sort that you described, chiefly
    around cable companies or other multi-channel video providers
    upgrading from analog to digital, and doing that in a way that
    makes it hard for PEG channels to come along. The good news
    that I am happy to report is that, in the year since we talked
    about this at the last appropriations hearing, about half of
    the complaints that PEG operators have filed have been resolved
    in a way that has been successful from the point of view of the
    PEG operators. Keep in mind that there is a lot of state and
    local involvement here, because the number and many of the
    requirements around PEG channels are done at the local level
    during the franchising process. And our abilities at the
    national level are somewhat constrained. There are some open
    issues, though, as you mentioned. And we look forward to
    continuing to work with you to make sure that PEG is treated
    fairly in this evolving world.
        Mr. Serrano. Do you remember, when we discussed this last
    time, there was not just the issue of this desire not to have
    PEG channels run anymore, but it was also those that were
    around in some areas were just being treated in a way where it
    was very difficult for them to exist. I remember the testimony
    we had about, in some cases, the PEG channels went from an easy
    place you could find them to Channel 900, and then there was a
    dropdown menu different from the rest of the channels, where
    you had to go find them. So, it really became an adventure to
    try to find them, which was, we think, just a way to try not to
    have them function. So, I hope as you resolve some of these
    issues and the complaints that you also look at the general
    treatment because, they were there at the beginning.
        Here is what is interesting about that. I remember when
    cable first came to the Bronx, and I say I remember because, as
    you know, New York had a reputation of having great stations
    and nobody thought cable was necessary. So we got it after most
    of the nation got cable. It was very weird. But I remember that
    that was very much a part of the agreement. We will have all of
    this, then there will be public access and there will be PEG
    channels, and so on. Now, people seem to forget this earlier
    agreement, so I hope that you stay on top of this, because this
    is very important.
        Mr. Genachowski. Understood. And I am hopeful that the
    positive resolutions over the last year can provide a baseline
    and a set of practices that will make it easier to resolve the
    ones that are still outstanding.
        Mr. Serrano. Right. Now, Mr. Chairman, we always talk here
    about, we have in the last couple of years, about the digital
    divide, which continues to be a problem in this country. But
    there is a digital divide in terms of the small business
    community. They do have not access to the services necessary,
    and, in some cases, have not used technology properly. So, our
    question is, What are the major impediments to faster
    implementation of IT among small businesses? What are you
    encountering? What are we doing to help them? At the expense of
    getting some people on this panel angry at me, what is
    government doing to help them move along? What is in the future
    for small businesses?
        Mr. Genachowski. I think this is a very important topic and
    sometimes in all the discussion about broadband adoption or
    broadband goals, it can be very focused on individual
    consumers. That is very, very important, but the opportunities
    of small businesses online are just enormous. You can expand
    your businesses to other markets, increase your customers,
    increase your revenue. You can move to lower cost services, by
    using your services online or in the cloud. More revenue, lower
    services, more profit, more jobs.
        The obstacles that we have seen in our work on this are
    somewhat similar to the obstacles that we see in our consumer
    research. A lack of appreciation of the relevance of online
    benefits. In some cases, digital literacy, just not knowing how
    to do it. In some cases, affordability. In some cases, trust.
    Here are some of the things that we are trying to do. We have
    teamed up with the Small Business Administration to make sure,
    as they have boots on the ground in communities all over the
    country helping small businesses, that those people are able to
    help with new technologies and new opportunities. That has been
    a successful program so far with their initiative called SCORE.
    We are also taking steps to make sure that small businesses
    have access to more choices in the marketplace for broadband
    access.
        Finally, we are addressing some of the trust issues that
    small businesses have. I have talked to small business owners
    who say, Yes, it seems like a good idea, but I am really
    worried about putting my sensitive data online or in the cloud.
    A reasonable worry, but there are steps to take. In the next
    month, we expect to do a forum on this, where we will present
    best practices for small businesses, steps that they can take
    to increase the security of their information online. Some of
    these things we all know; do not click on a link in an e-mail
    from someone you do not know. It would help to increase the
    level of understanding in small businesses and we think that we
    can help on that education campaign, and that will help
    increase small business adoption.
        Mr. Serrano. All right. Thank you. Madam Chair, in view of
    the fact that we may vote soon, I will stop now.
        Mrs. Emerson. Thank you very much, Mr. Serrano. Mr. Graves.
        Mr. Graves. Thank you, Mr. Chairman, for being here. First,
    I want to thank you for your work. I know that you have a big
    task ahead and, as I ask everyone that comes before our
    subcommittees, I would love for your cooperation in providing
    us with some options in how you can achieve the objectives of
    your commission with 10 percent less resources, 20 percent, and
    25 percent.
        [The information follows:]

        [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Mr. Graves. I will be submitting a letter for the record as
    well and your office should receive that. I hope we can get
    your assistance in that and we can work together as a partner
    in that way.
        If not, I imagine that this committee, as the Chairwoman
    has already brought up, will be looking to make some of those
    decisions for you. We would rather have your help in that, so I
    hope you can help us. I want to go back to November, when the
    FCC opened an investigation on privacy, the invasion of privacy
    of Americans, and just ask what is the status of that
    investigation into Google and the harvesting of personal data?
        Mr. Genachowski. You are referring to a specific
    investigation, which I cannot comment on. In general, I would
    say that any uses of spectrum or communications facilities that
    are in our jurisdiction are things that we would take
    seriously.
        Mr. Graves. So when do you expect that will be concluded?
        Mr. Genachowski. Again, I cannot comment on a specific
    investigation. It is in front of our Enforcement Bureau. So,
    with apologies, I can only comment generally, but not in a
    specific investigation.
        Mr. Graves. Okay, so really no idea when that will be
    concluded, even though there is by Google's own admission that
    data was collected, could be 62 million American e-mail
    addresses and personal data, but no idea when something may
    occur.
        Mr. Genachowski. Nothing that I can say about an ongoing
    investigation.
        Mr. Graves. Would you consider their admission that data
    has been collected? Do you consider that eavesdropping on
    innocent Americans?
        Mr. Genachowski. Again, it would not be right for me to
    comment on a specific investigation. In general, the FCC has
    had privacy rules in place for some time. They protect
    consumers when they make phone calls over wires, they protect
    consumers when they make mobile calls. They protect consumers
    when they are using various kinds of telecommunications
    facilities. We consider the privacy rules in our governing
    statute and in our rules to be very important. People have an
    expectation of privacy.
        Mr. Graves. So, do you consider it eavesdropping?
        Mr. Genachowski. Again, I will not comment on a specific
    investigation, but if there are any violations of our rules, we
    would take them very seriously.
        Mr. Graves. But would you consider anybody who harvests
    data from unknowing, innocent Americans identity theft, if it
    is personal data?
        Mr. Genachowski. There are many instances in this country
    of violations of privacy, misuse of communications facilities.
    We have other areas where we have investigated privacy
    violations. We take those very seriously. I understand what you
    are asking. I apologize that I cannot answer, but I just cannot
    talk about a specific investigation.
        Mr. Graves. So you are not certain if it is eavesdropping,
    not certain if it is an invasion of privacy or identity theft.
    Do you agree with the FCC's Enforcement Bureau, Michele
    Ellison, who said that it is a breach of privacy? Do you agree
    with that?
        Mr. Genachowski. I do not remember her quote exactly, but I
    remember at the time agreeing with what she said. If I could
    see the full quote, I am sure I would agree with the full
    quote.
        Mr. Graves. Right. She referred to it as a breach of
    privacy and it seems that this has been ongoing for awhile,
    because, prior to November, it was actually in May in which it
    was reported to the FTC. Is that right? They might have closed
    their case on that, but then you opened up one. So it has been
    going on awhile, three years of data has been harvested. I
    think the American people expect some action on that and I
    would hope that you would move swiftly. Because I can only
    imagine, and I would love for your response on this, if the
    government drove around taking pictures of homes, and at the
    same time was harvesting data over unencrypted Wi-Fis. How
    would the American people react to that?
        Mr. Genachowski. They would react badly, as they should.
    Americans should and do react badly to any invasions of privacy
    or violations of the rules that exist in privacy.
        Mr. Graves. So they should expect the same with anyone
    else, whether it was me or a large corporation, or the federal
    government themselves?
        Mr. Genachowski. I cannot disagree with that.
        Mr. Graves. All right. Thank you.
        Mrs. Emerson. Ms. Lee.
        Ms. Lee. Thank you very much. Good afternoon, Mr. Chairman.
    I apologize for being late. We had several meetings going on at
    the same time, and hearings. So, if my question is redundant, I
    apologize. First, I just want to say how important the FCC is
    to communities of color and underserved communities. So much of
    what we have been trying to do is close this digital divide and
    I would just like to get your sense of how that is going, if we
    are heading in the right direction. Secondly, in terms of any
    dramatic cuts to your budget, I would like to know how that
    would impact the work of the FCC. Thirdly, with regard, I am
    glad that you have reinstituted collecting data on the
    involvement of minority and women participation in the media
    and broadcast industry, because we have to be able to rely on
    data to make intelligent decisions about public policy.
        Along those lines, the Comcast-NBC merger, I know that is
    done, but in terms of the memos of understanding and all of the
    oversight responsibility, some of us thought the deal really
    was not what it should be, given the lack of minority
    participation in this. How, moving forward, will the FCC make
    sure that whatever those memos were, that they are complied
    with, for the full participation in minority and women-owned
    businesses?
        Mr. Genachowski. Thank you Congresswoman. In general, you
    identify a set of issues that have been historically bipartisan
    issues at the FCC, the goal of providing new entry to minority
    communities and others who are at risk of being left behind,
    the ability to participate in these technologies, these
    opportunities. In the area that is fastest growing and has the
    greatest opportunity, which is broadband and mobile-related
    opportunities, we are seeing two things. One is, there are
    across-the-board issues where, as a country, we are not where
    we should be. I mentioned some statistics earlier. Our adoption
    rate in the U.S. for broadband is about 67 percent, which
    compares to about 90 percent for Singapore and South Korea. But
    in certain communities, that number is even lower: minority
    communities, the elderly, rural communities, low-income.
        Meanwhile, the costs of digital exclusion are rising. Five
    years ago, if you were looking for a job and you did not have
    internet access, it was okay. You would find the classifieds in
    the newspaper and you would call up. You would at least be in
    the running. Today, if you do not have access to the Internet,
    you cannot even find the job, because the classifieds have
    moved online. And if you do not have basic digital skills, you
    are probably not eligible for the job. I do hear from business
    owners around the country who say, Actually, we do have some
    jobs open, but we need people who have digital skills, and they
    cannot use the Internet and they cannot use Excel and they
    cannot use Microsoft Word. So these are very big problems.
    There's no single silver bullet.
        Here are the kinds of initiatives we are working on. One,
    we are looking at reforming our Lifeline Link-Up program in a
    sensible way. This is the program that for many years has
    helped with adoption of telephone service. So, as part of our
    overall USF reform effort, bringing that program into the 21st
    century is an opportunity and a challenge, but it is one we are
    taking on. Second, we have been running activities to bring
    together entrepreneurs from diverse communities with capital.
    We call them speed-dating sessions, but they have been
    successful in overcoming barriers and getting the private
    market to work better for entrepreneurs. As I mentioned
    earlier, we are working with the Small Business Administration,
    so that their outreach to small businesses across the country
    includes education about the opportunities of the Internet for
    small and diverse businesses. So, these are just some of the
    areas we are working on. If I could mention one other example,
    on adoption, we are working on public-private partnerships.
    This is one of the areas where there is as much an opportunity
    for a win-win as you can find anywhere else.
        Any new subscriber for an Internet service provider is a
    win for that person who had previously been excluded, and also
    a win for the company because they get another subscriber.
    There are some innovative programs going on in the country that
    are focused on low-income Americans, communities that would
    otherwise be left behind. One of the things we are trying to do
    is work with companies to see if those, call them pilot
    programs, those pilot public-private partnerships, can be
    expanded and have more of a positive effect across the country.
        Ms. Lee. Comcast-NBC merger.
        Mr. Genachowski. I think with respect to any merger that
    has conditions, we have an obligation to make sure that the
    conditions, that the commitments made to the agency are
    honored, and we will have a process to make sure that that is
    so.
        Ms. Lee. Finally, the budget cuts.
        Mr. Genachowski. Budget cuts I will answer briefly, because
    the chairwoman asked the same question. Our ability to free up
    spectrum, generate auction revenue, would be hurt. Our ability
    to investigate waste, fraud, and abuse with our inspector
    general's office would be hurt. Our ability to transform the
    Universal Service Fund and take an inefficient program and make
    it an effective program would be hurt. We provide various
    services for consumers such as call centers, that would be
    hurt. We are in the middle of projects to upgrade our
    infrastructure in a way that would save money, consolidated
    licensing, consolidating data centers. Stopping those would
    have, as would these other things, a negative return on
    investment. This is an important area to me. I spent the last
    10 years in the private sector. The head of our managing
    director's office, who is in charge of this, spent the last 14
    years in the private sector. We both tried to drive here a
    private-sector mentality of making sure that we are getting the
    most bang for the buck in everything that we do; that we are
    taking costs out and delivering a greater return for the
    public.
        Ms. Lee. Thank you. Thank you, Madam Chair.
        Mrs. Emerson. Thank you, Ms. Lee. Our vice chairman, Mr.
    Diaz-Balart.
        Mr. Diaz-Balart. Thank you Madam Chairwoman. How are you,
    sir, Mr. Chairman?
        Mr. Genachowski. I am good, thank you.
        Mr. Diaz-Balart. Let me ask you, in the history of mankind,
    can you think of anything where there has been more innovation,
    so much innovation that has connected more people, that has
    employed more people, that has led to more inventions and
    innovations and spin-offs and launched more businesses and had
    more of an impact in such a short time? In the history of
    mankind, can tell me a couple of those that have done more than
    the Internet?
        Mr. Genachowski. I do not know that any has. It is an
    extraordinary boon to innovation, investment, job creation.
        Mr. Diaz-Balart. It truly is. It is one of those things
    that we are living in this incredible time and yet it looks
    like the answer to that is more government intervention and
    regulation. I guess government, who is not known as the
    innovator, the job creator, the efficient animal, is not doing
    enough. I guess the FCC now believes that government would have
    done better, could have done better, or regulation that
    government will come up with is better. I want to go back to
    your statement on page two.
        Mr. Genachowski. I would be happy to answer that, if you
    would like.
        Mr. Diaz-Balart. I think you already answered the issue
    about the fact that the Internet has clearly been among the
    most innovative things in the history of the planet, probably
    the most innovative, and yet it is clear that the FCC now wants
    to intervene there further. But let me just go back to your
    statement. You talk about how, even as the communications
    industry has grown, telecommunications is a critical and
    growing part of our economy. Yet, as the communications
    industry has grown in size and complexity, the FCC has remained
    relatively small and focused. You talk about how after the turn
    of the 21st century, even after the explosive growth in
    telecommunication services, the FCC is at a 10-year low in FTE.
    So, have you ever thought that maybe part of the reasons for
    that explosive growth is precisely because the FCC has not been
    meddling in every single decision? Have you ever thought, is
    that a possibility, that there is a correlation between this
    explosive growth? This innovation that you have just stated has
    no precedent. Could there be some relationship with not too
    much government regulation and that explosive growth?
        Mr. Genachowski. Two quick reactions. One is, with respect
    to preserving the freedom and openness of the Internet, and I
    could not agree more strongly with you that that is a central
    driver of innovation and our global competitiveness, on a
    bipartisan basis for the last five years, it has been thought
    at the FCC that basic rules of the road that give the broadband
    economy certainty and predictability would allow that to
    continue. That is what we did at the FCC, bringing in
    constituents and stakeholders from across the spectrum,
    internet-service providers, as well as early-stage businesses.
    There are many areas where we are working very actively to
    reduce regulations, reduce burdens on businesses. For example,
    opening up uses of spectrum, bringing market forces into uses
    of spectrum. There are areas where the FCC has responsibility
    for public resources, where it takes work and effort to make
    sure that those resources are being used for innovation and
    economic growth, like spectrum. So I would very much enjoy the
    chance to work with you on bringing market-driven policies to
    spectrum. I think there is some enormous opportunities for
    bipartisan efforts to unleash even more innovation in our
    mobile space.
        Mr. Diaz-Balart. Am I correct that the Net Neutrality vote
    was a split vote?
        Mr. Genachowski. It was a split vote at this FCC. Yes.
        Mr. Diaz-Balart. At the FCC, because there was obviously
    many, even in your board, that had those concerns about,
    frankly, over-regulating, and that you might have just the
    opposite effect. Sometimes government is in search of a
    problem. They have a solution for a problem that they later
    invent, and it seems that this may be one of those areas, but
    what you are potentially putting at risk again. And we agree
    with this, is the most innovative, the most dramatic, the most
    open, the most wealth creating animal maybe in the history of
    mankind. And yet, it seems that now, you know, a small group of
    people in the FCC people that they may know better than this
    incredible, dramatic thing.
        It is frankly a little frightening because now I hear
    rumors that the FCC may also be looking at wireless. And then,
    we will talk a little bit about that. But let me just ask you,
    do you have a cell phone?
        Mr. Genachowski. I do.
        Mr. Diaz-Balart. All right. I do too and I actually have
    two of them, because we are all weird in this place. Right? I
    am pretty sure that your first cell phone, like mine, that was
    in the second generation of that brick. The first one was too
    expensive. I am assuming that your first cell phone just made
    calls.
        Mr. Genachowski. True.
        Mr. Diaz-Balart. I am also assuming that you either have a
    BlackBerry or a Smartphone today that you can get phone calls,
    that you can get video, you can do SMS, MMS, Twitter,
    everything else. These are all new technologies that did not
    exist 10 years ago. Is it not because of the private sector
    innovation? Or is it government that comes up with all of these
    wonderful ideas and then tells the private sector, This is what
    you have to do and this is how you have to pursue it. I mean,
    which one is it?
        Mr. Genachowski. It is absolutely private sector. It is one
    of the reasons I am pushing so hard for a tool to use more
    spectrum auctions, two-sided auctions to bring more market
    forces into allocation of spectrum, free up spectrum for
    auction, billions for the Treasury, and even more innovation.
    And I was very, very supportive of the historically very
    important move that was made about 15, 20 years ago from
    spectrum lotteries and comparative hearings to auctions.
        Now the FCC has to run the auctions and it has to do a lot
    of work to identify spectrum to auction. A last quick point
    that I would make is I completely agree with you about the
    devices, the Smartphones that we each have, use about 22 more
    times spectrum than the old feature phones. The tablets that
    many of us have use 122 times more spectrum. We are facing a
    spectrum crunch in the country, and I very much look forward to
    working on a bipartisan basis to come up with market-based
    solutions to solve them.
        Mr. Diaz-Balart. And we need to, just again it does not
    seem like it has been a very bipartisan effort within the FCC.
        Mr. Genachowski. Over 95 percent of the FCC's decisions are
    unanimous or bipartisan.
        Mr. Diaz-Balart. Right, not net neutrality. And again, that
    one seems to be a solution trying to find a problem. And I
    think we all agree that clearly there has been innovation. In
    1997, the average cell phone bill was $98.63. In 2010, it was
    $47.21. In 1995 there were 340,000 cell phone subscribers in
    the United States and now there are 300 million subscribers.
    And again, these are private sector innovations.
        And here is my concern, Mr. Chairman. We all know that
    there is a need for some regulation. There is no doubt about
    it. But there seems to be this attitude, now, within the FCC,
    with your FCC, that it is almost like addicted to government;
    addicted to power. That now the federal government knows how to
    regulate the internet, the most innovative thing in the history
    of mankind because, I guess it has maybe been too innovative?
    It is crazy because it is too innovative? But the reality is
    that there a lot of us who are really concerned including
    almost half of your FCC board, with net neutrality, that is
    frankly, highly concerned that you are basically now meddling
    into something that has been an incredible advance. One of the
    most historic advances in the history of humanity as far as
    quickly. And because the federal government, the FCC, frankly
    knows best.
        Mr. Genachowski. If I may, the driving force behind what we
    have done is preservation of the incredible freedom and
    openness of the internet and the role that plays in driving
    innovation and job creation. And it is why we sought out to and
    were able to build very broad-based support for the sensible
    balance that we ended up with, from early stage and late stage
    technology companies, to the cable industry, major ISPs.
        Mr. Diaz-Balart. On that thought, though; you were talking
    about preservations of that. Well, wait a second. How is it
    possible then, to create it? You have to preserve it, I guess.
    But how was it created and preserved before you decided that
    government was going to be know-all, do-all. In other words,
    how did it become so big? What is it that you have to preserve?
    How would it be there if it was not for the federal government
    to take care of it originally?
        You are preserving something that was already created
    without your involvement, without the need of the federal
    government to do it, without taxpayer funding. So how was it
    created, without you being there originally to take care of it?
        Mr. Genachowski. Putting aside for a moment the origins of
    the internet its own story of the healthy relationship between
    the government and the private sector; what the FCC started
    realizing about 5 years ago, on a bipartisan basis, is that
    there were threats to freedom emerging and that sensible, high-
    level balanced rules would preserve freedom, and competition,
    and innovation on the internet. Not everyone agrees and I
    respect different points of view. But that was the goal. It has
    been supported on a bipartisan basis but the resolution that we
    came up with was not satisfactory to many of the people who
    were arguing for the stronger measures. There were many people
    who thought we did not go far enough. But fundamentally, it
    brought together different segments of our broadband economy,
    added certainty and predictability to the marketplace, because
    I want to see our broadband economy not fighting with each
    other. I want to see them competing with each other. But I do
    not want to see them having, you know, non-productive policy
    fights. I want to see that energy go and compete with the rest
    of the world, where we are in danger of falling behind unless
    we really take advantage of the wonderful entrepreneurial
    assets that we have in the United States and tackle some of the
    strategic issues that we face as a country.
        Mr. Diaz-Balart. Madam Chair, I do not know if I have much
    time as I have a few more questions, but maybe for the second
    round.
        Mrs. Emerson. Yes. for the second round, please, and we
    will let Mr. Bonner go and then what we are going to do, just
    so everyone knows, when we start the next vote, at about a
    minute and a half, we will take about a 10 minute recess and
    then we will be right back because we will have two more votes.
    Okay.
        Mr. Diaz-Balart. Sure.
        Mrs. Emerson. Thanks. Mr. Bonner.
        Mr. Bonner. Thank you, Madam Chair. Mr. Chair. I do not
    know if you received, or if you are aware even, that I wrote
    you a letter last week and I would not hold you accountable to
    being aware of that, but I have a copy of it that I will give
    you. But I want to just say briefly, it addresses the
    Commission's proposed spectrum policy. I am sure I am not the
    only member of Congress who has written about this.
        During the national transition from analog to digital
    television, both the American consumer and broadcasters made
    significant investment in digital equipment. In the FCC's
    efforts to re-allocate spectrum for broadband development and
    deployment, what steps is the Commission taking to guarantee
    the public's ability to continue to receive high-quality over
    their digital television programming and to protect television
    broadcasters' ability to deliver vital local news programming
    to their viewers?
        Mr. Genachowski. The challenge we are seeking to address is
    the one we were talking a little bit about before. It is the
    gap created by all of the new, exciting devices on spectrum
    creating tremendous demand for more. Spectrum supply is
    essentially flat. And we need to solve this gap for a couple of
    reasons.
        One is, consumers are going to be incredibly frustrated as
    they use their Smartphones and their tablets, and they know
    what dropped calls feel like; they are going to hate dropped
    internet connections. They are going to hate having bad
    connections. And that will, I fear, frustrate and slow down the
    incredible economic opportunities that come from the mobile
    revolution.
        And that is agreed to by many industries that are involved
    in this, the wireless industry, the consumer electronics
    industry, the technology industry, et cetera. And they
    specifically support the tool that we have suggested and that
    has been supported on a bi-partisan basis, for the FCC to have
    the tool to conduct incentive auctions. Simply, an auction of
    the sort we are familiar with, but where the supply of the
    spectrum would come from licensees who voluntarily contribute
    their spectrum in exchange for a portion of the proceeds.
        It is a way to bring market incentives, market forces into
    allocation of spectrum. In that process, if it were applied to
    broadcasting, our expectation is that the vast majority of
    broadcasters would continue to broadcast exactly as they are,
    because any digita1 to digital transitions are very different
    in kind from the analog to digital transition. And we are
    committed to addressing the kinds of issues that you are
    mentioning and I look forward to working with you on that, and
    finding a solution that helps drive our economy and frees up
    spectrum to raise money for the Treasury.
        Mr. Bonner. I look forward to it as well. I note in your
    discussion, in your written testimony, about the FCC's
    investment in cyber-security and homeland security efforts.
    Given that we already have a Department of Homeland Security
    and the Cyber Command within the Department of Defense, not to
    mention cyber security spending in other federal agencies, like
    Treasury, Health and Human Services, Agriculture, and
    Transportation, to name just a few, which is estimated to reach
    $55 billion a year by 2015. Do you think it is fair to say the
    FCC's entrance into this field is an example of mission creep?
        Mr. Genachowski. I do not, sir. With respect to public
    safety spectrum, the FCC has had responsibilities in these
    areas for years and years, and whether it was with respect to
    the older phones that firefighters and police officers used
    around the country or our efforts to upgrade that to a mobile
    broadband public safety network, and also move to next
    generation 911. These are activities that the FCC has been
    recognized as having very important responsibilities for
    decades. With respect to cyber security, the FCC is the agency
    of the government that interacts with the commercial companies
    that carry internet traffic, and so it has been recognized in
    all of the inter-agency cyber security efforts that as a
    result, the FCC has an important role to play in cyber security
    and connecting with the other agencies that are focusing on
    other parts of the problem.
        So I appreciate the question, and I can understand why you
    would ask it, but there is, I think, a proper history. Just
    last night, I was at a dinner where the FCC was honored for its
    work on 9-1-1 and specifically for helping to move to next
    generation 9-1-1. As I mentioned in my statement, I think it is
    close to a crime that people today cannot text to 9-1-1. You
    cannot take a photo on your smartphone of a crime and zap it to
    9-1-1, and we are working very hard with the first responder
    community, with Congress, and with others to make progress. And
    for many years, the FCC has been involved in improving 9-1-1.
        Mr. Bonner. Well, as a quick follow-up, though, I mean, is
    there any area of jurisdiction at the FCC that you think is
    redundant with some other federal agency or department that we
    do not need? I think there is a real disconnect in Washington
    with the rest of America. It is hard for people who only visit
    this city to come to the tourist attractions or perhaps to come
    see their members of Congress. I think, sometimes, they have a
    real reason to believe that we are totally in the land of
    disbelief. When you are talking about the kind of debt that we
    have got, the kind of deficit that we have got, that is why I
    am asking about redundancy in programs when other agencies are
    doing similar things. I think it is a fair question at this
    difficult time.
        Mr. Genachowski. I agree it is a fair question, and when I
    arrived at the FCC we asked that question internally. What are
    we doing that is redundant, where can we save money?
        Mr. Bonner. And what did you find?
        Mr. Genachowski. Well, one of the things that we found was
    that we had multiple licensing systems that kind of grew up
    historically that were inconsistent, that took longer for
    employees internally to use, and that were incredibly
    frustrating to the private sector that relied on them, and we
    embarked on a mission to consolidate our licensing services. We
    also found that the rules at the FCC were such that people in
    different parts of the agency were discouraged from working
    together, across bureaus and silos, even though almost every
    issue we face involves both wired and wireless. We removed
    those barriers, and I think we have become a more efficient
    organization in part because of it. I mentioned we have
    identified other areas of cost-saving, and I do not think you
    were in the room at the time, but I come from ten years in the
    private sector. I hired a managing director who came from 14
    years in the private sector managing budgets, managing P&L, and
    while I am sure there is always room for improvement, we have
    been focused on bringing private sector best practices into
    budgeting and operations at the FCC.
        Mr. Bonner. I think we are going to get another vote
    called. Let me try to get a couple questions, and if you cannot
    answer them at this time, maybe you can get it to us on the
    record. How many employees do you have working at the FCC today
    versus 10 years ago?
        [The information follows:]

                             FTE Comparison Levels

        Mr. Bonner. How many employees do you have working at the FCC
    versus ten years ago?
        Mr. Genachowski. The requested FTE level for FY 2012 is 1,794,
    which is 198 FTEs lower than the FY 2002 level of 1,992 FTEs.

        Mr. Bonner. What is the budget request today versus ten
    years ago?
        [The information follows:]

                            Budget Comparison Levels

        Mr. Bonner. What is the budget request today versus ten years ago?
        Mr. Genachowski. The requested budget for FY 2012 is $354.2M which
    is $109.1M above the FY 2002 level of $245.1M.

        Mr. Bonner. A lot of times when we are budgeting out for 50
    years or 100 years, that is beyond most people's ability to
    comprehend. So let us look backward and see where you are today
    in terms of number of employees, and budgets. Now I do not want
    you to actually hire anyone new to do this, but assuming you
    have got someone in your capable staff who could do it, I would
    love to know how many words of new regulation have come under
    your leadership with FCC during the last two years and have
    been published in the federal register.
        [The information follows:]

        [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Mr. Bonner. You talked about small business and you
    mentioned that you have a private sector background. I live in
    Alabama. I do not live up here. I just work up here. Most of
    the small businesses that I have talked to, whether they are in
    the industry or not, are begging for relief from regulation. We
    need regulation. I am not saying you do not need it, but I am
    just telling you it would be interesting to know how many new
    words of burden, regulation, expense, that this government is
    imposing on them and their ability to compete in a global
    marketplace. And again, if you can answer those now, that is
    great. If not, we would love them for the record.
        Mr. Genachowski. I am not sure I can tell you the words,
    but we will get back to you on that. And we will also send you
    the list of regulations that we have found that we can repeal
    because they did not serve a purpose anymore. Early in my
    tenure, we set up FCC reform task force to do a sweep and
    identify unnecessary regulations and repeal them. I believe
    they identified 20. And we are in the process of doing that.
    And so I would be happy to put that together for you. In terms
    of the number of FTE's, I think we are at a lower number of
    FTE's now than we were 10 years ago and approximately 1,775
    now, and I cannot remember exactly the number 10 years ago, but
    we will get that for you. And you had a third question?
        Mr. Bonner. Just how the budget has grown or shrunk over
    the last 10 years.
        Mr. Genachowski. We will get that for you. I do not
    remember what the budget level was ten years ago, but we would
    be happy to get that for you.
        Mr. Bonner. Great. Thank you. Madam Chair.
        Mrs. Emerson. Okay. Let's just go ahead and vote, because
    we do not have enough time to really go through another
    question. We will go vote and take a 10-minute break and we
    should be back hopefully by five past two. Thanks.
        [Recess.]
        Mrs. Emerson. Okay. We are going to start again. I am going
    to allow Mr. Serrano to ask his next round of questions since
    Mr. Yoder is not quite ready yet.
        Mr. Serrano. Rather than go through all the prefacing
    comments on this, this whole thing with the FCC granting
    conditional approval for a company called LightSquared to build
    a terrestrial wireless broadband, now, the concern is that what
    they are building will interfere with GPS. And GPS, I do not
    know how long ago, to follow up a bit on Mr. Diaz-Balart's line
    of questioning today, GPS stopped being a fun, innovative thing
    and became very much a necessity for so many people, and so
    many law enforcement agencies, and so on.
        So the concern is that this will interfere with that
    service. And that is a big no-no. What can you tell us about
    that, and what precautions are you taking to make sure that
    that does not happen? And what is it exactly that they are
    going to do?
        Mr. Genachowski. Protecting safety, making sure that there
    is no interference with GPS, that harms safety is very central
    to what we are doing. Let me take a step back. An important
    part of our job is finding ways to unleash spectrum, make more
    spectrum available for new uses, for innovation, for job
    creation, for investment. And, in this case, this particular
    company has a proposal to build an innovative network, to
    invest literally billions of dollars, create hundreds of
    thousands of jobs, and provide mobile broadband services.
        Now as it is very common in the history of the FCC that
    when a new service proposes to launch, that interference issues
    are raised with existing services. And this is something the
    FCC has done for years. It has fantastic engineers that work
    with the engineers from the various parties, and others, to
    resolve interference disputes. There is an interference dispute
    right now about whether this new service would interfere with
    GPS.
        Mr. Serrano. And this new service would be used for what?
        Mr. Genachowski. It is called LightSquared, they are
    providing mobile broadband services for consumers and
    businesses.
        Mr. Serrano. So no different than what we have now, just
    more?
        Mr. Genachowski. Exactly. This is what we were talking
    about before, we are running out of spectrum, and in this case,
    it is proposing to use some spectrum and it is not worth
    getting into the details; but the short answer is, yes, it
    would be more and we need more.
        The GPS industry has raised interference issues, as I said.
    We are running the kind of process that we have run many times
    in the past to study the facts, to study the engineering, and
    to make sure that anything that we ultimately approve addresses
    interference issues that were raised. And obviously we are not
    going to do anything that would create safety issues with GPS.
        Mr. Serrano. Just one last question. Existing broadband
    services do not seem to be a problem for GPS. Why do the
    supporters of GPS services' technology feel that this
    particular one would be a problem? What is different about this
    delivery of service that is different from what we have now?
        Mr. Genachowski. It is a good question. Part of the answer
    is where on the spectrum chart this new service would be
    provided. And, again, this is something that is very common at
    the FCC, when any band of spectrum that is being used for a
    particular service in a way that it has not before, it raises
    new issues.
        And there are people who have been doing this at the FCC
    for decades: resolving interference disputes between parties.
    They are very, very good, they have tremendous credibility and
    respect, and they have earned it, because their track record
    over the years of making engineering-based, fact-based
    determinations about interference disputes is exactly what you
    would want the FCC to do to make sure that we are getting the
    balance right between driving investment, driving job creation,
    driving innovation and new services, while also protecting
    against interference to existing services, particularly
    interference that may cause harm and threaten safety, which we
    will not allow.
        Mr. Serrano. Okay. I have one more question. Ten years and
    we are still talking, in many ways, and rightfully so, about 9/
    11. But one of the issues of 9/11 and that whole period of time
    was the inability of first responders to communicate with each
    other. And a lot has been said, a lot has been done. And you
    folks proposed some dramatic changes which some folks are
    opposing. Where is that whole issue? How much different are we
    now, heaven forbid we should ever be in that situation again?
        I was, unlike most members of Congress, I was in New York
    on 9/11, and in fact I always comment on the fact that we spoke
    about everything the terrorists did on that day. And one of the
    things that was never really written about is that there was an
    election going on which was suspended, or postponed, at 11 a.m.
    in the morning. So not only did they bring all that harm, and
    they attacked symbols of who we are, Wall Street, and the
    Pentagon, and they were trying to attack the legislative body,
    or the White House. But also the fact that they interfered with
    the electoral process, if you want to carry it that far. It was
    a wide effect.
        And I remember that, at that moment, and for quite a while,
    there was no way to communicate by phone or anything else. If
    we were having that problem and we know first responders were
    having similar, or even more difficult, problems? Where are we
    now, 10 years later?
        Mr. Genachowski. Not where we should be. The most important
    thing that we recommended on this was we absolutely need to get
    a mobile broadband public safety network built for our first
    responders that would be interoperable. And it is an
    unfortunate reality, even in these times of a budget crunch; it
    will cost money to do this. And as a society, we have to find
    an answer because the private sector will not, on its own,
    build a mobile broadband public safety network for police
    officers and firefighters.
        One of the things that I think is a positive in the
    voluntary incentive auction idea that many are looking at, is
    that it would generate, the estimates are between $20 and $30
    billion in new revenue for the Treasury, which would be more
    than enough to finally take care of funding a mobile broadband
    public safety network.
        The other important issue is moving forward on standards
    for interoperability, so that when the network is built it is
    not just built, but different services in different regions can
    talk to each other. We are moving forward on making sure that
    we have interoperability standards. In fact, over the last
    year, we granted some waivers that allowed first responders in
    a handful of communities to move forward, where they have the
    resources, to start building. We have conditioned that on
    having interoperability standards and our Public Safety and
    Homeland Security Bureau is working hard on that process. We
    have a proceeding now to develop those standards.
        Mr. Serrano. Thank you so much. Thank you.
        Mrs. Emerson. Thank you, Mr. Serrano. Mr. Yoder.
        Mr. Yoder. Thank you, Madam Chair. Sir, I appreciate you
    coming today and giving testimony, and certainly there are a
    lot of issues. I did want to follow up on the questions that
    Mr. Serrano was asking, particularly related to LightSquared's
    use of the GPS spectrum. I noted your answers, and I also noted
    some of the conversation that is out there right now. Clearly
    there are hundreds of millions of GPS users in this country. It
    is a very significant usage of consumable goods. A lot of
    people rely on these. And all these devices were deployed in
    reliance on the FCC's rules prohibiting a terrestrial-only
    network in the band adjacent to GPS. That is where you now have
    authorized LightSquared to deploy such a network. Do you agree
    with that statement, first of all?
        Mr. Genachowski. Generally, yes. But in addition to that,
    the companies that provide GPS also have to comply with certain
    standards with respect to their emissions and their ability to
    hear signals.
        Mr. Yoder. But there was a reliance on the fact that it
    would not be a terrestrial-only network in a band adjacent to
    GPS?
        Mr. Genachowski. I do not think that is right.
        Mr. Yoder. Okay, that is what I want to know. Do you agree
    with that statement?
        Mr. Genachowski. No. I do not think that is right. There
    are interference issues here that have to be resolved, but I do
    not think that reliance statement is correct.
        [The information follows:]

                          LightSquared Reliance Issue

        Mr. Genachowski: To clarify for the record, when the International
    Bureau released the MSV ATC Order in 2004, there was no promise,
    implied or otherwise that would have provided interested parties with
    this sort of assurance, especially since the Commission routinely
    provides licensees with the flexibility to deploy technologies they
    believe best serve market demand. Also, LightSquared does not propose
    to provide terrestrial-only service.

        Mr. Yoder. Okay. I want to talk a little bit about the
    process that you are using in relation to this issue, and so
    the committee can understand the decision making process that
    you go through, the standards you are going to use. And I know
    that you made clear in the comments to Mr. Serrano, that
    certainly you would not want to jeopardize GPS. That is not a
    goal. You would want to make sure that GPS has its full range
    of functionality. But the Commander of the U.S. Space Command
    testified to the House Armed Services Committee about two weeks
    ago, you may have seen this, that, ``We believe from what we
    have seen thus far, that virtually every GPS receiver out there
    would be affected''. This is a serious claim, clearly. Why did
    you go forward with even a conditional grant of LightSquared's
    application given the gravity of these concerns from the
    Department of Defense, which runs the national GPS system?
        Mr. Genachowski. Well, to make a couple of things clear;
    the waiver that was granted was conditioned on resolution of
    the GPS interference issues, and there is also information that
    suggests that the interference issues can be resolved. Why
    bother at all? The answer is massive private investment, jobs,
    and new innovative services. So the company that is pursuing
    this venture expects to invest billions of dollars, create
    hundreds of thousands of new jobs, literally, and provide new
    services in the marketplace. I think it would have been
    completely unacceptable to say, Well, we are not going to look
    at it. We are not even going to study the interference issues.
        And so what we decided to do is to say look, We understand
    the plan for providing these services. We understand how it
    could lead to massive private investment and job creation. We
    are going to treat this as we have many other interference
    disputes that the FCC has had for years. Like some of the other
    issues we face, you get people with very strong feelings on
    both sides that are absolutely sure that they are right. And I
    am proud of the career staff at the FCC that has the very hard
    job of getting into the engineering, doing the field tests,
    doing the work, and on behalf of the American people, getting
    the balance right to protect public safety and make sure that
    Spectrum is used to drive private investment and create jobs.
        Mr. Yoder. And so the idea is you give a conditional grant
    so you can see what the effect will be. Is that correct?
        Mr. Genachowski. Yes. It allows us to move to the next
    stage. It allows the company to move to the next stage. It
    allows us to move to the next stage, which we have, of running
    a process to resolve the interference issues.
        Mr. Yoder. Okay. And so, what I understand is that the
    Department of Defense, Homeland Security, Transportation,
    Interior, have each individually raised concerns about the
    proposal. And clearly, the comments from the U.S. Space Command
    to the House Armed Services Committee that they believe, from
    what they have seen so far, virtually every GPS receiver out
    there would be affected. From what you have seen so far, are
    they wrong? And if they are wrong, how so? And if they are
    correct, what are we doing to fix this problem?
        Mr. Genachowski. My experience in this area, having watched
    some of these interference disputes work themselves out over
    time, is to create a space where the expert engineers at the
    FCC can run a fact-based process with participation from
    everyone who has a concern, pro or negative, and to let that
    process try to produce a result. So I would not want to pre-
    judge it. I think that would be wrong. We are prepared to do
    whatever is right to make sure we get the balance right to
    drive investment, jobs, and our economy, and absolutely make
    sure that we are protecting public safety.
        Mr. Yoder. And so what is the standard you use in making
    that decision? Is it a clear and convincing standard? Do you
    get to a point where the U.S. Space Command, Department of
    Defense, Homeland Security, other GPS providers are saying,
    Please do not do this, and you say, After receiving all the
    input, I think it is okay. And then we have an ongoing dispute,
    and there are clearly challenges then on the investment side
    for those who are producing the GPS products.
        [The information follows:]

                        LightSquared Standard of Review

        Mr. Genachowski. To clarify for the record, the standard we would
    normally apply to this situation is whether the new service would
    create ``harmful interference'' which is defined in Section 2.1 of the
    rules as ``Interference which endangers the functioning of a
    radionavigation service or of other safety services or seriously
    degrades, obstructs, or rapidly interrupts a radiocommunication service
    operating in accordance with the ITURadio Regulations.''

        Mr. Genachowski. Well, I hope we will not get to that
    point. We are running a process that is inviting the inclusion
    of all the different agencies and private sector players that
    have an interest. We are asking only one thing of everyone,
    which is, Let's work together to look at the evidence and see
    if we cannot find a common-sense resolution.
        So I am hopeful that that process will work well. We have
    had conversations with people in the GPS industry who agree
    that a process is necessary, and who I understand are
    supportive of the kind of process that we are running. And the
    evidence will determine the outcome.
        Mr. Yoder. And this process is open, everyone has an
    opportunity to have input, it is open to the public. Do we have
    access to everything that is going on along this process?
        Mr. Genachowski. The process is consistent with the kinds
    of processes the FCC has run in the past. I would be happy to
    get you more detail on exactly how this process works.
        Mr. Yoder. Well, I know that the NTIA provided a letter to
    the FCC describing the concerns that Federal users have
    regarding LightSquared's proposal. Are there other
    communications or meetings that have occurred between NTIA and
    the FCC?
        Mr. Genachowski. Well, the NTIA and the FCC meet frequently
    to discuss this. I am sure there have been some discussions in
    getting ready for running a process on addressing the
    interference issues.
        Mr. Yoder. Well, I just hope to impress upon you today that
    there are a tremendous amount of concerns about what is
    happening here. And some of those concerns are being expressed
    to members of Congress, who want to make sure that you aware
    that these concerns are out there, and that this is a very
    high-stakes situation, where a lot of investment has occurred
    in GPS, and hundreds of millions of devices, millions of users
    in the United States. And so if there are these concerns out
    there from many of these folks, who we take very credibly,
    including many of our Departments and agencies, we want to make
    sure that you, sir, understand the gravity of that. And I want
    to make sure I do my part impressing upon you that the concerns
    are out there.
        Mr. Genachowski. Well, you absolutely have, and I
    appreciate that. And I look forward to working together. I know
    we all share an interest both in making sure that there are no
    safety risks with respect to GPS, and also making sure that we
    are driving new businesses, that government is getting out of
    the way of new businesses that have the opportunity to lead to
    billions of dollars in private investment and hundreds of
    thousands of new jobs.
        Mr. Yoder. Well those are great goals, and let's hope it
    works out that way.
        Mr. Genachowski. Terrific. I look forward to working with
    you.
        Mr. Yoder. I yield back to Madam Chair.
        Mrs. Emerson. Thank you, Mr. Yoder. You mentioned earlier,
    you raised the issue of 9-1-1 texting. Why can we not text 9-1-
    1?
        Mr. Genachowski. Because as a very broadly general matter,
    our 9-1-1 call centers are not set up to receive the texts. And
    I visited a couple of 9-1-1 call centers. They are incredible
    operations, I mean there are heroes who work at these places
    every day. And with respect to landline 9-1-1 calls, it works
    well. The call comes in, it goes up on the computer, they know
    exactly where you are, and within seconds they can dispatch
    someone to where you are. With mobile calls it does not work
    quite as well, though progress has been made. And I hope you
    will forgive a little bit of a digression, but I think this
    issue is very important; about more than half, I think about 65
    percent of 9-1-1 calls now come from mobile devices. But the
    location accuracy that the 9-1-1 dispatchers get from mobile is
    not as good. And in some cases it is quite bad. So in cities
    with tall buildings, or in very rural areas, the information
    may be of very little use to the dispatcher. So one line of our
    work involves working with first responders and industry to try
    to improve the location accuracy of mobile 9-1-1. And we are
    making progress on that, there is more to do. With respect to
    what we call next generation technologies, like texting, like
    sending photos, like sending videos, as a general rule the call
    centers are just not set up for it at all. The system will not
    receive a text. Many of them are non-IP based systems. So that
    is the reason. They are just not set up for it. They want to
    be. There are funding issues. I hate to say it, but there are.
    But I do think we need to work together on a bi-partisan basis
    to find a way, also with the states and local governments,
    because that is where a lot of the funding comes from. But as I
    said, two or three years ago, if you had said to someone, You
    cannot text 9-1-1, they would have said, Who cares? But
    texting, sending videos, have become so quickly so central to
    part of our daily activities, that it is no longer an
    acceptable answer to say, We do not have a plan for this. Even
    at the Virginia Tech tragedy a couple of years ago, there were
    students who did not know any better and tried to text 9-1-1.
    They did not go anywhere, there was no one to get those texts.
        Mrs. Emerson. So what is the solution?
        Mr. Genachowski. Well, some of it involves funding, as I
    said, and one of the things that we are trying to be helpful
    with is, as a resource to Congress and others, working with the
    industry and first responders, to price out what it would cost.
    A second issue is having standards. This is an area where a
    smart standard process can potentially accelerate the move of a
    lot of local 9-1-1 centers to an IP-based system and also lower
    the costs. Because the more that this equipment is up to scale,
    the faster it will be rolled out and the less it will cost. So
    we are working on that; we have a terrific person leading this
    up, Admiral Jamie Barnett who runs our Public Safety and
    Homeland Security Bureau. I look forward to following up with
    you on this because I think it is a very important issue.
        Mrs. Emerson. And I would appreciate that; I would like to
    very, very much.
        [The information follows:]

                           E911 Texting Capabilities

        Mr. Genachowski. With respect to your question about why Public
    Safety Answering Points--PSAPs--do not currently receive text messages,
    I wanted to clarify the two reasons for the record. First, circuit-
    switched 911 networks and selective routers use old technology that is
    designed solely to support voice telephone service and, like
    residential wired telephone service, are not configured to receive text
    messages.
        Second, the texting methods that most consumers use today were not
    developed with 911 in mind, which affects their usefulness in emergency
    situations. For example, consumers using existing texting technology
    may not be able to transmit in real time, convey location information,
    or establish reliable 2-way communications between a particular call
    taker at the PSAP and the caller.
        Since PSAPs will need to upgrade their technology to be able to
    receive texts, states and localities also will have a critical role in
    the transition to next generation 911-NG911. Stakeholders, including
    the FCC, industry and the 911 community, are working hard on potential
    solutions to make texting to 911 possible. There has already been one
    small text-to-911 trial in Black Hawk County, Iowa, and we anticipate
    that there will be additional trials in other locations later this
    year.
        As part of a Notice of Inquiry issued by the Commission on December
    21, 2010, we are seeking to gain a better understanding of how to
    bridge the gap between the capabilities of newer, IP-based networks and
    devices and today's 911 system. We also are asking for input on how to
    further PSAPs' transition to IP-based communications capabilities and
    NG911 for emergency communications. We will keep this subcommittee
    apprised of our work in this area.

        Mr. Genachowski. Can I mention one other concern that has
    been raised just to note, something that we could look at
    together? We have heard complaints from first responders that
    in some states funds that have been designated as 9-1-1 funds
    on consumers' phone bills are not getting spent for that
    purpose. And I am not saying that that is an FCC issue; I am
    relaying a concern that I have heard from first responders who
    are trying to upgrade their 9-1-1 systems.
        Mrs. Emerson. I would agree with that; I am hearing the
    same thing from mine, and it is a little more complicated than
    it seems on the surface, but nonetheless it is one issue that
    has to get solved sooner rather than later. Let me ask you a
    little bit about the Universal Service Fund and your National
    Broadband Plan. I would like to know where you are with it, why
    don't you just answer that one first?
        Mr. Genachowski. Well, we issued a National Broadband Plan
    last year that identified the opportunities of accelerating
    deployment and adoption of broadband, opportunities for our
    economy, for job creation, investment, for making progress on
    education, health IT, et cetera, and it had some big ticket
    items in there which I can discuss. One is transforming the
    Universal Service Fund, another is unleashing spectrum in the
    incentive auctions. A third is removing barriers to broadband
    adoption. A fourth is improving broadband adoption. I would say
    a couple of things. One, a year and a half ago at this time,
    very few people were talking about broadband. And it was much
    more, I think in some other countries, thought of as an
    important economic issue than it was here and I am pleased that
    more and more people are understanding the opportunities of
    broadband, and it is creating more of a desire to tackle the
    challenges.
        With respect to spectrum, the challenge grows every day.
    There is an article in the papers today about how smart phone
    sales are going to be even faster next year than people
    thought. Again, Smartphones use more than 20 times as much
    spectrum, they put 20 times more demand on spectrum than old
    feature phones. I wish we had a warehouse of spectrum just
    lying around at the FCC that we can auction off, but we do not.
    So taking seriously the incentive auction proposal, which has
    had bipartisan support, and brings market incentives to the
    allocation of spectrum; it is a tool that the FCC does not have
    that is very important and we would be happy to work with you
    on that option. Transforming the Universal Service Fund, it
    does not make sense to have a fund that supports only universal
    telephone service. It has to support broadband. We are moving
    in that direction, we are doing it together with the reform of
    Intercarrier Compensation because it is a whole complex system
    that has to be done together.
        I am proud that just last week, thanks to the work of our
    staff, all five commissioners on a unanimous basis did
    something that was unprecedented; we issued a joint blog. And
    the blog said to the community of people who are concerned
    about this, We are serious about USF reform. We are serious
    about moving forward. We are serious about doing it quickly,
    and we want all stakeholders to participate in our process in a
    way that really rolls up the sleeves and helps solve problems,
    as opposed to blocking reform. I can keep going, but I think on
    a whole series of areas, we are making very significant
    progress. There is always a lot of work to do, and the rest of
    the world is not standing still when it comes to broadband
    deployment and adoption.
        Mrs. Emerson. You know, it was interesting and perhaps kind
    of strange at the same time that the ARRA bill was passed, and
    in it you were asked to put together your National Broadband
    Plan simultaneous to lots of monies being given out through
    NTIA or RUS to build out the infrastructure. It was kind of
    putting the cart before the horse because I would have thought
    you would have a plan and then deploy various tools to make it
    work, but nonetheless.
        Mr. Genachowski. If I could reserve my right to disagree
    with that.
        Mrs. Emerson. Well, coming from a rural area, I have to
    have every single type of phone, AT&T, Verizon, Century. I need
    really every single service there is to be able to get service
    in my district, and then there are still just dead spaces.
        Mr. Genachowski. I do think that is why it made sense to
    start moving forward where we knew there was need even as we
    developed a plan to tackle some of the larger things like
    spectrum reform, like universal service. And so given a fast-
    moving globally competitive landscape, starting to make the
    first investments and taking care of the low-hanging fruit that
    everyone agreed made sense, I do appreciate your point of view,
    but I think it made sense and it will help the country make
    progress.
        Mrs. Emerson. Well, hopefully we will begin to make
    progress because I think everybody agrees, particularly in
    rural areas where we do so much telehealth and where it is
    really helpful as people want to become their own entrepreneurs
    and work for themselves. When you still have dial-up service on
    your computer that is pretty pathetic and there is no way you
    can compete or do things fast enough. One other quick question:
    there are a number of grant programs that come under the
    Universal Service Fund, and I know that regulators do not
    typically monitor grants, so how do you really ensure then that
    those funds are being used properly?
        Mr. Genachowski. Well, we do monitor. Most of them are
    distributed by an intermediary organization called USAC,
    Universal Service Administrative Company. And we do oversight
    over USAC and we have been very aggressive, and we have ramped
    up our efforts over the last year to audit what they are doing,
    to make sure that money is being spent wisely. We have found
    issues and moved to correct them, so I think oversight of every
    dollar that is being spent is incredibly important and if I
    could come back to the budget, it is one of the things that our
    IGs office helps us do. They help us do oversight on programs
    like VRS, where we saved $250 million, and they play an
    important role.
        Mrs. Emerson. So does the FCC determine the eligibility for
    those grants or does USAC determine the eligibility?
        Mr. Genachowski. We set the rules, the parameters, and they
    are the operational entity.
        Mrs. Emerson. Okay. I know Mr. Diaz-Balart has some other
    questions, and we also have simultaneously a briefing on Libya
    by the Secretary of State and others, and I know people are
    anxious to get to that. Go ahead, Mario.
        Mr. Diaz-Balart. Thank you, Madam Chairwoman. First Mr.
    Chairman, we were speaking between votes, and I appreciate your
    willingness to continue to talk and to work out some of these
    issues that are very complex, but obviously very important. So
    I want to thank you for that attitude, I really do.
        My understanding is that next week, the FCC is set to vote
    on a data roaming order. Now, this order can be seen as, in
    effect, for the FCC to over regulate the wireless industry. I
    want to make sure I understood you, because I am obviously
    concerned with--we keep talking about innovation and everything
    else, and that was done through the private sector. I just want
    to make sure that we are not over-regulating. And I also want
    to make sure that the FCC is not over-exceeding its statutory
    boundaries. Clearly if that is the case, what authority is
    being used in order to do so? I think it is pretty clear that
    Congress did not give statutory authority to impose a common
    carrier regulations like data roaming or wireless broadband
    data, et cetera, et cetera. So I just wanted to see what is
    going on next week at the FCC with this order and what are you
    looking at, and put my mind at ease, if you would.
        Mr. Genachowski. I would be happy to. About five or six
    years ago on a bipartisan basis, the FCC adopted voice roaming
    rules. And that meant that a consumer who got essentially any
    old-fashioned phone that just did voice could know that it
    would have national service. And it meant that competitors in
    the marketplace, particularly rural companies that were
    providing mobile service, would know that they could offer
    their customers a national voice service. It has worked very
    well. At the time, people attacked it as an overreach and they
    said it would deter investment, et cetera. As it played out in
    practice, it helped provide better consumer services, more
    investment, more competition, and no complaints at the FCC. The
    industry said, We are just going to get the deals done.
        So what we are looking at now as the world has changed
    along the lines that you talked about before, from old voice
    phones to data phones, is something very similar. Updating the
    rules to apply to data roaming so that a consumer, when they
    get a smart phone, can know that they will be able to roam
    anywhere, to make sure that competitive providers like rural
    carriers have the ability to offer competitive service, and we
    have heard very loudly from the rural carriers that this is a
    very big issue for them. And we are doing it in a way that we
    think will, as before, promote investment, promote competition,
    promote consumer benefits.
        On the legal authority, we are being very careful.
    Obviously it is very important that we act within our
    authority. Title III of the Communications Act provides ample
    authority to adopt rules like this. You are correct that there
    is a provision that says we cannot do common carriage, and we
    have been very careful to make sure that these common carriage
    rules, and in a whole series of ways, the rules that we have
    proposed and are discussing at the commission are not common
    carriage. They will, I hope, lead to companies in the private
    sector doing deals. We have heard many complaints from rural
    carriers and others, as the commission did before voice
    roaming, that the deals just were not getting done, and not for
    good reason.
        Mr. Diaz-Balart. I want to make sure that the FCC is not
    looking at trying to circumvent the old thing about depending
    on what your definition of ``is'' is? I want to make sure that
    the FCC is not looking at ways to circumvent the lack of
    Congressional authority. In other words, it is pretty clear
    what that is, and I just want to make sure that what you are
    not looking at doing is looking at ways to, All right, let's
    still do it but figure out how legally we can justify it.
    Because Congressional authority is pretty clear.
        Mr. Genachowski. And we have been considering the options
    here. There were some options on the table, including options
    that were requested by rural carriers, that we looked at and
    said, Those are potentially inconsistent with the statute. The
    approach that we have proposed we think is well within the
    statute.
        Mr. Diaz-Balart. Is the purpose to allow smaller companies
    to use the infrastructure of some of the larger networks that
    are already there, that they invested the private sector with
    their money? Is that what you are looking at?
        Mr. Genachowski. Well, the purpose is really the same as
    voice roaming. Roaming has become an essential feature of a
    competitive marketplace that gives consumers the option of
    something we know that they want. So essentially, this has been
    something that has been a success. It has served businesses,
    investment, and consumers well. As we move from a voice to a
    data world, replicating that in a cautious, smart way that has
    fidelity to the statute is what we have proposed, and I think
    it will have a positive effect on the marketplace.
        Mr. Diaz-Balart. So is that yes? Is the purpose, then, to
    allow some companies to use the investments of other companies,
    the infrastructure investments of others, in order to do that?
    Is that the purpose?
        Mr. Genachowski. It is not how I would characterize the
    purpose. We think that this will, as with voice roaming,
    increase overall investment. What we have heard from many rural
    carriers and other competitive carriers is that there is a lot
    of investment sitting on the sidelines, because unless they
    have a degree of confidence that they can get roaming deals
    nationally, they do not want to start investing and building
    out a network. They know they cannot offer a business where
    someone says, You mean I cannot use this phone if I am outside
    of the area? So we think that this will unleash investment. The
    experience for voice roaming is that companies much prefer to
    have their own networks than to roam on others, because it is
    over time much less expensive. Voice roaming and data roaming
    is expensive for the company that has to get it, and once they
    have a service up and running and they have the capital
    available, it is in their interest to build out their own
    networks. This was something of the theory when the voice
    roaming rules were adopted several years ago, but that theory
    has now been proven out in practice, and the voice roaming
    rules have had a very positive net effect on investment, and
    competition, and on providing better consumer services.
        Mr. Diaz-Balart. And again, I just want to make sure that I
    am understanding your answer. So you are telling me that that
    is not going to be the case, that the FCC's not looking at
    telling those who already have investment in infrastructure
    that they are going to have to allow others to use that
    infrastructure, correct? If you can just get to that specific
    part.
        Mr. Genachowski. Yes. It is not how I would put it. The
    rules that have been proposed, and I am limited in what I can
    say because we are still discussing this at the Commission, but
    you would have a framework where carriers with national
    networks would have to offer roaming agreements on commercially
    reasonable terms.
        Mr. Diaz-Balart. Who sets that commercially reasonable
    term?
        Mr. Genachowski. The private parties will set them, and I
    think as with voice roaming, we expect it to work well in the
    private sector and for the FCC not to have to be brought in.
        Mr. Diaz-Balart. And if there is no agreement between the
    two private sector or the multiple private sector parties to a
    price, then what happens? Does the FCC step in then?
        Mr. Genachowski. We expect that there will be agreements.
        Mr. Diaz-Balart. But if there is not?
        Mr. Genachowski. As with voice roaming, there is a process
    to come to the Commission, and complaints will be resolved.
        Mr. Diaz-Balart. Again, and I keep getting back to this
    because what I think I am hearing is basically that yes, that
    basically if they do not have an agreement, then you will
    basically force them to have an agreement. Correct?
        Mr. Genachowski. No. Well, what the remedies would be would
    depend on the circumstances involved. But again, I think the
    core point is that we have experience with a very successful
    program that has worked for companies throughout the ecosystem
    and consumers, and we have a very good basis of evidence to
    believe that this would work again, promote investment,
    innovation, competition, help consumers.
        Mr. Diaz-Balart. And that model is to allow those that do
    not have the infrastructure to use the infrastructure of
    others. Is that what you are doing?
        Mr. Genachowski. It is to make sure that companies that
    have national infrastructure offer roaming deals on
    commercially reasonable terms.
        Mr. Diaz-Balart. And I understand that, but if there is no
    agreement on that, does then government step in and decide what
    a commercial viable rate is?
        Mr. Genachowski. No.
        Mr. Diaz-Balart. Does the Federal government push on making
    sure? Is there a penalty if they do not reach an agreement?
        Mr. Genachowski. Well, some of these issues, we are still
    talking about, deliberating at the Commission exactly how it
    would work, and so I do not want to speak for the other
    commissioners. My own view, as with voice roaming, once there
    is the basic framework that says that companies are expected to
    do commercially reasonable deals, there will be deals. The
    companies who are seeking these deals do not want to have to
    file complaints. They do not have the capital to file
    complaints. And I think we will see a successful policy that
    promotes investment, promotes competition, promotes consumers
    in this as we have in the past, assuming the Commission adopts
    this next week.
        Mr. Diaz-Balart. All right, so that is happening next week.
    Again, I am concerned, as one who believes that free markets,
    frankly, have created a pretty good thing here in the United
    States, we have a pretty good gig going here, the wealthiest
    nation in the history of humanity; it has been because of this
    free market enterprise system that we have.
        Mr. Genachowski. Well, I agree, and the companies that are
    coming to us are companies that are trying to compete in the
    free markets. They are rural telephone companies from all over
    the country, and I would also point out that this approach has
    bipartisan support. It always has, it still does, and the
    spirit of it is to be extremely light-touch, and to promote a
    free-flowing market in which deals are getting done along the
    lines that we have planned out.
        Mr. Diaz-Balart. And I want to stay in touch with you, and
    obviously we will keep an eye on how that is moving, because
    obviously I think there are some of us that have great concerns
    about government being too heavy-handed on a lot of these
    issues. We already talked about net neutrality, and Madam
    Chairman, if I may just very briefly talk a little bit about
    this issue with LightSquared. Is that the right term?
        Mr. Genachowski. Correct.
        Mr. Diaz-Balart. And the possibility that it may affect
    GPS. Obviously if it affects GPS, I will never be able to get
    out of the Rayburn Building. So let me just put that on the
    table first. I guess there is a comment period. Is that the
    case? My understanding is that there is usually 45 days, when
    people were talking here about the waiver. I guess that it is
    because the waiver is about 45 days, right? So I think 7 days.
    Is that correct? Is that not correct?
        Mr. Genachowski. You are at a level that I do not recall.
        Mr. Diaz-Balart. Okay.
        Mr. Genachowski. I apologize.
        [The information follows:]

                          LightSquared Comment Period

        Mr. Genachowski. I appreciate the opportunity to clarify for the
    record the comment period issue related to LightSquared's conditional
    waiver and provide additional information on this matter. In November
    2010, LightSquared applied to the FCC to modify its Ancillary
    Terrestrial Component--``ATC'' authority. Its existing authority
    allowed terrestrial services to dual-mode handsets using LTE
    technology. The request was designed to permit LightSquared to offer
    wholesale terrestrial service to single-mode handsets--it neither
    requested nor was granted any alterations to its allowed transmission
    power, number of cell towers deployed, or any other changes.
        On November 19th, the International Bureau issued a Public Notice
    requesting comments, which ultimately were due on December 2, 2010,
    with replies due on December 9, 2010. On January 26, 2011 the FCC's
    International Bureau issued an Order and Authorization granting
    LightSquared conditional approval for its customers to offer
    terrestrial only devices to consumers. The waiver was granted with
    specific conditions including the formation of a working group to
    resolve the concerns raised, but more importantly noted that a final
    waiver grant was conditioned on the resolution of the interference
    issues.
        Some of the commenters in the proceeding raised the timing issue
    and claimed that they were precluded from fully participating in the
    proceeding. When the International Bureau issued its Order, the Bureau
    specifically addressed this concern and noted that the decision was
    consistent with timing for similar procedures and in accordance with
    our rules. As the Bureau noted, those entities that raised timing
    concerns also fully participated in the proceeding and filed
    substantive comments on the issues raised in the petition.

        Mr. Diaz-Balart. Here is one of the things that you heard
    today is that there clearly have been a number of federal
    agencies: DOT, DOD, DOT, NHS, NASA, FAA, NTIA, and others who
    have expressed some written concerns, I understand. And by the
    way, I commend you the way you talk about how we clearly want
    to make sure that we have investment, and that we have
    competition, and that we have innovation. So that is good. But
    you rarely get those agencies having objections. I just want to
    make sure that we are very careful that if the waivers have
    been granted; it is, to my understanding, that there are test
    results due on January 15, 2011.
        And does the waiver or whatever is happening now, has the
    FCC allowed LightSquared to build out its infrastructure prior
    to the test results of January 15?
        Mr. Genachowski. My understanding is that the
    infrastructure that they would be building out now will relate
    to the interference testing. It is interesting to put these
    issues together, because what we are being asked to do is
    interfere with the private operation of the market and deals
    that could, theoretically, be negotiated to resolve
    interference issues without government involvement. Now, that
    is not the way the process has worked and I think we are
    playing an appropriate role here, as we do in other areas, to
    make sure that there is a framework that protects against
    important issues. And we are going to be very careful in making
    sure that there is a framework that protects health and safety.
        Mr. Diaz-Balart. No, and there is no doubt. And you are
    always going to have the naysayers whenever there is new
    competition. And that is why I said a little while ago I am
    glad that you talked about that. We have got to make sure that
    we can, whenever possible, allow for innovation and
    competition. But when you are dealing with DOD and NASA; I know
    you are aware of it and I just wanted to make sure that we are
    not doing something that will jeopardize. Because that is, in
    essence, the purpose of your organization.
        Mr. Genachowski. Absolutely. Yes, sir and we take it very
    seriously.
        Mr. Diaz-Balart. Not to regulate things that are working,
    not to regulate things that are being innovative, not to
    regulate things where there is competition; i.e., Internet,
    which I, for some reason, insist you all are being very
    aggressive in regulating that part, but to make sure that there
    is no damage if that would be the case. And I am not saying
    that is the case with LightSquared. I mean, hopefully it is
    not, but I just want to make sure. I think that you and I do
    not disagree, and that there is a case for your organization. I
    think the cases that deal with those issues when they are
    legitimate concerns: to see if they are legitimate. I do not
    think that your role should be to intervene and regulate, when
    in fact, something is not broken; i.e., as you and I agreed at
    the beginning of our conversation, probably the most dramatic
    case of innovation, job creation, wealth creation, opening
    societies, that has taken place in the history of mankind: that
    is the Internet.
        I am a little concerned that for some reason you are
    emphasizing that in such a strong manner; I think you may be
    stepping a little bit too heavily there. But we will continue
    to have the conversation and we will continue to work together.
    And I appreciate the opportunity to do that with you and I look
    forward to it.
        Mr. Genachowski. Thank you.
        Mr. Diaz-Balart. Thank you, Madam Chairwoman.
        Mrs. Emerson. Thank you, Mr. Diaz-Balart. Chairman
    Genachowski, thank you so much for being here. I have some
    questions I would like to submit for the record; so does Mr.
    Serrano. And any others will also be submitted for the record.
    And if you can respond to us within 30 days, I would be very
    grateful. Thanks again for being here.
        Mr. Genachowski. Thank you.
        [The information follows:]

        [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                                               Tuesday, March 15, 2011.

                       SECURITIES AND EXCHANGE COMMISSION

                                    WITNESS

    MARY L. SCHAPIRO, CHAIRMAN, SECURITIES AND EXCHANGE COMMISSION
        Mrs. Emerson. The hearing will come to order. I would like
    to welcome our witness, Chairwoman Schapiro, and I thank you so
    much for being here today and for the testimony you will be
    giving related to the Securities and Exchange Commission. The
    SEC has a complicated mission of protecting investors,
    maintaining fair, orderly, and efficient markets, and
    facilitating capital formation, while at the same time not
    over-regulating our markets and hindering economic recovery.
        As you know, this committee is committed to reducing non-
    security discretionary spending to fiscal year 2008 levels, and
    so far we have had a strong hearing schedule and I intend to
    continue this theme of strong oversight throughout the rest of
    the year. While the SEC is funded by fees, Congressional
    oversight over your budget is an important check on agency
    activities. Since 2001 in the wake of Enron, this committee has
    increased the SEC's budget by over 160 percent. Few if any
    other agencies have received such a large increase. In fiscal
    year 2001, the SEC's budget was $423 million; today it is $1.1
    billion. The fiscal year 2012 request proposes a significant
    increase, including a 20 percent increase in staff.
        Before we decide to provide the SEC with even more
    resources, several concerns need to be addressed such as the
    SEC's internal financial reporting, leasing practices, and the
    ability to ensure investors that another Madoff or Stanford
    Ponzi scheme will be caught and brought to justice before
    investors are severely affected. Capital formation and
    investment are critical parts of our economy and we must be
    sure that this agency is protecting investors while at the same
    time not precluding investment. This committee must be vigilant
    in our oversight of agencies like the SEC that play a critical
    role in the U.S. economy. Chairman Schapiro, you have a very,
    very challenging job and we do appreciate all the hard work you
    and your staff do and look forward to your testimony. I would
    now like to recognize my friend, Ranking Member Joe Serrano.
        Mr. Serrano. Thank you. Thank you, Madam Chair. And I also
    would like to welcome you to today's hearings. You have been
    involved in reforming the internal operations of the SEC and I
    look forward to learning more about your efforts during this
    hearing about that reform. You have been given many new
    responsibilities under the recently passed Dodd-Frank Act.
    These new responsibilities are vital to protect consumers and
    shareholders and to ensure that past abuses are not repeated.
    Unfortunately, you now have to implement your many new mandates
    without the necessary resources. I look forward to discussing
    this problem with you in greater detail today.
        We are also aware of your need to increase staffing, make
    significant information technology investments so that you can
    better fulfill your extensive new responsibilities. These are
    real needs that we need to work with you on addressing in a
    timely way. We are all in agreement that we need a strong SEC
    to protect us from investment scandals and another meltdown of
    the securities markets. We cannot afford to repeat our past
    mistakes, but now need a robust and well-run SEC so that we can
    apply past lessons to future challenges. During today's
    hearings, I hope to learn more about your reform efforts at the
    SEC and about the progress you are making.
        In closing, let me just make a comment. I know that the
    Chairwoman spoke about the fact that there is a great desire to
    cut back to 2008 levels. And certainly we on this side
    understand that that is going to happen in one way or another,
    maybe not to the extent that we have seen expressed so far, but
    there will be serious cuts across the federal government. It
    would seem to me that this is a dangerous place to cut if we
    are not going to provide proper oversight. I have been in
    public office 37 years. I cannot tell you, except for once, did
    I ever hear a state or federal agency come before me and say,
    We do not need money. We have enough. That was the SEC some
    years ago before you that actually came to us and said, No, no,
    that is fine, Mr. Serrano. We do not need any money.
    Translation, We do not want any oversight. And that is what
    happened.
        And so on one hand, I understand the need to cut. On the
    other hand, I fear that this is a place not to cut. One last
    point. I realize that there are a lot of people out there who
    do not like Obamacare, and by the way, I was the first one who
    said, Let us call it Obamacare because at the end of the day,
    there will be Social Security, Medicare, and Obamacare, and the
    other side would have given him his legacy. And so I am proud
    to call it Obamacare. I understand that that is an issue. But
    there is also a move afoot not to fund Dodd-Frank. And so we
    have this law that everybody agreed had to be passed in order
    to deal with this meltdown and all the schemes and all the
    scandals, and now we are not going to fund it and that would be
    a tragedy. So I hope that in the desire to cut, we come to some
    conclusion that there are some things we need to fund and fund
    properly. And I welcome you today. And I thank you, Madam
    Chair.
        Mrs. Emerson. Thanks, Mr. Serrano. I now recognize Chairman
    Schapiro for her opening. If you would try to keep your remarks
    to about five minutes, we will have more time for questions.
    Thanks so much.
        Ms. Schapiro. Chairwoman Emerson, Ranking Member Serrano,
    thank you for the opportunity to testify in support of the
    President's fiscal year 2012 budget request for the United
    States Securities and Exchange Commission. The $1.4 billion
    that the President is requesting will allow us to adequately
    staff the agency to fulfill our core mission of protecting
    investors, expand our information technology system so we can
    realize operational efficiencies, better keep pace with
    increasingly sophisticated financial market participants, and
    carry out our new responsibilities over hedge funds,
    derivatives, and credit rating agencies.
        As you know, we have worked tirelessly to make the SEC a
    more vigilant, agile, and responsive agency over the past two
    years, and we continue moving forward on multiple fronts
    designed to enhance our effectiveness and ensure robust
    oversight of the financial markets.
        In addition, we have embarked on a vigorous rule-making
    agenda, addressing critical issues including equity market
    structure, money market fund resiliency, asset-backed
    securities, consolidated audit trail, and municipal securities
    disclosure. I believe we have made a great number of necessary
    changes and accomplished a great deal, but this year we find
    ourselves at a critical juncture. That is because Congress has
    challenged us not only to continue our reform efforts and to
    carry out our core responsibilities, but also to fulfill the
    significant new responsibilities under the Dodd-Frank Act.
        As you know, separate and apart from that legislation, the
    SEC is responsible for essential financial market activities
    such as pursuing securities fraud, reviewing public company
    disclosures, inspecting the activities of investment advisers
    and investment companies and broker-dealers, and ensuring fair
    and efficient markets. And because of the new legislation we
    are taking on considerable new responsibilities. For oversight
    of the over-the-counter derivatives market and hedge fund
    advisers, registration of municipal advisers and security-based
    swap market participants; enhanced supervision of credit rating
    agencies, heightened regulation of asset-backed securities, and
    the creation of a new whistleblower program.
        Over the past decade, the SEC has faced significant
    challenges maintaining staffing levels sufficient to carry out
    its existing mission. For instance, from 2005 to 2007 the SEC
    experienced three years of frozen or reduced budgets forcing a
    10 percent reduction in the agency's staff. Similarly the
    agency's investment in new or enhanced IT systems declined
    approximately 50 percent between 2005 and 2009.
        At the same time, the size and complexity of the securities
    markets were growing at a rapid pace. Indeed, during the past
    decade, trading volume more than doubled, listed equity market
    volume alone now averages approximately 8.5 billion shares a
    day. The number of investment advisers grew by 50 percent and
    the assets they managed increased to $38 trillion. Today the
    SEC has responsibility for approximately 35,000 entities,
    including direct oversight of more than 11,000 investment
    advisers, 7,000 mutual funds, and 5,000 broker-dealers with
    more than 160,000 branch offices.
        We also review the disclosures and financial statements of
    approximately 10,000 reporting companies. And we oversee
    transfer agents, national securities exchanges, clearing
    agencies, and credit rating agencies. Indeed, we oversee some
    financial firms that regularly spend many times more just on
    their technology operations than the SEC's entire budget.
        A budget of $1.4 billion would allow us to hire the experts
    and acquire the technology we need to effectively carry out our
    core responsibilities and to begin implementation of Dodd-
    Frank.
        Of the 2012 requested amount, we estimated that $123
    million will be allocated to begin implementing the provisions
    of the new law. This funding request also will support
    information technology investments of $78 million, including
    vital new technology initiatives ranging from data management
    and integration, to internal accounting and financial
    reporting. It will permit the agency to develop risk-analysis
    tools to help us triage and analyze tips, complaints, and
    referrals. And it will permit us to complete a digital
    forensics lab that enforcement staff will use to recreate data
    of computer hard drives and cell phones capturing evidence of
    sophisticated frauds.
        Finally, it is important to note that the SEC's fiscal year
    2012 funding request will be fully offset by matching
    collections of fees on securities transactions. Beginning with
    fiscal year 2012, the SEC is required to adjust fee rates so
    the amount collected will match the total amount appropriated
    for the agency by Congress. Because of this mechanism, SEC
    funding will be deficit neutral.
        I thank the subcommittee for your support and I look
    forward to working with you to improve the agency's performance
    of its core mission, to implement our new responsibilities, and
    to continue protecting investors. And, I am, of course, happy
    to answer any questions.
        [The statement of Ms. Schapiro follows:]

        [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Mrs. Emerson. Thank you so much Chairman Schapiro. I am
    going to try to keep my questions to five minutes just because
    we seem to have a lot of folks here today.
        Our party is really trying to get a grip on spending and is
    very committed to reducing spending. While the SEC's
    appropriation is offset by collections, we still need to look
    at all agencies in our efforts to reduce funding for
    ineffective programs and the like, no matter what their funding
    source is.
        So could you explain to all of us on the subcommittee here,
    number one, how would a reduction of the SEC's appropriation to
    fiscal year 2008 levels affect the SEC? Do you believe that tax
    payer dollars are effectively being spent at the SEC? And what
    recommendations can you offer for more efficient and effective
    use of tax payer funds within your organization?
        Ms. Schapiro. Sure. With respect to returning to 2008
    levels, that year we had a $906 million appropriation. So it is
    about a $241 million funding gap. The way we would go about
    that would be to take the maximum non-compensation cuts that we
    can, including travel, expert witnesses, and information
    technology. Although, I have to say that I am not really in
    favor of cutting information technology to the bone. I think it
    is really critical for us to be successful in what we do. But
    then it would require that we likely have significant furlough
    or RIFS, or potentially office closings.
        The way we view it is after accounting for our normal
    attrition, going back to 2008 levels in 2012, assuming we do
    not go back this year, which would have, somewhat, more drastic
    consequences. About 740 FTE would have to be reduced. So in
    terms of a RIF, that would be something like a 1,000 positions.
    And if it were to be done through furloughs something like 50
    days for the entire agency to be furloughed. It would have a
    dramatic impact on our ability to pursue our enforcement cases,
    to continue even our internal reform efforts, but also to
    survey the markets during this particularly volatile time,
    given our very complex market structure.
        We would reduce even further the number of examinations
    that we are doing of regulated entities now. We are only
    examining nine percent of the investment advisers; I would
    expect to see that cut very dramatically.
        So it would have serious consequences, I believe, for our
    core programs, putting aside Dodd-Frank, for which of course,
    we would have virtually nothing for the implementation of.
        Mrs. Emerson. So what can you recommend? I know that you
    are doing your best to put efficiencies into practice. Are
    there other measures that you can take? Forget about the money
    piece of it, but are there other measures you can take with the
    budget that you have today to get done all of the
    responsibilities that you have been entrusted with.
        Ms. Schapiro. There are things. We can go through an
    initiative, and in fact we will because it is part of the
    Boston Consulting Group report that was just issued last week,
    to rethink our priorities and, perhaps, reprioritize in some
    areas. But we are already making some hard choices. We would be
    making very hard choices. And we would be stopping doing things
    I think are really critical to investor protection and their
    confidence in the integrity of our market. So if we have
    investment advisers with $38 trillion of assets under
    management and we are only inspecting nine percent of them,
    know we would have many fewer inspected and we would have
    significantly more assets that are at risk.
        But we can reprioritize in some areas; some things we
    cannot. Congress has decreed that we do certain things, and of
    course, we must try to do those. But even within
    reprioritization, we would be leaving some very, very big gaps
    in the regulation of the financial markets at a time when, I
    think, investors really question the integrity of financial
    intermediaries and even the integrity of our market structure
    after events like May 6.
        We can also continue to try to leverage more. One of my
    themes since I came on board two years ago has been to try to
    leverage private sector efforts. For example, in order to
    verify that the assets that an investment adviser says that
    they have in custody are, in fact there, we did a rule that
    says that investment advisers who custody with an affiliated
    broker-dealer have to get a surprise audit by a registered
    accounting firm. And that is a way for us to leverage third-
    parties to try to do more and take a little bit off our
    shoulders. The whistle-blower program: it is about leveraging
    third-parties to bring us high-value information so that we may
    be able to bring securities fraud cases and stop ongoing
    frauds.
        Mrs. Emerson. You mentioned gaps. What gaps do you expect
    would not be filled?
        Ms. Schapiro. Well I think if we were to go back to 2008
    levels and potentially lose 1,000 positions from our staff of
    3,800, we would have to give up significant examination
    responsibilities. Our two largest divisions are examination and
    enforcement; between them about 2,000 people. We cannot bring
    all the cases now that are out there. But we are bringing about
    700 cases a year; that would be significantly reduced. Our
    ability to examine broker-dealers, credit rating agencies,
    investment advisers, mutual funds, where the vast majority of
    Americans have their personal savings. Our ability to monitor
    the exchanges and keep up with new phenomena, like high-
    frequency trading, would be severely impacted.
        Mrs. Emerson. Thank you. Mr. Serrano.
        Mr. Serrano. Thank you, Madam Chair. I will also try to
    keep it to as close to five minutes as possible, because we do
    have a lot of folks here that should participate. Again, Ms.
    Schapiro, the big issue here, to me, is whether or not Congress
    will fund Dodd-Frank. So, my question to you is, assuming for a
    second that some folks get their way and we do not, we cripple
    the effects of Dodd-Frank. Is the law still strong enough to
    take effect, to keep us from not falling into the same
    situation we fell into last time? In this country, we have a
    unique way of having some folks either rewrite history or
    forget. It will not be long, I assure you, before people will
    forget what caused this mess a few years ago. And so, no one
    will be asking any questions. If we cripple Dodd-Frank, if we
    do not fund it, is the law on the books strong enough to have
    an impact, or will we run the risk again of not supervising,
    not analyzing, and therefore having the same kinds of schemes
    and situations again.
        Ms. Schapiro. Under our existing capability, we will get
    lots of the rules written for Dodd-Frank. We will not make the
    deadlines, for sure, on many of them. But for over-the-counter
    derivatives, for example, which is the largest area of concern,
    we will get the rules written. But I really believe and I think
    we can look back on history and see evidence of this, an
    inability to inspect for compliance with the rules and to
    enforce the rules, ultimately means that no matter how strong
    the law is, no matter how strong the rules are, we will have
    non-compliance, because there is no penalty for non-compliance.
    Compliance has costs associated with it. Some firms will
    continue to do a good job and be compliant and I think some
    clearly will not, if there is no mechanism for enforcing
    compliance.
        When we look at programs like the Consolidated Supervised
    Entities Program that was started by the agency in the mid-
    2000s and disbanded by my predecessor, which was a voluntary
    program for regulation of the largest investment banks. One of
    the flaws in it, and there were many, was that it was a
    voluntary program. It was not really a good means for the SEC
    to enforce compliance, with the requirements of that program.
    As we know now, all of those investment banks are either gone
    or they have been converted to bank holding companies under
    supervision of the Federal Reserve. So, I think history tells
    us that it is important that we have the capability to follow
    up on compliance and enforcement.
        Mr. Serrano. What is really interesting about this, and
    this is a total personal statement, is that we do have in this
    country right now two groups who are disagreeing with each
    other on cuts and how to handle these cuts. But interestingly
    enough, from what I have seen, on the side of those who want
    cutting, their constituents do not want another meltdown on
    Wall Street. And on the side of those who may cut with caution,
    also do not want a meltdown. So, if there is one issue that
    most groups agree on, it is that we cannot have that kind of
    lack of supervision again and lack of oversight.
        So let me just ask you one last question. A lot is said
    about bringing the levels down, back to 2008. But I think we
    need to know, that from 2005 to 2007 frozen or reduced budgets
    cut a number of employees and the SEC is just now approaching
    the levels for 2005. Given all that has happened between 2005
    and today in the financial world, how did a reduced workforce
    affect the SEC over the past several years? I am talking now
    about that period when we were reducing rather than increasing.
        Ms. Schapiro. Of course, I was not at the agency at that
    time, but I think that is when you saw the agency go from
    examining, for example, with respect to investment advisers, a
    significant portion of the population, down to very low
    numbers, in the single digits of the investment adviser
    population. We saw dramatic cutbacks in technology spending,
    which I think has been one of the things that has most
    surprised me in the time that I have been at the agency. I was
    at the agency from 1988-1994, under President Reagan and then
    President Bush, and served as a commissioner. When I came back,
    in 2009, I was really shocked to see that the quality of the
    technology had hardly improved in that period of time. I think,
    given the size of our markets, the complexity and their global
    reach, the agency being unable to do a lot of its work through
    the use of technology and analytics is very crippling and
    leaves us in a position to not be able to do the kind of job
    that the American people have a right to expect from us. So, I
    would say during that period, examination resources were
    particularly reduced and the capability to keep up with these
    very complex financial institutions was definitely hurt.
        Mr. Serrano. Thank you.
        Mrs. Emerson. Mr. Diaz-Balart.
        Mr. Diaz-Balart. Thank you Madam Chairwoman. How are you
    doing? The SEC's Proposal for Municipal Advisors appears to
    cast a really wide net as to who has to register. In addition
    to the appointed members of [inaudible] boards, et cetera. It
    looks the SEC believes that the requirement applies to
    traditional bank products, including deposits and loans. So if
    all those bank employees and appointed officials have to
    register, I am not sure how the SEC expects to monitor and
    examine all those activities and how it would not distract from
    your other critical mandates.
        Two questions on that, do you really think it is the best
    use of Commission resources to try to regulate bank activities
    that are already regulated by the bank regulators who are more
    familiar with those banks, and their activities, and how they
    do business, number one. And number two is, would not it just
    lead to banks being subjected to yet another layer, another set
    of regulators with the SEC imposing a regulatory scheme, a
    regime that is completely different than the one they are
    already subjected to under banking regulations already in
    existence?
        Ms. Schapiro. Congressman, let me agree with you that we do
    not have the luxury or the resources or the desire to duplicate
    what other regulators are doing. And that I think also goes
    back to the leverage point. Where can we rely on our fellow
    regulators to pick up the slack? I will say on the muni adviser
    rule that we have gotten lots of comment, and the rule proposal
    is out for comment right now, and that we have cast the net in
    defining municipal adviser a little bit broadly. The statutory
    language is quite broad, but we are taking very seriously the
    comment letters, particularly with respect to the difference
    between appointed members of a public pension fund or a
    municipal hospital versus elected members and employees, and
    why was there a distinction made? And I appreciate that issue
    very much, and I think more was read into what we said than we
    intended in that regard, but we are looking very carefully at
    whether we may have cast the net too widely and taking the
    comments very, very seriously.
        Mr. Diaz-Balart. I appreciate that, and I am glad to hear
    that you are still looking at that because I think it does lead
    to a lot of concerns.
        Ms. Schapiro. Oh, absolutely, hundreds of comment letters
    yes, and from real people with real concerns because they
    volunteer their time on a school board.
        Mr. Diaz-Balart. Well, it is also--well, it might even
    hinder your ability to do what you have to do, your core
    mission. So, anyways, I am glad you are looking at that. The
    500 shareholder registration threshold, which I guess I just
    learned after a little bit of research, I guess under 1934 act
    has not been updated since the 1960s and for obviously a
    substantial number of community banks, it is either a restraint
    or it really hurts their ability to loan. And it is tough on
    them for raising capital, et cetera. Either way, it acts as a
    restriction on lending and I think particularly for community
    banks, in particular it could hurt the economic recovery, so
    when does the SEC expect to act to raise the threshold and will
    the SEC also act to raise a level of shareholders at which
    registered community banks can actually deregister?
        Ms. Schapiro. The second issue I would like to get back to
    you on, I do not know the answer. We have been looking at the
    500 shareholder limit because it has obviously become very
    current in the last couple of months with the increasing
    trading activity of unregistered shares and it has been brought
    very much to light. I have asked the staff to come back to me
    with a recommendation with respect to the 500 shareholder
    limit.
        You are right it has been in law since the 1960s, the goal
    was, of course, to make sure that when a company had a certain
    number shareholders and a certain amount of following, it was
    providing public disclosure and information for all of those
    shareholders about the finances of the company so investors
    could make reasonable, well-informed decisions. It may be that
    this is one of those areas where it is due for our looking at
    it again. It is in the statute. Although how we interpret the
    500 shareholder limit is in our rules so we have some
    flexibility with respect to that and we are looking at that. I
    would be happy to come back to you as we get closer.
        Mr. Diaz-Balart. Please. And if I may Madam Chairwoman, one
    last question, and you have heard this one before. The issue of
    the Stanford Ponzi Scheme, there are a lot of victims, and many
    in Florida, South Florida, that are eagerly awaiting an SEC
    decision on their SIPC eligibility so that they can potentially
    recoup some of their lost funds. And as you know in Florida
    where we have a lot of retirees it has been a huge issue. So,
    would you make the 16-month-old request for that determination
    a priority?
        Ms. Schapiro. Congressman it is a priority. We have been
    working with the Stanford Victim's Group and in fact, have not
    made a final decision because they asked us to keep the record
    open to provide us with additional information. I understand
    that late in January of this year we received significant new
    information from them, we are reviewing it right now and we
    will make it a priority.
        Mr. Diaz-Balart. So you will be taking into account the
    recently released Stanford Group Forensic Accounting Reports
    which show that Stanford funds were stolen and not used to
    purchase securities. So you will have that?
        Ms. Schapiro. We will take everything into account and
    speaking personally, I would love to find a way for this to
    work out well for the victims. But the law is our constraint
    and SIPC has quite different perspectives as well.
        Mr. Diaz-Balart. Madam Chairwoman I have a number of other
    questions but I will submit those for the record. Thank you
    very much.
        Mrs. Emerson. Thank you Mr. Diaz-Balart. Ms Lee.
        Ms. Lee. Thank you Madam Chair, good morning. First let me
    just say your leadership in strengthening the SEC has really
    been vital in maintaining strong and fair markets and in
    stabilizing the overall economy following the financial crises.
    And quite frankly, I think that $1.4 billion really is not
    quite enough to ensure that the SEC has the resources and
    skills and technology that you need to complete your mission
    given the size, the massive size, and the constantly increasing
    complexity of our markets. So let me ask you a couple of
    questions as it relates first of all, to fines and fees that
    you have levied. Can you give us a sense of how much in fines
    and fees were levied by the SEC?
        Ms. Schapiro. Sure. If we use 2010 as a benchmark, we had
    penalties ordered of just over $1 billion. That money goes to
    the Treasury, although some of that is actually returned to
    investors, but the bulk of that goes to the Treasury. We also
    assessed fees of $1.5 billion in 2010, all of which goes to the
    Treasury, so about $2.5 billion in fines and fees, an
    additional $1.8 in disgorgement does not go to the Treasury but
    goes back to harmed investors, was distributed in 2010. So, I
    think we are bargain.
        Ms. Lee. So the taxpayer, definitely, we are getting our
    money's worth in terms of return on investment in the SEC.
        Ms. Schapiro. I believe so. I know, as hard as we have
    worked over the last two years, with our new leadership team,
    we have more to do, there are efficiencies to find. We have a
    tiger team that is constantly going through and looking for
    pools of money that can be reallocated or used more
    effectively. But in terms of fees and fines, the SEC pays a
    very significant amount of money.
        Ms. Lee. And I suspect, I do not know but if your budget
    were cut, the assessment and the levying and the fines and fees
    probably would be reduced.
        Ms. Schapiro. If we do fewer enforcement cases, there will
    be fewer fines, and under the 2012 provisions, our fees are
    automatically adjusted to meet out appropriated amount.
        Ms. Lee. Let me ask you as it relates to the Dodd-Frank
    requirement of the SEC to set up and Office of Minority and
    Women Inclusion to be responsible for all agency matters
    relating to minority owned businesses, diversity in management,
    employment and business activities. Can you give us an update
    on that and how closely are you working with the SBA and all
    other Department of Commerce to adopt the best possible
    practices and policies to implement and maximize the impact of
    this office?
        Ms. Schapiro. Congresswoman we have posted the position for
    the head of that office. We did a nationwide posting. We have
    gotten 250 resumes. We are in the process of waiting for the
    re-programming authorization in order to actually set the
    office up, and in the meantime we have the functions, not all
    of them, but largely being done by existing staff. Once re-
    programming has been decided, we will go ahead and hire the
    head of that office. I would like that person to be involved in
    setting up our processes and procedures, and then depending
    upon budgetary resources, we will either hire additional people
    or we will move people from other parts of the agency into the
    function.
        Ms. Lee. Could you keep the subcommittee updated on the
    status? It is something that some of us are very interested.
        Ms. Schapiro. Absolutely, I would be happy to.
        Ms. Lee. Thank you, and finally let me just ask you, in
    terms of some of the regulatory controls under Dodd-Frank as it
    relates to executive compensation; what impact have these new
    reforms been on executive pay and have companies changed their
    way of paying employees in terms of the connections between pay
    and performance across the financial services sector?
        Ms. Schapiro. Well there are a couple of different threads
    under Dodd-Frank. We just proposed rules, we and the FDIC, but
    we need to wait for the other financial regulators to join us
    on executive compensation clawback and deferral of compensation
    at the largest financial institutions, so those rules are not
    in effect yet. We have also done rules at the SEC that require
    enhanced disclosure with respect to executive compensation.
    Those pre-dated Dodd-Frank and went into effect last year and I
    think we saw generally better, more clear disclosure about
    compensation philosophy, so forth. And then the major Dodd-
    Frank piece of this is the Say on Pay Proposals which we will
    start to see play out over this proxy season, which is really
    just going to begin in the next month or so. So we have not yet
    seen how Say on Pay is impacting compensation programs yet.
        Ms. Lee. Yes, disclosure is one aspect of it which is fine.
    Again I am not sure if Dodd-Frank requires some actual
    regulation.
        Ms. Schapiro. It requires that companies give their
    shareholders the opportunity to have an advisory vote on
    compensation and those are rules that are out now. And it
    requires that for the largest financial institutions, that all
    of the financial regulators jointly propose rules that would
    ensure that companies do not exacerbate or engage in excessive
    risk-taking through compensation programs that reward,
    essentially, risk-taking. We and the FDIC have done those rules
    for comment; the other regulators are following along.
        Ms. Lee. Madam Chair, let me just make one point for the
    record. I have legislation that I think would be a heck of a
    lot stronger in this environment, I know it will not pass but,
    I do not believe that taxpayers should pay for executive
    compensation pay over a 25 to 1 ratio. No more than 25 times
    what the average employee, or the lowest employee makes, to get
    a tax deduction from the federal government. And I do not think
    the public realizes that they do get tax deductions, these
    companies, by paying these employees this money.
        Ms. Schapiro. And that is the third piece of Dodd-Frank,
    you have reminded me. There is a requirement; we have not done
    these rules yet. They are very complex to write. It requires
    that companies calculate a pay ratio for median employee total
    compensation versus the CEO's total compensation. And by all
    that, included with every filing that the company does, and so
    we are working on those rules. As I say, there is complexity in
    the way the statute is written that we are trying to work
    through to do those rules.
        Ms. Lee. Thank you very much, Madam Chair.
        Mrs. Emerson. You are welcome. Mr. Graves.
        Mr. Graves. Thank you, Madam Chair. Thanks for joining us
    this morning, and there seems to be some discussion about the
    Dodd-Frank legislation, and I guess I want to talk about that a
    little bit as well. I know there is a fine line between
    consumer protection and personal responsibility, and that is
    certainly a difficult challenge for you. And as we just think
    about the Dodd-Frank law, and oftentimes I guess I will say
    government overreaches, it does want to jump in there and
    provide too much protection or save the taxpayer from decisions
    that they are making; and Dodd-Frank, in my opinion, and I
    think in many others, is one of those overreaching pieces of
    legislation. And as we think about, I know there are a lot of
    rules and things that have to be implemented from the
    commission, can you help us understand how long that might take
    to fully implement it?
        And partly because we know with uncertainty even in what we
    are doing here as policymakers, there is uncertainty in the
    marketplace, and it is holding up investment and cash is on the
    sideline. So maybe you could help us understand how long you
    think it will take to fully implement it. And then, in your
    opinion, when it is fully implemented, what impact does that
    have on the financial markets and maybe folks not investing
    where they may have previously.
        Ms. Schapiro. I am happy to. As you know, Congressman,
    there are lots of statutory deadlines in Dodd-Frank that
    require us to go very quickly. I think in part, this is
    motivated by a desire to have certainty about what the
    regulatory framework would look like, particularly around areas
    like over the counter derivatives where there was no regulation
    at all; hedge funds to a lesser extent and so forth. So we have
    been working very hard to try to meet the statutory deadlines
    where we can, but where we have found the statutory deadline
    runs headlong into our ability to really do a good job in
    proposing a rule and really having sufficient consultation with
    industry and market participants and investors, we have taken
    the time to do that because we think that is really important;
    more important to get it right than to get it fast. We
    appreciate the need for the certainty that the ultimate
    regulatory regime, particularly for derivatives, will create
    for industry as institutions and individuals determine if they
    want to run a swap data repository; do they want to have a
    swaps execution facility; do they want to be clearing agencies;
    do they want to participate in this market as it is regulated?
        We have done lots of consultations, as I said, we have
    gotten thousands of comment letters, and we have tried to
    propose our rules in a sequence that makes sense for industry
    in order to comment on them. We are also going to ask the
    industry how much time, once rules are finalized, do they need
    to implement them. What kind of technology do you need to build
    to be a major swap participant and be connected to the markets
    that are clearing and trading? And then try to build in
    reasonable amounts of time for people to get ready and to make
    the rules effective in a sequence also that makes sense.
        So I cannot predict for you how long that will take. Most
    of these rules have to be done by July 21 of this year; many of
    them will be, but not all of them. And then we will have the
    implementation periods that will largely be driven by the
    practical realities of the industry being ready. And so I would
    imagine it could take some significant time beyond there.
        But they will have legal certainty once the rules are done
    about what is the world going to look like; do we want to be in
    this world, do we not? How do we structure our business to work
    in this?
        Mr. Graves. So it could be the next 12, 24 months of
    uncertainty, quite frankly, I guess.
        Ms. Schapiro. I think 12 months of uncertainty; but again,
    uncertainty on some levels, but not uncertainty on other levels
    because there is some statutory certainty, also, specificity
    about a number of these things as well.
        Mr. Graves. Then what is your sense of money staying on the
    sidelines as a result of the new rules and regulations? You
    mentioned it is going to take a significant amount of
    investment in order to comply, potentially, by somebody who is
    in the marketplace with investment in new technology.
        Ms. Schapiro. You know, I do not have a number for you,
    certainly, from our meetings, we meet with lots and lots of
    industry participants. There is interest in being engaged in
    this market, and so I think there may well be some less
    spending right now until it is clear what the rules will
    require, what the technology will require in terms of
    reporting, for example. I think that once there is clarity,
    people will be in this marketplace, and they will want to
    participate in it.
        What I see causing more money, frankly, to stay on the
    sidelines are events like May 6, which scared people when we
    had that dramatic 500 point drop in the Dow in a matter of
    minutes; it really frightened people. The money is coming back
    now, but from that period until very recently, we had net
    outflows from equity mutual funds virtually every week. So
    retail investors were nervous, but even institutional investors
    were nervous about the frailty and the fragility of our market
    structure after that period. And then, of course, world events
    are causing a great deal of uncertainty.
        Mr. Graves. Madam Chair, can I ask one more question?
        Mrs. Emerson. Certainly.
        Mr. Graves. I would like to just get your opinion. Knowing
    where the debt is, the government, what we have as debt, and
    the tremendous load that that is, it is my understanding that
    when investors are investing in U.S. treasuries or notes, the
    bonds and such, that is taking money outside of the private
    sector. And right now, with $14 trillion of debt, the majority
    of that, what 65 percent of that or more, being the public
    debt, or what we would define as public debt, what impact is
    that having on the marketplace when we as a federal government
    are demanding so much in dollars to be invested in us? And
    there is only a finite amount no matter how fast they want to
    print it, there is still a limited amount. And yet it is not in
    the private sector being invested in new buildings or employees
    or products.
        Ms. Schapiro. Well, the stock market has been reasonably
    healthy; I should not probably say that and jinx things. And I
    think that suggests that the markets are available for equity
    capital raising, we have not had a lot of IPOs yet, although
    that is picking up again. I think it is a better question for
    an economist than for me, but I think the way the SEC enters
    into that equation is to do our best to ensure that investors
    have the information they need so they can make the rational
    choice between a treasury security and a share of common stock
    and feel comfortable that they know everything there is to know
    about that company. They will take their risks, prices will go
    up, prices will go down, but they have all the information that
    they need, and the market structure will facilitate their
    selling that stock after they bought it and they want to get
    out of it at a reasonable price; at a price that is reasonably
    related to the market.
        So to me, that is how I view our role in this. It is not so
    much to mediate between the competitive forces for where
    investors put their precious capital, but making sure that if
    it is in the equity markets, it is a stable marketplace and
    people have the information.
        Mr. Graves. And I appreciate that you cannot really give an
    opinion. I know you are right about the various markets there.
    I guess I am of the opinion, and I am sure many in this
    Congress are, that we would rather be in the private sector in
    the common stock and preferred stock and such.
        Ms. Schapiro. I believe in our equity market. One reason I
    believe the SEC is such an important piece of the economic
    framework is our equity markets are absolutely critical to the
    future of our economy. If companies cannot raise money and
    investors are not confident about putting in their money, we
    will not create jobs, we will not grow.
        Mr. Graves. Great, thank you, Commissioner.
        Mrs. Emerson. Thank you. I am going to go off Dodd-Frank
    for a little bit and just get back to some budget issues
    because we really do need to cover those. There is one thing
    that I want to follow up with you on: the request for increased
    personnel related to Dodd-Frank. You have asked for a 20
    percent staff increase, and given the short amount of time that
    we have, you know, for the rest of this fiscal year, and trying
    to figure out how we are going to fund the government until
    September 30, this seems impossible. But given that, and
    looking at fiscal year 2012: do you have the capacity to
    actually hire that many people?
        Ms. Schapiro. I believe we do. Actually we have
    strengthened our human resources function and Congress has
    given us some expanded hiring authorities that allow us to move
    more quickly than we have historically. We need to actually
    move aggressively utilize those. And we have, although I
    understand OPM has some disagreements with how aggressively we
    can utilize them. I do think it is a big number. There is no
    question. The total would be 780 new positions, 584 FTE, so it
    is not a small number. But I think they are spread out over
    many different divisions and departments which gives us, also,
    the capability to have hiring managers in a position to get
    that number of people on board.
        I will also say that we have wonderful opportunities to
    hire right now. We have not been hiring except very selectively
    during this continuing resolution to fill very specific
    positions. But when we do go out we are able to get people with
    tremendous backgrounds in algorithmic trading or hedge funds or
    credit rating agency expertise. It has been really incredible
    to me to see the kind of talent we can bring on and have,
    again, very selectively during the CR. So I think we can do it.
    We also have a new chief operating officer who is very
    committed to the improvements of our systems and our capability
    to move people through the system.
        Mrs. Emerson. You mentioned Boston Consulting and the
    report that they did. Going back to the staffing question, it
    summarized that you currently have 19 offices reporting
    directly to you and if we increase that with Dodd-Frank, it
    will be 24. Now I have worked in the private sector and I have
    had a lot of people report to me, but I have never had that
    many people. That would be, for me, personally, a very tough
    juggling act. So I just want to ask if that, for you, is the
    most efficient way to operate. And perhaps it might be worth
    looking at having a deputy or two to help run all those people.
    So please talk about that a little bit.
        Ms. Schapiro. Sure. I mean look, it is a big number. There
    is no question about it. Now, some of them are very small
    offices. The Office of the Chief Accountant is quite small, the
    Office of International Affairs is quite small. We have the
    five major divisions and the Examination Office which are very
    large. But it is a lot and I will say that it would be
    wonderful to have a little more flexibility than Dodd-Frank
    gave us with respect to the four new offices that will report
    to me, to perhaps have them report somewhat differently. Most
    all those functions that are contained in those offices are
    already being done elsewhere in the agency and reporting to
    different people. It would just bring them under me. And
    frankly, the intent was a good one. It was so they would have
    high level of visibility and support but, in fact, because it
    does give me a very large span of control they may not actually
    get more visibility and more support as a result.
        But we are working through all the Boston Consulting group
    recommendations and looking at where we can do some
    rationalizing of offices. So for example, we are going to put
    under the chief operating officer all the functions of the
    executive director's office. So those will not report to me
    separately, they will report to the chief operating officer.
    And there are some other opportunities, I think, to streamline
    this a little bit.
        Mrs. Emerson. I mean, you have a big job and you do need
    sleep occasionally. Efficiencies work. I know sometimes it is
    hard to do that and of course if Congress then requires people
    to report to you as opposed to you actually designing the most
    effective way to run your organization, I can imagine that can
    be difficult. I think we all should know better than to tell
    you precisely how to do something as long as you achieve the
    goals that are set out. With that, I am going to let Mr.
    Serrano ask questions.
        Mr. Serrano. I was interested that you had people report to
    you but not that many. Now we report to 700,000.
        Mrs. Emerson. Well there is that so I guess I probably had
    about 25 people doing really different things. So technically
    they could have all reported to me at one time. But it was just
    easier to split it up with three people, so only three people
    had to direct report because I could not have managed. I was a
    lot younger then and I actually could not multi-task much
    better than I can now.
        Mr. Serrano. Without a blackberry. Here is a concern, you
    spoke about IT and it almost sounded like you were willing to
    cut it but not to the bare bone. Maybe I did not hear you
    correctly, my concern there is that Wall Street firms and their
    lawyers are well prepared in that department and they certainly
    can outgun the SEC any time they wish even without some cuts.
    So what did you mean to tell us and how far are you willing to
    go?
        Ms. Schapiro. I only meant that if we have to go back to
    2008 levels we will have to make tradeoffs between our
    personnel costs and our IT costs. Over 70 percent of our budget
    is personnel and IT costs. So in order to go back to 2008
    levels, those are the two levers we have to pull to make really
    big differences and find that $240 million in savings. I meant
    only to say that we have not made choices yet about how we
    would calibrate furloughs or RIFF's versus IT cuts, but I would
    not want to take IT down to nothing, even under those
    circumstances because it is just way too important for us to be
    able to do our job. We do regulate firms that sometimes spend
    as much as $2 billion a year, $3 billion a year on their
    telecom and information technology costs compared to our
    relatively modest spending.
        Mr. Serrano. Something like the Cardinals and the Yankees.
    You guys invest on pitching, we invest on hitting.
        Mrs. Emerson. Well none of our pitchers are quite available
    at the rate we are going now.
        Mr. Serrano. There are injuries, as the SEC can tell you.
    So on that issue, you have to understand that we never miss one
    hearing opportunity to mention baseball.
        Ms. Schapiro. I know that.
        Mr. Serrano. It is what keeps us sane. But Boston beat the
    Yankees, yes I am depressed. So we talk about IT and yes we
    need to support it and so on, but give us specifics. How will
    increased information technology help the SEC perform oversight
    of the complex markets that we have?
        Ms. Schapiro. Sure, I am happy to do that. There are the
    systems that help us to do our jobs better internally. Case
    tracking systems and the capacity for our economists and our
    people who do market surveillance to have the analytics to
    review trading information and look for trends and patterns
    that are problematic. There are systems like the new TCR
    system, which I know this committee talked with our inspector
    general about, which helps us to bring in all of the tips and
    complaints and referrals that we receive in the agency,
    centralize them into one repository and allow everybody who is
    working on a particular matter to search that data to find what
    might be relevant to the case that they are working or the
    matter they are working on. And then to actually risk rank
    those tips and make sure the most important ones are being
    worked on first.
        And then there are systems like EDGAR which is how public
    companies get all their filing information to the SEC and the
    public accesses that data to understand what companies are
    saying in their 10-Ks and their 10-Qs. And we use that data to
    do our surveillance of public company disclosure. And there are
    systems like SEC.gov, which gets 18.5 million visitors a day.
    It has not been upgraded since it was launched in 1996, I
    believe. Yet it is a really critical tool for the public to
    access the SEC and the information that we have in the form of
    investor alerts, rulemakings, pronouncements, speeches,
    interpretations, everything that we are doing, and so that is a
    system where we really need to do a lot of work. And then we
    have systems that are critical to the integrity of the SEC's
    operations and the Chairwoman mentioned this earlier, our
    financial capabilities. We had in our audit two material
    weaknesses in our controls over financial reporting, largely
    because of a lack of investment in our internal financial
    management technology over many, many years. It is completely
    unacceptable for the SEC to be in that position. We have made a
    decision to outsource that function to a federal shared service
    provider, the Department of Transportation, but it will cost us
    money. It will cost us $13 million in 2012 to complete that
    migration to the Department of Transportation, but hopefully we
    will clear our internal weaknesses and have clean audit reports
    going forward.
        So, there are lots of different systems, whether it is
    Edgar Modernization for the corporate filings, SEC.gov, our
    case management and data management, internal systems or our
    financial reporting systems; they all help us do our job much
    better. And, of course, under Dodd-Frank, we are now going to
    have to register swap market participants, and municipal
    advisers and others and we need to build out the technology to
    do that.
        Mr. Serrano. Let me ask you a question. During the height
    of the crisis, there were a lot of folks unemployed on Wall
    Street and not necessarily the bigger shots but some middle
    management folks. Did any of those folks come over to the SEC?
    And if so, was it similar to when you see Fox or CNN say, And
    we have this issue we are dealing with today and we have an
    expert here who was once involved on the wrong side of the
    issue and he will tell us how to do it or not do it. I mean, I
    am not a lawyer so I do not know if I am getting into any
    difficulties here or getting you into any difficulties. Did any
    folks come over?
        Ms. Schapiro. Oh, absolutely. About 50 percent of our
    workforce has prior experience in the securities markets, and
    we have been the beneficiary of Wall Street's lean times, quite
    honestly. During the last two years in particular where we were
    in a position to do hiring, we were able to bring in people
    with great expertise and talent, and one of the criticisms of
    the SEC has been that we are too far from Wall Street and we
    have not kept up. These people help us keep up.
        Mr. Serrano. Thank you.
        Mrs. Emerson. What really makes me nervous is all the flash
    trading, the algorithmic trading et cetera. Obviously you do
    not have a computer system that can monitor that. I do not know
    that you can monitor it anyway because it is too split second,
    but how much would it cost to upgrade your system to even be
    able to track this?
        Ms. Schapiro. You know, we cannot and we probably should
    not be able to track this. But somebody has to be able to track
    this, so what we have done is we have proposed a consolidated
    audit trail that would require all of the markets, that are
    already surveiling their piece of the pie separately, to come
    to us with a plan and I hope we will finalize this rule in the
    next couple of months. Come to us with a national market system
    plan that would create a consolidated audit trail that would in
    fact give us an order by order, microsecond by microsecond
    audit trail for every transaction in the securities markets and
    ultimately we would like to be able to expand it to include the
    derivatives markets as well.
        After May 6, it took us four months to be able to
    reconstruct the market trading so we could reassure people that
    what had happened in our markets on that date, that it was not
    a cyber attack, it was not just a mistake, it was what it
    turned out to be in our report. And so this consolidated audit
    trail system will actually have to be paid for by the industry
    and the SEC will have complete access to the information. Now
    we will need tools with which to use that data, and to be able
    to look for improper trading, to be able to reconstruct trading
    after a serious market event, but we have actually pushed to
    the private sector in a sense, the responsibility of self
    regulatory organizations, the responsibility to actually build
    the data repository and build the system that will have a
    genuine audit trail for the first time in the U.S. equity
    markets.
        Mrs. Emerson. I am glad to hear that.
        Mr. Serrano. I did not catch or understand why you said
    that you probably should not be involved?
        Ms. Schapiro. Well we have to be involved, and we will set
    all the requirements and we will be deeply involved in what
    this looks like because it has to satisfy our standards for
    what market surveillance would look like. I meant only in the
    sense that in a time when there is not a lot of funding around
    if we can leverage third parties, leverage self regulatory
    organizations I believe that is a better approach for us. They
    will also have talent, expertise, and capability to oversee the
    extraordinary detail that will go into the building of a
    consolidated audit trail system. And of course it has to link
    all of their markets, so I think there is a logic to having the
    industry do this, but under very close oversight of the SEC.
        Mr. Serrano. Thank you.
        Mrs. Emerson. Since they already have the machines doing it
    anyway. Time for Mr. Graves.
        Mr. Graves. That is fine. You know, it seems like on every
    subcommittee, each agency comes before us and they all have
    great presentations, and yours has been fantastic as well and I
    appreciate that, and each time though it is asking for
    additional resources and because there are critical missions I
    know you are trying to accomplish and I think we all know the
    resources are limited and so we are looking for the efficient
    and effective ways to govern right now and I guess that is code
    words for less spending and being responsible to the tax
    payers. And I know, Chairwoman asked you about the 2008 levels,
    and that is a serious discussion I think we are all having
    right now. And so when it is brought up I know you do not take
    it lightly in any way, and I know it would not be devastating
    according to the words you used.
        Has the commission gone through an analysis of how it might
    be able to reach those levels in a comprehensive way, and not
    so just, you know, off the top of the head so much but as a
    agency they are comprehensively looked at and seen how they
    might do it? Or with any recommendations as to what we might do
    as a Congress to repeal authorizations or something that may no
    longer be necessary that you see as still burdensome, that we
    have overcome that error or whatever it might but just sort of
    a comprehensive approach to how we might reach 2008.
        Ms. Schapiro. Well as you can imagine, we have been doing
    lots of contingency planning over the last few months, but we
    have not sat down and said if we have to lose 1,000 positions
    from the SEC we will definitively choose not to do the
    following five things and the positions associated with those.
    What we have done is we have asked all of our division
    directors to prioritize those functions that are absolutely
    most critical and there are some we think we could stop doing
    and nobody would really notice. Or we could push again, to self
    regulatory organizations or to other third parties.
        But I cannot tell you that we have made the granular
    decisions yet, as well as how it would impact our technology
    investment going forward as well. Because for us, we do not do
    a lot of contracting, we do not do a lot of programs that can
    be shut down in the way that many Cabinet agencies do for
    example. For us it is going to always be a tradeoff between
    people and technology. There are efficiencies still to be
    gained at the SEC, I absolutely believe that and we are working
    hard to do that. But I do not believe there is a lot of money
    being spent on non productive functions. We will make very,
    very hard choices that I think have the potential to impact
    investor confidence in whether our markets are sufficiently
    regulated.
        Mr. Graves. And I think we as a committee would really like
    to work with you on that. You know, unfortunately, we will be
    put in the position to make some of those decisions for you if
    we are not given some of those recommendations as well, because
    regardless of any input we get from the various agencies the
    resources are still limited and there is only so much that we
    can apply toward your purpose and mission. So I would certainly
    encourage you to work with us and look for those opportunities
    in which maybe you are performing a task that is no longer
    necessary, that is still something that is going on and is
    required to be funded because law says you must carry out that
    task. But maybe you do not see that its purpose is necessary.
        Ms. Schapiro. And there are some of those. I mean, just to
    give you a quick example, under Dodd-Frank, we are required to
    examine every credit rating agency once a year. That is without
    regard to the risk that they might be presenting to the
    financial system, or to investors, or to companies. And our
    view would be it would be better for us to do our risk
    analytics and decide, yes, this one needs to be examined every
    year, but this one, maybe every three years, is good enough. So
    there are some small examples, I do not think they are huge,
    but there are some small examples where the constraints of the
    law might be loosened in a way that would give us more
    flexibility to deploy our resources.
        Mr. Graves. Right. Well, thank you. Thank you, Chairman.
        Mrs. Emerson. I want to bring up an issue that I know is
    not pleasant. But it has to do with rent, and leasing, and
    inefficiencies that might exist within the SEC's office that
    performs leasing for you all. Obviously, I am referring to the
    Constitution Center lease, and the fact that, as a result of us
    passing Dodd-Frank, and the anticipation that funds would be
    forthcoming, I assume, you all went out and leased 900,000
    square feet of space at Constitution Center. And yet it was not
    filled. And then there were other facilities that were not as
    well. And so, talk to us a little bit about how you are
    revamping this whole process, because there is nothing that is
    more frustrating to us than to know that there are 300
    workstations somewhere, with all the equipment, and no people,
    and no budget to pay for it.
        Ms. Schapiro. Well, that is not the case right now. There
    are not 300 workstations with no people. But, as you know,
    Dodd-Frank authorized doubling of the SEC's budget over five
    years, and gave us very, very significant new responsibilities.
    And we have to have people to do those responsibilities. We
    also have to plan for our space needs in advance because the
    time it takes to fit out a building, and particularly to
    install technology and telecomm, is not something we can turn
    on a dime to do.
        We did lease the space when it became clear that we might
    not have a budget; we very quickly released 600,000 square feet
    to self-funded agencies, FHFA and the OCC. So I think we have
    done the very responsible thing there. We still have the
    300,000 square feet, and we are, obviously, assessing our
    needs, and when we have clarity around the budget going
    forward, we will do what we need to do to continue to shed that
    space if that is what is required. But we moved aggressively
    because we had huge responsibilities coming, and an expectation
    from the authorization.
        Mrs. Emerson. Do you go through GSA for leases?
        Ms. Schapiro. Currently we do not. And I should say more
    broadly to your question, as you know, the Inspector General is
    looking at our leasing functions, and I am looking forward to
    his recommendations for improving that area. And again, I would
    mention, we have a new chief operating officer, who is
    experienced, not just in technology; he came from Capital One,
    but also with respect to issues like this. And I think we will
    be able to implement the IG's recommendations and move forward.
        Mrs. Emerson. Do you know how much one square foot costs at
    Constitution Center?
        Ms. Schapiro. I do not know off the top of my head; I would
    be happy to provide that information to you.
        Mrs. Emerson. I would appreciate it, because prices all
    over D.C. are crazy. But I had a meeting with somebody who
    happens to be in office management, or development, I do not
    know what you call it, but they own the buildings and they rent
    them out. And he told me that the average is somewhere in the
    $58 range, but it can go up to $94 if you are in a prime
    location. So I am just curious, and if you all would get back
    to me on that.
        Ms. Schapiro. More than happy to do that.
        Mrs. Emerson. I would appreciate it. And I understand, on
    the one hand, the need to anticipate. On the other hand,
    perhaps you had more faith in us than we had in ourselves for
    getting things done in a quick fashion.
        On the issue of financial reporting, the GAO report issued
    in November of 2010 said, in essence, that since 2004 you all
    had continually struggled with issuing clean financial
    statements. I know you addressed that, just for a moment
    before; and so given the fact that you do sophisticated
    monitoring of financial markets, it is a little embarrassing.
        Ms. Schapiro. It is more than a little embarrassing. It is
    not the right result for the SEC, and I actually announced it
    to a very large conference of auditors and accountants, that
    this was the result of our annual audit, because I think it is
    very important that we own up to it, and own up to the fact
    that over many years there was no investment in our financial
    management systems. They grew with lots of workarounds, and
    bolted on systems, that overtime, just became unsustainable.
        So the decision we have made, and I really believe it is
    the right decision, because this is not going to be a core area
    of focus for us, is to outsource this to a federal shared
    service provider. We will use Department of Transportation;
    that the GAO uses as well. And we made the decision, we have a
    new CFO, and a new Chief Information Officer as well, and we
    collectively made the decision that rather than take on the
    risks of trying to build a new system ourselves, and deploy
    that, that we should go with something that is basically tried
    and true. And I think it is the right decision.
        Mrs. Emerson. So, how does the financial part of that work?
    The Department of Transportation charges you for that service,
    and it is a kind of interchange between agencies?
        Ms. Schapiro. Yes. My understanding is that it will cost us
    about $5 million a year, annually, after we have made the
    switch over to DOT, which should happen by April of next year;
    so within the next year. The costs are $13 million in 2012 and
    $12 million in 2013, so it is not an inexpensive undertaking.
    But at the end of the day we will have a financial management
    system that works and remediates our internal weaknesses. I
    fear we could spend a lot of money to try to recreate the
    wheel, and maybe at the end of the day, not have a system that
    is tried and true.
        Mrs. Emerson. And could cost you easily that much.
        Ms. Schapiro. Exactly.
        Mrs. Emerson. Okay. I think that, you know, sometimes it is
    why we invent the wheel, if you will.
        Ms. Schapiro. Right. Exactly. To me it was the responsible
    thing to do, for the taxpayers.
        Mrs. Emerson. Yes, I mean, so DOT actually has the system
    and then you would just replicate it.
        Ms. Schapiro. They run the systems for multiple agencies.
        Mrs. Emerson. Oh, I see. Okay.
        Ms. Schapiro. They do it for GAO, they do it for CFTC; they
    have been designated by OMB as the service provider to other
    agencies, of financial management systems.
        Mrs. Emerson. Okay. Thank you. Mr. Serrano.
        Mr. Serrano. I will submit the rest for the record. Part of
    what the SEC provides to the financial markets is confidence
    that a powerful watchdog is providing the proper amount of
    oversight to the market. With the proposed H.R.-1 Bill, and
    this series of two to three week continuing resolutions, is the
    SEC able to provide that level of confidence in such an
    uncertain legislative climate?
        Ms. Schapiro. I think that, you know, H.R.-1, while
    certainly not having as dramatic an impact as going back to
    2008, would still impact the agency's ability to fulfill even
    its core functions. Operating as we are now, on the CR, we are
    not hiring, even though there are good people available for us
    to hire. We have cut back our investments in technology; we
    have spread them out over more years. We have cut back our
    examiners' ability to travel. And, you know, importantly, we
    are really, feeling the impact on our capability to engage, for
    example, with industry, or with foreign regulators, at a time
    when Dodd-Frank coordination is so critical with foreign
    regulators. We cannot spend the money to send people back and
    forth to Europe and to Asia, to really be working on
    coordinated rule sets.
        So, I think if we were to go back to the numbers in H.R.-1
    we would see, obviously, even more tightening of the belt:
    fewer enforcement cases, fewer examinations, less travel, and
    less technology investment. We are impacted now, that would
    clearly impact us more.
        Mr. Serrano. When we had the Inspector General here, the
    Inspector General remarked during his testimony that the SEC is
    in a much better position now than it was when he became
    Inspector General in 2007. So you are to be commended for that
    turnaround. What are your next goals for the agency, except in
    addition to staying alive?
        Ms. Schapiro. Staying alive is good. You know, we have an
    entirely new leadership team across the entire agency. And they
    are incredibly talented people. They are working
    collaboratively together and we have to continue to instill in
    our culture that investors come first and collaboration,
    cooperation with our colleagues internally, and in other
    agencies, and continue to make that part of our DNA. We have to
    always continue to be willing to remember the lessons of the
    past. We talk about Madoff a lot at the SEC, because we need to
    remember that the agency's failures cause tremendous harm. We
    need to continue to embrace those lessons of the past failures.
        And so my goal is that we become more agile, that we
    continue to recruit different kinds of skill sets and different
    kinds of talent to the agency, so that we are better able to
    connect the dots and understand what is going on on Wall
    Street, and throughout the financial markets that might impact
    investors. We could prevent more harm, which would be a
    wonderful legacy, and not just redress the harms after they
    have been exposed. So we have a lot of work ahead of us, a lot
    to do, but we have an incredibly engaged senior leadership team
    now. And I am pretty optimistic that we are going to continue
    to make real strides.
        Mr. Serrano. I should leave it there, for my part, but let
    me ask you a question: Do we know everything that we should
    know about the people, the groups, that were harmed by Madoff?
    It even reached the baseball team in New York. Where does it
    end?
        Ms. Schapiro. I think there is quite a lot of information
    out there as a result of the efforts by the SIPC trustee, and
    of course the SEC and the Justice Department have brought
    multiple cases in this regard. So I think it has been pretty
    transparent.
        Mr. Serrano. All right. Thank you so much.
        Mrs. Emerson. I have a bunch more questions and I know Mr.
    Womack wants to get back here. Oh, he is not going to make it,
    after all? Okay, well I know he will have some questions to
    submit for the record. Will you just go over, for Mr. Serrano
    and I, and for the record here, talk a little bit about all of
    the rule-making that you have to do as a result of Dodd-Frank.
    Explain, a little bit, those rules that you have to coordinate
    with the Commodity Futures Trading Commission, and how that
    whole process will work. Because I know that there is some
    frustration on the part of colleagues that the SEC is taking
    too long to do the rule-making, or implement the rules, but,
    quite frankly, I believe in your philosophy that you have got
    to get it right and that is more important than hurrying.
        Just explain, because the complexity of it is enormous, as
    is the impact if you get it wrong, which I think would have a
    very negative impact on the market.
        Ms. Schapiro. Sure. Well, we have some rules that we are
    doing jointly with the CFTC. But all the rules in the over the
    counter derivative space are at least in close consultation and
    collaboration. And I think both of us believe that, to the
    extent market participants are going to be both in their world
    of OTC derivatives and our world of OTC derivatives, we need to
    make the rules as synchronous as possible and as consistent as
    possible, because we do not want institutions to incur
    unreasonable costs trying to comply with two sets of regulatory
    requirements. So we have worked very, very closely together. We
    have coordinated very, very closely. Many of the rules we have
    proposed are essentially the same.
        But there are a bit in number where we have taken a
    different approach than the CFTC, in part based on the nature
    of the small piece of the OTC derivatives market we have
    responsibility for, the securities base swap market is
    different, for example, than the interest rate swap market,
    which is enormous and very liquid.
        And some of the differences really come from the fact that
    we just have different historical statutes and philosophies
    about things.
        We have gone out for comment on more than a dozen rules. We
    have reopened some comment periods, in fact, where we have
    gotten interesting comment letters, or there are other
    approaches. We have sought cross comments in our rule
    proposals. So if we have proposed something, we have asked. Did
    you think the CFTC has done it better? Yes, no, why? What would
    you do differently?
        And we have had many, many meetings, and we in fact held
    four round tables together where we brought industry in to talk
    through the different rule sets. As we come to final proposals
    we will need, I think, to work very hard to try to get these
    rules to be the same as much as we possibly can. And that is
    the challenge that is before us right now. And, then we need to
    also phase them in in the same way so that industry is meeting
    one set of deadlines, not two different sets of deadlines.
        Mrs. Emerson. Are there some things that we in Congress
    need to do to help clarify some of the requests or requirements
    that we imposed, I mean, within the rule-making process.
    Obviously, you are the expert at what you do, we are not
    necessarily the experts at what you do; and therefore,
    something that sounds like a good idea might not, in reality,
    be workable. Are there things that we can help you with this?
        Ms. Schapiro. I was going to say, we are getting a record
    number of comment letters from members of Congress, at least in
    my experience, over the last couple of months, explaining what
    was intended, or what was meant by particular provisions in
    Dodd-Frank; and that is actually extremely helpful to us. But I
    think we are trying to work things through the rule-making
    process as best we can.
        Where there are issues, or where we think there really is a
    necessity, potentially, for change, and I can think of one in
    the OTC derivatives area. There is a requirement that foreign
    regulators have to indemnify a swap data repository for
    information that it receives. Most foreign regulators cannot
    indemnify; we certainly could not indemnify a foreign swap data
    repository if we needed information from them. And we are going
    to see if we can work this through, somehow, through exemptive
    and other actions, but if not, we may well come back and say,
    this is a provision that will make it very hard for us to work
    collegially with foreign regulators. And it may also put them
    in the position of forcing us through the same hoop in getting
    information that we might need from their repositories, so that
    is just an example where we may well come back.
        Mrs. Emerson. Speaking of foreign regulators, I mean,
    obviously, so much of what you do, is at a global level and the
    global marketplace needs to more or less be on the same page.
    Are you finding good cooperation with your counterparts?
        Ms. Schapiro. There is great cooperation, I would say. Of
    everybody, I would say the United States is leading in the
    derivatives space, less so in compensation and some other
    areas. But it is very, very important for us to stay very
    closely tied to what foreign regulators are doing, because we
    do not want to create artificial opportunities for regulatory
    arbitrage, or see industries move from one jurisdiction to
    another simply because one regulator is far ahead of the
    others.
        To date, the G20 countries are talking about the same kinds
    of rules and the same kinds of protections built into their
    regulatory system for derivatives as we are, so we remain very
    confident at this point, but we will be watching closely. And,
    as well, that will go to the implementation periods.
        Mrs. Emerson. Mr. Serrano. I may just ask a couple more.
        Mr. Serrano. Ask as many as you want.
        Mrs. Emerson. I know, I know, but I do not want to keep
    everybody, especially if Mr. Womack is not coming back. I do
    have a very short question, and then I am going to ask
    something else that is just something that is more annoying
    than anything else, perhaps, and it has to do with the Facebook
    private sales. Only because that would have been one stock that
    would have been fun to buy one share for my grandchildren, just
    because it would be a fun thing to do.
        And I know that a lot of Americans were upset that Goldman
    chose not to allow American investors to buy stock in
    Facebook's stock offerings. Some have argued that regulations
    have forced the capital formation process offshore. In this
    case, Goldman actually marketed sale of shares to savvy, large
    scale investors, not smaller, less sophisticated investors like
    me. And so, while they were able to collect fees at Goldman,
    American investors were not able to invest in an American
    company. I mean, how do you all balance protecting investors
    while at the same time not depriving them of opportunities to
    invest?
        Ms. Schapiro. Well you know, the basic requirement is that
    securities have to be registered to be sold publicly, and there
    needs to be financial reporting, unless there is an exemption
    from that requirement. And Goldman proceeded, I believe, on the
    basis that this would be a private offering to large players
    without a general solicitation. And then when the media frenzy
    erupted, their concern was they might not be able to satisfy
    the requirement that this was not a general solicitation.
        So in light of that, I have asked the staff to come back to
    me with some recommendations on whether we need to look at the
    requirements of our exemptions. When these exemptions were
    written, nobody thought about media frenzy being the sort of
    thing that would tip the balance into whether you were engaged
    in a general solicitation or a truly private offering. And so
    we are looking at this issue very closely. We recognize the
    frustration that people felt. On the other hand, we do have to
    balance it with the need for people to have current, reliable
    financial information if they are going to buy shares of
    companies.
        Mrs. Emerson. And I do agree. It is just that it was
    frustrating.
        Ms. Schapiro. Understood.
        Mrs. Emerson. Let me just ask you about municipal
    securities. Primarily because I know that you have been, we all
    have been, looking into the issue of the safety and
    transparency of the muni bond market, and that you conducted a
    number of field hearings on the issue last year. So, if you
    could answer these few questions. First, how does the SEC
    propose to balance the importance of this financial instrument
    for cities and States with the importance of protecting
    investors? And while you do not have direct authority to
    require financial disclosures before municipal securities are
    issued, how does the SEC monitor these securities currently?
        It is worrisome, given all of the stress we are seeing
    today in States and in cities, with regard to pensions and
    financial obligations. So it does concern me that we may be
    potentially selling these bonds with the possibility that a
    town or a city might go bankrupt. I realize that traditionally
    nobody thought that that would happen, but, as I said, with
    pensions not fully funded, this becomes a little problematic.
    So I would just like to hear your thoughts on that.
        Ms. Schapiro. Well, as you point out, we do not have the
    ability to tell municipal issuers what they have to disclose or
    when they have to disclose it. We do get a reasonable amount of
    disclosure out by putting burdens on the broker-dealers who are
    going to sell the municipal securities to make certain
    information available. We have actually increased that in my
    two years at the SEC to require that even more information be
    made available. But we are reaching the limits of the authority
    that we were exercising over broker-dealers to do that.
        So, as you point out, we started a series of field hearings
    last year under Commissioner Walter's leadership, to try to
    bring issuers, investors, commentators, academics, everybody
    together, around the country, to talk about the issues with
    respect to the municipal securities market, and what could the
    SEC do that would get the balance right and protect investors
    in this, frankly, $3 trillion market, which is really, largely
    an individual investor-held market. And we had to suspend those
    because we didn't have the travel budget, but I am hoping that
    we will pick those up again later this year. And we did get a
    couple of them in, and they have been enormously valuable. And
    we have also been inviting people to Washington to come and
    talk with us about it.
        We have also done a lot in enforcement. We created a
    specialized group in our enforcement reorganization to focus on
    municipal issues. That group brought the first case against the
    State of New Jersey for inadequate disclosure. And they have a
    number of investigations going on around the country. One of
    the things we have seen from our enforcement actions is that it
    is having the effect on other state and municipal issuers to go
    back and look at the quality of their disclosure, the
    timeliness of their disclosure, the accuracy, the fullsomeness,
    to see if they can make improvements. And that is a great
    result from an enforcement case. We didn't levy a fine or
    anything, we didn't want to burden the taxpayers of New Jersey,
    but we wanted to make the point that you have to be truthful
    and you have to be honest in the disclosure that you do.
        My view would be that we get through the bulk of Dodd-
    Frank. We'd like to come back to Congress and talk about
    whether there should be some more direct authority at the SEC
    with respect to the content of disclosure by municipal
    insurers. And the way we monitor it is largely through the
    MSRB, which is a self-regulatory organization that we leverage
    that runs the database for municipal disclosure.
        Mrs. Emerson. This will be my last question, and then I'll
    submit the rest of mine for the record. Because you referred to
    credit ratings agencies and perhaps the need to keep your hands
    off them, per-se, that is not how you said it, but that was the
    gist I got. But on the other hand, many people have said that
    part of the whole financial meltdown was due to the fact that
    the credit ratings agencies, or companies, were too invested
    with some of their clients, and not vigilant enough, if you
    will. And so, I am curious why they have not, in the past, been
    subject to the same expert liability standards that accountants
    and lawyers who make statements on security prospects would
    have been subject to.
        Ms. Schapiro. My point earlier was not that we should not
    be regulating them. I believe we should and that we have new
    tools under Dodd-Frank. Just that the statutory requirement
    that we analyze, examining every single one of them every year
    might be a little bit inflexible.
        Mrs. Emerson. OK, I misunderstood. Thank you.
        Ms. Schapiro. But the provision 436G in Dodd-Frank that
    would repeal the statutory provision that shielded them from
    expert liability is one we are wrestling with right now,
    because we do not want it to create issues, particularly for
    the asset backed securities market. I do not really know the
    historical reasons why credit ratings agencies did not consent
    and face expert liability. I would be happy to get back to you
    on that. I am just not recalling.
        Mrs. Emerson. Perhaps we should ask the authorizing
    committee to give us the answers to that, or look into that. I
    would appreciate that. That is certainly problematic to some
    extent.
        Ms. Schapiro. Well, the issue we face now is that they are
    refusing to consent, so that the ratings cannot be included in
    the registration statement, and that makes it very difficult to
    sell the securities in the public market. And so, we are trying
    to get the balance right. But we are going to move forward on
    that provision.
        Mrs. Emerson. Thank you, I think it is pretty necessary to
    do that. Joe, do you have any closing comments?
        Mr. Serrano. Yes. Please do not cut them. I know. That is a
    Congressional decision.
        Mrs. Emerson. Over my pay grade.
        Mr. Serrano. Just, my closing comments is that I really
    believe that they need every opportunity, the Commission does,
    to carry out its function, and put in place Dodd-Frank, and in
    the process we will all be better for it. If not, then we just
    wasted a lot of years and didn't learn anything from the last
    meltdown.
        Mrs. Emerson. Mr. Yoder is here, and so, let's filibuster a
    couple of minutes and talk about baseball teams so he can get
    organized to ask his one question. So, is St. Louis ahead of
    the Yankees in the standings?
        Mr. Serrano. I didn't even know St. Louis was still in the
    league.
        Mrs. Emerson. Oh, Joe. Well, listen, are you going to
    opening day?
        Mr. Serrano. No.
        Mrs. Emerson. I am going to try to. Let me just let Mr.
    Yoder go ahead, and thanks for getting here.
        Mr. Yoder. Thank you, Madam Chair, and I actually was
    distracted by your conversation, because I actually wanted to
    join you in that conversation.
        Mrs. Emerson. Because he is a Royals fan.
        Mr. Yoder. A long-suffering Royals fan.
        Mr. Serrano. But you gave up David DeJesus, right?
        Mr. Yoder. We are a farm team for a lot of the other
    national teams.
        Mrs. Emerson. Let me just say that you really do have a
    great farm team, though, I think. I mean, they are terrific.
    They are terrific. But it just seems like they are better than
    the division.
        Mr. Yoder. That is true. That is true. Last time we won our
    division, I believe was in 1994, when the strike ended the
    season early.
        Mr. Serrano. If I am not mistaken, you guys had the first
    baseball academy, right?
        Mr. Yoder. I'll take credit for that. I am not sure.
        Mr. Serrano. A thousand years ago. And you know who went
    there? Bill Richardson.
        Mrs. Emerson. Really? How come he never played on the
    Congressional baseball team?
        Mr. Serrano. He did. He was a great hitter. Could not run.
        Mr. Yoder. Thank you, Madam Chair. Ms. Schapiro, I
    appreciate you being here today, and I apologize for coming in
    here towards the end, but I did have a couple of questions for
    you. One is for very specific and it is related to complex
    minerals.
        Ms. Schapiro. Conflict.
        Mr. Yoder. I am sorry, conflict minerals. Pardon me. And I
    have had some concern raised, and I am apologizing if this has
    already been discussed, by a company in my district related to
    what they believe is a very difficult and onerous provision
    that would require them to have to understand the history of a
    mineral that has gone through so many different entities, that
    they feel it would be impossible for them to use it at the very
    trail-end. And the question they have that they wanted me to
    ask you is related to a potential de minimis provision. Could
    you maybe discuss that a little bit? And I might have a follow-
    up question.
        Ms. Schapiro. Sure. We have a proposal out for comment
    right now on conflict minerals, and this relates to certain
    enumerated minerals in the statute that come from the
    Democratic Republic of the Congo, or the surrounding area. Our
    rule proposal is out, which would set forth the requirements
    for companies that use these particular minerals in their
    products to do due diligence about the source of the minerals,
    and provide a due diligence report if they are not conflict-
    free, or they cannot determine whether or not they are, and
    have an audit of that report. I do not believe, and I would
    like to get back to you on this specifically, that the statute
    has a de minimis exception in it, and I do not honestly recall
    whether we made any proposal or asked for any comment with
    regard to a de minimis exception, but my recollection is that
    it is not contained in the statute.
        Mr. Yoder. Well, I appreciate that. I just want to share
    with you some concern from American companies that are having
    to compete globally. And we all share the same interests here
    in creating jobs in the United States, and I know you do as
    well, and I just want to make sure you are aware that there are
    some companies that use a very, very small amount of these
    minerals, a very de minimis amount, and that it would be
    extremely arduous and difficult for them, and a high cost would
    make them less competitive and affect their ability to create
    jobs and get the economy back on track.
        Ms. Schapiro. And you should know that we have met with
    many companies to talk because these are all important
    minerals. It includes gold, coltan, and a number of others that
    are really critical to the manufacture of electronics, as well
    as jewelry and other things. So, we have met with many
    companies, and we have gathered very broadly their input, and
    we will take it very seriously. And I would be happy to come
    back to you with further thoughts on that.
        Mr. Yoder. Would you, please? And particularly with
    electronics, where you might be using a minuscule amount, but
    the effort that it would take to understand that whole process,
    I think, is overly burdensome for some of these companies.
        And then I just had a couple general questions that small
    businesses ask me all the time, related to the fees they pay to
    the federal government and various agencies, and I wonder if
    you would comment on the status of all the different fees that
    businesses are paying to the SEC. And are there ways in which
    we can alleviate some of those to help the pressure on business
    owners? And then the other question would be related to just
    general regulations and the President's call for each agency to
    go through and review, and modify, and change regulations such
    that they are not burdensome and onerous. And we talked about
    one, the conflict minerals one. What is your agency doing
    specifically in that regard?
        Ms. Schapiro. The executive order does not actually apply
    to the independent agencies like the SEC. But that said, we
    have said that while we do much of what is already sought in
    the executive order: the cost-benefit analysis, trying to make
    accommodations for smaller businesses where we can with delayed
    implementation periods, or delayed compliance dates, and so
    forth, or exemptions. We are very active, and have been, over
    the last couple of years, looking at that, as well. But we have
    said that we want to go back. We are about to form a small
    business advisory committee. I have asked our commission to
    approve our doing that and going back and looking at rules that
    have been on the books for a long time to see whether there is
    small business relief that the SEC can make possible. So, for
    example, on regulation A offerings one of the ideas on the
    table is raising the limit, so more money can be raised with
    fewer requirements. We actually have come up with many ideas
    that we hope to address with our advisory committee once it has
    been put into place. So, while the executive order does not
    apply to us, we are trying to act as though it does because we
    think it is just a good practice.
        With respect to fees paid to the SEC by small companies,
    there are of course some fees related to securities
    registration, when you go public or your offer stock, but I am
    not aware of other fees. Again, I would be happy to supplement
    the record with that. But unlike other agencies, we do not have
    a lot of programs that I think would generate fee payments to
    the SEC.
        Mr. Yoder. Do you generate your resources, then, from tax
    dollars, or are you entirely fee-based?
        Ms. Schapiro. Well, we are fully appropriated by Congress,
    obviously, since we are all sitting here, but the SEC's budget
    is covered by a transaction fee that is paid by the self-
    regulatory organizations to the SEC, and that is generally, I
    believe, passed on, ultimately, to customers. It is a fee on
    every stock trade, as opposed to a fee directly on businesses.
    And it is two cents per $1,000.
        Mr. Yoder. And I have not had a chance to review your
    comments, but what is the SEC doing in terms of reducing
    expenditures, and trying to find ways to become more efficient
    in this economy in which resources are obviously very scarce?
        Ms. Schapiro. Well, living under a continuing resolution,
    after two years of growth, we have had to significantly cut
    back on a number of activities, and try to reprioritize as best
    we can with the dollars that we have. We have a team under the
    leadership of our chief operating officer that has been going
    through and looking for all the places we are spending money
    less efficiently or less effectively than we think we could,
    trying to redeploy those resources to higher and better uses
    throughout the agency. We are also trying to leverage the
    efforts of third parties where we can, whether that is
    accounting firms, or whistle-blowers, or self-regulatory
    organizations.
        Mr. Yoder. Do you have examples on where you have made
    reductions?
        Ms. Schapiro. Sure.
        Mr. Yoder. Anything you want to highlight for the
    committee?
        Ms. Schapiro. This year we zeroed-out bonuses. We cut
    travel by 10 percent. We have delayed our technology spending
    by a significant amount. I would be happy to provide the actual
    dollar numbers, but we have reduced our security guards; we
    have reduced our overtime pay; we have reduced the use of
    expert witnesses even in our own enforcement cases, and
    consultants; we have eliminated the summer intern program; we
    have eliminated the student loan repayment program. A number of
    efforts we have taken.
        Mr. Yoder. Okay. Well, I appreciate that. I hope you
    continue to go down that road. And certainly, I want to follow-
    up with you again on that conflict minerals issue.
        Ms. Schapiro. I am sorry. I said we eliminated the summer
    intern program. I think that is targeted. I do not know that we
    have actually done that, so let me get back to you.
        Mr. Yoder. Well, keep doing what you can do to reduce
    spending and keep costs low for business owners, and certainly,
    as well, on the regulatory side. As you take comment, it is my
    hope that you will keep an eye towards helping our innovators
    and entrepreneurs in the country be as successful as possible,
    and that our regulations are such that they do not create
    onerous burdens that make our U.S. companies less competitive
    in the global marketplace. So thank you for your comments.
    Madam Chair, I yield back. Thank you for the time.
        Mrs. Emerson. Thanks, Mr. Yoder. Chairman Schapiro, I
    really want to thank you for being here today, and thank you
    for undertaking the enormous job that you have that is probably
    quite intimidating to most people. And you do a very good job
    at it. And I know that you have had many, many messes to clean
    up, and you are going about doing it in the right way. And I
    also appreciate the fact that you are making efficiencies in
    some things, and I also understand the great need for you to be
    funded to the maximum extent possible in other areas, because
    of the nature of the work that you do.
        I may challenge my good friend, Mr. Serrano, on your
    statement that, I believe you said that the financial crisis
    was in fact perhaps mostly caused by lack of regulation and
    oversight. I think there were many, many things involved that
    led to it, and that was not necessarily the primary thing, but
    I feel good that the Chairman has undertaken a good review of
    the many burdens that they have to oversee and to regulate. It
    is tough, and it is a big burden, on the one hand. We will do
    our very best to ensure that you have the tools necessary to do
    your job, because our markets are absolutely critical, and I do
    not want you all to short-thrift that IT system, particularly
    because technology changes so rapidly. So we will keep our
    fingers crossed and do the best we can. Thank you so much for
    being here.
        Ms. Schapiro. Thank you so much.
        Mr. Serrano. Thank you.
        [The information follows:]

        [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                                           Thursday, February 10, 2011.

                       SECURITIES AND EXCHANGE COMMISSION

                                    WITNESS

    H. DAVID KOTZ, INSPECTOR GENERAL, SECURITIES AND EXCHANGE COMMISSION

                     Chairwoman Emerson's Opening Statement

        Mrs. Emerson. Okay, we'll go ahead and get started. I want
    to thank you very much, Inspector General Kotz, for coming
    today. This is the first hearing for the Financial Services and
    General Government Subcommittee of the 112th Congress. I'm
    really very honored to have been selected to be chairwoman of
    this important Subcommittee. The Subcommittee has many new
    members this year on both sides of the aisle. Mr. Diaz-Balart
    from Florida is here, and I guess the others will be coming
    along because we probably have several committee meetings that
    are scheduled simultaneously, as usual.
        We're going to follow the five-minute rule for questions,
    except for Ranking Member Serrano who can take as much time as
    he wants as long as he's not talking about the Yankees. We just
    have this running argument about the St. Louis Cardinals and
    the New York Yankees and----
        Mr. Serrano. I just want to know that the----
        Mrs. Emerson [continuing]. I guess we're going to get the
    Florida teams involved here too.
        Mr. Serrano. I just want to know if the Republican cuts
    will affect Pujols' contract. [Laughter.]
        Mrs. Emerson. I certainly hope not. I'm a little worried
    about the Pujol's contract, but I'm assured that it's all going
    to work out, Joe, so keep your fingers crossed. Although you
    all can afford him and I'm not sure that we can, but we're
    going to have to make do.
        For everybody else, we'll go on the five-minute rule
    although, quite frankly, I'm not going to cut off anybody in
    mid-sentence. We'll also recognize members in order of
    seniority based on who's present at the beginning of the
    hearing, going back and forth between the parties. For
    latecomers, you'll be recognized in the order that you arrive.
        Joe, you did a great job in the last Congress of being very
    understanding of all of the concerns that my side of the aisle
    had and obviously we will do the same of yours. We know that
    we're going to disagree on many issues, but I also believe it's
    very important for us to hear each other and really understand
    where everybody's coming from.
        We have a very difficult challenge in front of us. The
    federal government's debt is almost $14 trillion and we have to
    begin living within our means. The Appropriations Committee has
    been tasked with reducing spending to the fiscal year 2008
    level and this will require a 17 percent reduction in spending
    from fiscal year 2010 for this Subcommittee. It's not going to
    be easy. It's going to require incredibly tough choices, but
    I'm committed to holding as many hearings as we possibly can
    about the operations of agencies under our jurisdiction to find
    ways to make reductions to low priority, ineffective, and
    duplicative programs.
        The budget request for fiscal year 2012 will be submitted
    next week, but we wanted to get to work so we are beginning
    this hearing season by meeting some inspectors general. Quite
    frankly, we can learn an awful lot from you all, and I am very
    pleased that you're here today. Part of the reason is that, all
    inspectors general are a great check on our government agencies
    and the fact that you're able to find efficiencies within
    agencies is quite critical. We're looking to you all,
    especially this year, to really help us identify ways to reduce
    spending, and particularly spending which we would consider
    wasteful.
        Our Subcommittee has jurisdiction over a diverse group of
    agencies, many of which have a profound impact on Americans'
    lives and the financial stability of our economy. The SEC in
    particular has the unique task of protecting investors,
    maintaining fair, orderly, and efficient markets, and
    facilitating capital formation, while at the same time not
    over-regulating our markets and hindering economic recovery.
    Since 2001, Congress has provided the SEC with additional
    regulatory tools and has more than doubled the SEC's annual
    appropriation. That is a very short time period in which the
    SEC's budget has been doubled. It's difficult to understand how
    the SEC was not better positioned to deal with the economic
    turmoil of the last few years, and how the SEC allowed the
    Madoff and Stanford Ponzi schemes to continue for many years
    when they had complaints registered about these two entities
    over a decade before the individuals were charged.
        In addition, the SEC has been cited by GAO for inaccuracies
    in its financial reporting almost every year since it began
    producing audited financial statements in 2004. This is
    especially troubling as certainly the SEC would not tolerate a
    company with possible material inaccuracies in their financial
    statements for seven years. This past year, the SEC has also
    been cited by you, Mr. Kotz, for lacking clear leasing practice
    guidelines as well as waste and inefficiencies in their
    procurement and contracting costs. I really am encouraged that
    your office is looking into these issues and working with the
    SEC to correct the problems in a timely manner.
        Both the IGs and Congress should be watchdogs for taxpayer
    money. We should be actively looking for improvements and
    efficiencies in order to ensure that taxpayer money is being
    effectively utilized. I look forward to our Subcommittee
    members' contributions and I'd like to remind members again of
    the five-minute rule for questions. Now let me recognize my
    good friend from New York, Mr. Serrano, for any opening
    statements you'd like to make.

                        Mr. Serrano's Opening Statement

        Mr. Serrano. Thank you, Chairwoman Emerson, and
    congratulations. As I said to Chairman Wolf yesterday in the
    Commerce, Justice Subcommittee, to tell you that I'm glad to
    see your side in the majority would be a lie. But to tell you
    that if I had choices of who--which Republicans should head
    Subcommittees, I felt that way about Mr. Wolf and I certainly
    feel that way about you, that you're the best person to lead
    this Subcommittee when I'm not leading it.
        And the relationship we have--which, you know, the public,
    it's sad in a way, doesn't understand, doesn't understand that
    we as Members of Congress have relationships that go beyond the
    political stances we have to take. And what I always tell
    people back in my district when they tell me, ``Well, that
    person from that place,'' I say, ``You know, whether it's in
    front on an American Legion Hall, whether it's in front--during
    a parade for veterans, whether it's at the Puerto Rican parade
    in New York,--we all get here the same way, by begging somebody
    to vote for us and then getting insulted right after they vote
    for us.'' [Laughter.]
        Mr. Serrano. So we understand that. And I want to thank you
    for your support in the past for the kind of work that we've
    done. And I look forward to working with you again. Now, I read
    this morning that unfortunately you broke your arm and you
    can't do a lot of things for yourself, so I'm volunteering to,
    within House rules, to vote for you on the House floor.
        If you can't put the card in, I know how to vote ``no'' all
    the time now. I'm learning to do that----
        Mrs. Emerson. I thought you might be offering to wash my
    hair and save me some money every day.
        Mr. Serrano. My people will call your people. [Laughter.]
        It has been a pleasure to work with you on this
    Subcommittee for so long. Although our roles are now switched,
    I'm hopeful that we can continue to work in a bipartisan
    fashion on the many important issues under this Subcommittee's
    jurisdiction. I'd also like to take a moment to join with
    Chairwoman Emerson in welcoming new members from both sides of
    the aisle to this Subcommittee. There are a lot of important
    decisions to be made over the next couple of years and I
    believe that this Subcommittee has a significant role to play.
    I would like to join Chairwoman Emerson also in welcoming the
    Inspector General to the hearing in Financial Services today.
    You have an important role in conducting oversight of the
    Securities and Exchange Commission. I'm looking forward to
    hearing your testimony today and learning more about your work
    and ongoing investigations.
        With the passage of the Dodd-Frank Wall Street Reform and
    Consumer Protection Act, the SEC has a critical role to play in
    the successful implementation. The new powers given to the
    Commission are vital in preventing another financial meltdown.
    We must make sure that the SEC receives the robust funding that
    it needs in order to undertake these new responsibilities. I
    know that as Inspector General, you will be monitoring this
    important implementation. So again, thank you, Chairwoman
    Emerson, and welcome to you.
        And I must say, Madam Chair, that it's ironic in a way that
    we are facing the cuts we are because you remember how much you
    and I fought to make sure that whatever came out of Dodd-Frank
    would be in this Subcommittee. There was talk whether--what
    committee it would go to. So now we have this implementation in
    our Subcommittee and we have to make sure that it survives. And
    lastly, just in sort of saying goodbye officially to my
    chairmanship and welcoming yours, I hope that it survives, and
    I hope that as we work through these very important and serious
    cuts, that we keep three things in mind. One, that we created a
    lot of programs that help the consumer. And if you notice in
    the bills that you and I passed in the last four years, or
    tried to pass, all the bills speak in the prefacing comments
    about consumerism. Whether it's the product safety commission
    or whether it's investors--that the SEC has to protect
    consumers.
        Secondly, and very personal to me, we were very fair to the
    territories, to Puerto Rico, to Guam, Samoa, and all those
    American citizens who live in territories. And I hope that that
    continues.
        And lastly, for me again very personal, but for this
    committee and I know for you too, we did a lot of good things,
    a lot of good things in bringing dignity and giving the respect
    that the people that live in the District of Columbia deserve.
    I know that there are some folks who would like to bring back
    old issues, social issues that deal only with the District of
    Columbia. I hope that's not the case. I hope we realize that
    all American citizens should be treated equally, and while
    there are some constitutional requirements on our part in
    dealing with the District, that we don't have to make that
    hurtful or mean in our approach. And I know that's not who you
    are, and I know that your only pain in life, as you continue to
    think the Cardinals will win a World Series sometime soon--
    which is not going to happen--but other than that, I welcome
    your chairmanship and I stand ready to support you.
        Mrs. Emerson. Thank you so much, Joe, and perhaps we should
    make a bet on the World Series after the hearing is over. Thank
    you for your very kind comments and very thoughtful comments.
    Let me take a moment to welcome Ms. Lee from California, Mr.
    Womack from Arkansas, and Mr. Alexander from Louisiana; and I
    already acknowledged Mr. Diaz-Balart from Florida. I thank you
    all so much for being here. And Mr. Bonner from Alabama, thank
    you. Inspector General Kotz I'd appreciate it if you keep your
    statement to five minutes so we can maximize the opportunities
    to ask questions. Thank you so much.

                       Inspector General Kotz' Testimony

        Mr. Kotz. Thank you for the opportunity to testify before
    this Subcommittee with respect to the Securities and Exchange
    Commission. In my testimony, I am representing the Office of
    the Inspector General, and the views that I express are those
    of my office and do not necessarily reflect the views of the
    Commission or any Commissioners. I'd like to begin my remarks
    by briefly discussing the role of my office and the oversight
    efforts we have undertaken during the past few years.
        The Office of Inspector General is an independent office
    within the SEC that conducts audits of programs and operations
    of the Commission, and investigations into allegations of
    misconduct by agency staff or contractors. The OIG does not
    make policy decisions for the SEC, or substantive
    determinations regarding the commission's program, functions,
    or budgetary process. Rather, the OIG's mission is to promote
    the integrity, efficiency, and effectiveness of the programs
    and operations of the SEC, and to report its findings and
    recommendations to the agency and to Congress.
        Since my appointment as Inspector General of the SEC in
    December 2007, our investigations unit has conducted numerous,
    comprehensive investigations into significant failures of the
    SEC in accomplishing its regulatory mission, as well as
    investigations into allegations of violations of statues,
    rules, and regulations, and other misconduct by commission
    employees and contractors. In August 2009, we issued a 457-page
    report of investigation analyzing the reasons why the SEC
    failed to uncover Bernard Madoff's $50 billion Ponzi scheme.
    This report was issued after a nine-month investigation in
    which we conducted 140 interviews and reviewed approximately
    3.7 million e-mails.
        In March 2010, we issued a thorough and comprehensive
    report of investigation regarding the history of the SEC's
    examinations and investigations of Robert Allen Stanford's
    alleged $8 billion Ponzi scheme.
        More recently, we issued reports on the circumstances
    surrounding the SEC's proposed settlements with Bank of
    America, and allegations of improper coordination between the
    SEC and other governmental entities concerning the SEC's
    enforcement action against Goldman Sachs.
        The office's audit unit has also issued numerous reports
    involving matters critical to SEC programs and operations in
    the investing public. These have included, just to name a few,
    an examination of the commission's oversight of Bear Stearns
    and the factors that led to its collapse, a review of the SEC
    bounty program for whistle-blowers, and an analysis of the
    SEC's oversight of credit-rating agencies and an audit of the
    SEC's real property and leasing procurement process.
        In addition, following the investigative report related to
    the Madoff Ponzi scheme, we performed three comprehensive
    reviews providing the SEC with 69 specific and concrete
    recommendations to improve the operations of both its
    enforcement and examination functions. Over the past three
    years, many of our efforts have been directed at identifying
    waste or misuse of government funds by the SEC. The two largest
    areas in which we have found significant waste and
    inefficiencies have been in procurement and contracting, and
    costs relating to real property leasing and office moves. In
    the procurement and contracting area, we've identified numerous
    deficiencies in the management and oversight of the SEC's
    contracts: A lack of written internal policies and procedures
    for administering contracts, a failure to maintain accurate
    records and data regarding contracts, and improprieties in the
    selection of vendors and the awarding of contracts. These
    failures led to the cancellation of contracts and the
    expenditure of funds to re-procure required services.
        In addition, numerous OIG investigations, audits, and
    reviews have revealed excessive costs and inefficiencies in the
    SEC's leasing of real property and the relocation of staff
    offices. We found situations in which the SEC made excessive
    payments that could have been avoided if appropriate policies
    and procedures had existed and been followed. We also found
    that SEC management approved a project to reconfigure internal
    office space at a significant monetary cost, without performing
    any cost-benefit analysis of the project prior to its
    undertaking. In the instances that I've described in which our
    office found wasteful expenditures and inefficiencies, we have
    provided SEC management with detailed descriptions of our
    findings, as well as concrete and specific recommendations to
    alleviate the problems and concerns we identified. We have also
    followed up to ensure that these recommendations have been
    agreed to and are fully implemented. We've also made
    recommendations designed to increase the SEC's oversight
    capability and its internal controls.
         In certain instances, it has been and will be necessary
    for the SEC to incur additional expenses to implement our
    recommendations. For example, after our investigative report
    found the SEC failed to respond appropriately to credible tips
    and complaints about Bernard Madoff's operations by conducting
    competent exams and investigations, we recommended numerous
    reforms to the SEC's Tips and Complaint system. The SEC has
    instituted a new Tip, Complaint, and Referral system in order
    to ensure that complaints received are acted upon in a timely
    and appropriate manner, at a total estimated cost of $21
    million.
        I believe that the SEC's mission of protecting investors,
    maintaining fair, orderly, and efficient markets, and
    facilitating capital information is more important than ever.
    At the same time, the SEC has a responsibility to utilize
    government funds in an efficient and effective manner. The
    Office of the Inspector General intends to remain vigilant to
    ensure that scarce government resources are utilized wisely and
    cost-effectively, and instances of waste and abuse are
    eliminated. Thank you.
        [The information follows:]

        [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Mrs. Emerson. Thank you Mr. Kotz. I'll start the questions,
    but let me just ask you--I've got four quick ones that I want
    to ask, and then I'll turn it over to Mr. Serrano--when you say
    that you're recommending an expenditure of $21 million to
    update the Tips and Complaints Department, what does that
    entail?
        Mr. Kotz. Well we didn't recommend that particular
    expenditure. What we said was The Tip, Complaint, and Referral
    system at the SEC doesn't work. You know, Harry Markopolos and
    others came forward with tips about Bernie Madoff, the tips
    were not reviewed appropriately, competent exams and
    investigations weren't done. And so the SEC put in a new
    system, a computerized system that involves ensuring that all
    different offices within the SEC are advised of the tips, that
    there's appropriate triage of the tips, that they're followed
    up appropriately. And so the SEC decided to put in a new
    system, in response to our recommendation, and they informed me
    that the system cost $21 million.
        Mrs. Emerson. So $21 million includes the computer system
    itself and the people to run the system?
        Mr. Kotz. I believe it's all-inclusive, yes. I believe the
    total cost of putting the system in and having the appropriate
    manpower--You know, one of the issues is, obviously the SEC
    gets a tremendous number of complaints.
        Mrs. Emerson. Right.
        Mr. Kotz. They have to weed through the complaints to make
    sure that they don't miss any that are significant. So they
    need significant manpower to be able to do that. So I believe,
    and this is what I've been advised, is that that's the total
    cost.
        Mrs. Emerson. So, you make the recommendation, they go
    ahead and follow through and put in place a better system, and
    then do you come back to see that in fact, yes, this new system
    they've put in place would in fact work, should another
    situation like Madoff or Stanford happens?
        Mr. Kotz. Right, yeah. Certainly. I mean, we initially make
    sure that they actually put in a system, that the system in
    finalized and up and running. But yes, I believe that our
    office needs to go back once all the improvements have been put
    in, particularly with respect to Madoff and Stanford, and test
    it to ensure that it works. I mean, we don't want systems put
    in that sound good on paper but don't actually make a
    difference. So we will go back and look into these systems and
    make sure that they will actually put the SEC in a better
    position to catch frauds that have occurred.
        Mrs. Emerson. So in fact, this system, is it complete?
        Mr. Kotz. I think it's nearly complete.
        Mrs. Emerson. Okay. I would appreciate it if you would come
    back to us and let us know what your review shows.
        Mr. Kotz. Sure. I mean, we have to give, obviously, a
    significant time for the system to be up and running in order
    to review it, but yeah. Absolutely. We definitely intend to
    look back on all these improvements, because again, you can put
    new policies in, you can put new systems in. We have to make
    sure that it makes a difference.
        Mrs. Emerson. Indeed. Especially for $21 million, which you
    know, in the whole scheme of things may not sound like a lot of
    money but in fact, you add $21 million up a few times and then
    you're talking about real money.
        Mr. Kotz. Twenty-one million dollars for me is a lot of
    money.
        Mrs. Emerson. Believe me, for me it's a lot of money, too.
    That speaks to the whole issue of really taking seriously our
    commitment to reduce spending. While the SEC's appropriation is
    offset by collections, we still need to look at all agencies in
    an effort to reduce funding for ineffective programs, no matter
    what their funding sources are. My concern is that we have
    doubled the SEC's budget over the last nine years, and yet at
    the same time we've had Madoff, we've had Stanford, we've had
    numerous other issues. There is skepticism among my colleagues
    that the SEC can effectively do its job, in spite of what you
    say that they followed through on some of your recommendations.
    Can you tell us, I'm going to ask these four questions in
    order----
        Mr. Kotz. Great.
        Mrs. Emerson. Number one: how would a reduction of the
    SEC's appropriation to fiscal year 2008 levels affect the SEC?
    Do you believe, based on all of the internal investigations
    that you've done, that taxpayer dollars are being used
    effectively or spent effectively? What can you do or what are
    you doing proactively to identify inefficiencies within the SEC
    budget itself? What recommendations might you offer for more
    efficient and effective use of taxpayer money for the SEC?
        Mr. Kotz. Okay, sure. In terms of reduction and
    appropriations to fiscal year 2008, obviously I can't speak for
    the entire SEC; I've not done a full analysis of how the budget
    would affect the SEC as a whole. Certainly, they tell me that
    if we went back to 2008 levels, it would require a significant
    reduction in force, possibly over 600 people. And I think I
    would have some concerns about the SEC losing 600 people in
    terms of being able to do the work they did. You know, in terms
    of efficiencies, one of the things we do is look for areas
    where there are inefficiencies. And so I certainly can't say
    that every penny spent is being spent in an efficient way. In
    fact, we've identified areas in which it's been inefficient, as
    I indicated. In the procurement area we've identified
    inefficiencies; we've identified inefficiencies in leasing
    area, and proactively, what we do is we look carefully at the
    areas where historically there have been problems. And so we'll
    go back, I mean we have offices and divisions who say ``Why are
    you auditing us again?'' and we say ``We're auditing you again
    because we had a lot of problems the last time we audited
    you.'' And so we are very aggressive and very vigilant in
    looking into the programs that have historically had problems.
    We do what we can to ensure that there are efficiencies.
        Look, the SEC's made a lot of mistakes, we've chronicled
    many of those mistakes, you know, in painstaking fashion,
    particularly with Madoff and Stanford and others. But I believe
    that the SEC is on the road to making improvements. I believe
    the SEC understands the importance of fixing the problems that
    they have, and I believe that they are working to do that. Our
    job is to ensure that it's reality, that it's not just a paper
    record. So I mean I don't know that I'm in a position,
    particularly, to make recommendations in terms of overall SEC.
    But you know our office is very aggressive and vigilant in
    looking at the SEC carefully. And anywhere we find any waste or
    inefficiencies, we point them out and we're very aggressive
    about ensuring that the SEC responds to our recommendations and
    does the appropriate thing. And I can tell you that Chairman
    Shapiro has been very good about assisting in that process. If
    I ever have a situation where I feel an office or division
    isn't being responsive enough, and we require a lot of
    responsiveness to our recommendations and we take them very
    seriously, her office is very helpful in ensuring that things
    are done the right way.
        Mrs. Emerson. I appreciate hearing that. One quick follow-
    up. You've been told that if the SEC was to go back to 2008
    funding levels, that it would result in a loss of 600 people.
    The question is are the people who are currently working within
    the SEC doing the right jobs? Hypothetically, if you lose 600
    people, are there other people within the organization itself
    who perhaps should be doing something differently than they are
    today? Do you all look at that sort of thing?
        Mr. Kotz. From time to time in a particular office. We
    wouldn't do sort of a global view of that. You know, I don't
    know, I can't speak sort of for the SEC overall. Certainly,
    where we feel that people are not working hard, or they're
    engaging in inappropriate conduct, we'll recommend they be
    terminated. We have done that many times in my three years at
    the SEC, and many people have been terminated as a result of
    our investigations. So you know, certainly the ones we're aware
    of, we take action. Could I tell you that there is no one there
    who couldn't be in a different job? I couldn't.
        Mrs. Emerson. Some of the people who were involved in the
    Madoff scheme are still working there, is that not correct?
        Mr. Kotz. Many of the people who were involved in the
    Madoff scheme are gone. Some are still working there, but there
    is disciplinary action going on with respect to many of the
    folks who were involved in the Madoff matter.
        Mrs. Emerson. Okay, thanks. Mr. Serrano.
        Mr. Serrano. Thank you. Just a follow-up. I don't want to
    spend too much time on this, but you say that you're probably
    not equipped to, or prepared to tell us how cuts would hurt the
    agency--because that's the inner workings of the agencies. But
    you do know waste when you see it.
        Mr. Kotz. Right.
        Mr. Serrano. So, if you see waste, don't you also see when
    the budget gets too low to perform their duties? Doesn't that
    play----
        Mr. Kotz. Yeah, I mean, I would say so. I mean, as I said,
    I think that significant cuts or furloughs, 600 or more people,
    I think would have an impact. I don't think that there are 600
    people in the SEC who are not providing value, and so I would
    say that that would have an impact on the SEC's operations. As
    I said in my oral testimony, many of our recommendations
    require that people do additional things. So I'm in a position
    where I'm recommending that action be taken to redress
    something. You know, I don't want there to be a situation where
    they say, ``We'd like to redress it but we can't because we
    have budget cuts,'' or ``We can't because we don't have the
    people anymore to do it,'' or ``We don't have the funds to put
    in a system,'' so that is certainly a concern.
        Mr. Serrano. We would hope that the SEC has changed since
    the financial crisis started and the Ponzi schemes were
    discovered, and I believe they've changed, but for the record
    just say we hope they've changed. Question is, How has your
    office changed because of what's happened? How have you had to
    adjust? Have you had to look at things differently? Have you
    had to allocate your staff differently? When do you go after an
    investigation, you know, how do you determine which one to go
    after?
        Mr. Kotz. Yeah, well I think we've become even more
    vigilant and frankly more skeptical of things that happen. And
    so, you know, whenever there's a request, we look at it. We
    look at all of them. I mean, we certainly don't want to be
    caught in a situation where there's a complaint that comes in
    that we haven't reviewed carefully, so we review all the
    complaints. And you know, we have had more people added to our
    staff, we have a very small staff as it is. We have 18 full-
    time employees at the moment. We did the Madoff investigation
    with four investigators. And so there have been need--we've
    gotten a lot more complaints in since the Madoff and Stanford
    scandals, and so we've had to address them. But frankly, I'm
    certainly very skeptical and suspicious, and if I see a
    complaint that comes in that alleges that something was missed,
    then we look at it very carefully to see if it was missed.
    Because there was a track record where important matters were
    missed, and so we have to look at them. I feel that I have to
    stay on my toes; I have to be very vigilant. We investigate
    everything thoroughly, and sometimes it turns out that the SEC
    did nothing wrong, but we have to take everything very
    seriously.
        Mr. Serrano. Are you at liberty to tell us without,
    obviously, getting specific or giving us information we don't
    need to know in public, where the complaints come from? I mean,
    who gives you these tips to follow in addition to whatever you
    uncover yourself?
        Mr. Kotz. We have some tips from inside, inside the SEC,
    employees coming forward in making claims, but the majority of
    the tips come from the outside, from investors, from folks who
    are either under investigation by the SEC or somehow affected
    by what the SEC does, and so I think that's the lion's share of
    them, is folks from the outside, investors who come in and say,
    ``This was done wrong.''
        Mr. Serrano. Thank you. Getting back to the Dodd-Frank
    legislation which created more responsibilities and oversight
    responsibilities for the SEC, again, talking about staffing, do
    you feel, or do you have information that can tell us, whether
    in fact the SEC is equipped, staff-wise, now to handle these
    new responsibilities?
        Mr. Kotz. Again----
        Mr. Serrano. And by the way, I understand that friendly or
    unfriendly agency; all agencies always want more staff.
        Mr. Kotz. Right.
        Mr. Serrano. I only remember once, and it was an issue that
    I kept bringing up, and it was the SEC. In the prior
    administration, they were the only agency that came before us,
    and said that ``We don't need any more money.'' That should
    have been a sign that something was wrong, because every agency
    wants more staff----
        Mr. Kotz. Right.
        Mr. Serrano. They didn't want anymore, and obviously it was
    a problem, because they needed more. So do you think they're
    equipped to handle what they have to handle, assuming it goes
    forward, because, you know, there are some folks who would like
    no oversight of Wall Street.
        Mr. Kotz. Right, I mean I know that there are a lot of
    responsibilities associated with Dodd-Frank. Our office even
    has one relatively small responsibility, but we have a
    responsibility involving an OIG employee suggestion program.
    And I do think that at the moment what the SEC is doing is
    they're using other folks who were working on other matters to
    handle Dodd-Frank matters, because I don't think that they've
    been able to do any significant hiring for Dodd-Frank, so, you
    know, while I haven't done an analysis, per se, of the effect
    of Dodd-Frank on the SEC, I would certainly venture to say that
    it would be difficult to implement many of those
    responsibilities if there were cuts, and if they didn't have
    sufficient funds to do it.
        Mr. Serrano. One last question. The President's budget
    proposal for the SEC. Did you feel that, for what you may know
    about the President's budget proposal, that there are areas
    that are vulnerable at the SEC under that budget?
        Mr. Kotz. Yeah, I mean that, I have not really analyzed,
    you know, the particular budget proposals; I'm not really
    involved in that process, you know, so I don't know that I
    could really give an educated opinion on what the impact would
    be. But I do know that there are new responsibilities, I do
    know that there are many times where our office will recommend
    things that require additional funds. I can tell you that, you
    know, we will certainly be very watchful to ensure that if
    additional money comes to the SEC, that it's used wisely and
    efficiently. But I'm not sure I could give an educated opinion
    on, you know, one particular budget versus another.
        Mr. Serrano. Thank you.
        Mrs. Emerson. Thanks, Mr. Serrano. Mr. Womack.
        Mr. Womack. Thank you, Mr. Inspector General, thank you,
    Madam Chairman. I appreciate the testimony today. I've only got
    a couple of questions. Having spent 30 years in uniform, having
    been the subject of a number of Inspector General visits in my
    various military units, I recognize very quickly that troops,
    as it were, in this case the SEC, typically work on the things
    that they know the Inspector General is going to check, and so
    I have a couple of questions, reference your oral testimony
    about particularly the TCR, and the fact that, if I heard you
    correctly, the recommendation or the investment was about $21
    million.
        And I want to know--I want to be confident that we haven't
    created a $21 million paper tiger. Because on one hand, in your
    testimony you talk about the tips, and what later turned out to
    be credible evidence of problems, Madoff, Stanford, et cetera,
    were not followed up on, not taken seriously, something
    happened, there was a disconnect somewhere, and you are
    confident that the implementation of the TCR is going to fix
    those problems. What systems do you have in place from your
    office to check, to ensure, that those are happening, i.e.,
    have we performed any test cases, have we engaged the system
    that is in place to ensure that there is a tracking program
    established to ensure that information that comes into the
    system is triaged and accurately determined to be credible or
    not credible?
        Mr. Kotz. Well I'm certainly hopeful that the system works,
    I don't know that I'm entirely confident, as you are, that the
    new system will work, and I couldn't----
        Mr. Womack. I didn't say I was confident. I want to be
    confident.
        Mr. Kotz [continuing]. As you were saying, I'm not sure I'm
    that confident either. I agree, certainly, with what you're
    saying, sometimes it's easy to put in a computer system, to
    make IT changes as a way to solve all problems. And you know,
    I've seen many times, both as Inspector General of the SEC and
    another job as Inspector General, that sometimes the easiest
    solution is to say, ``Oh, we'll just put a new computerized
    system in, that'll solve all the problems.'' And it sometimes
    is a paper tiger, and it doesn't necessarily work. So, as I
    indicated, once the system is put in fully, begins to work,
    there is sufficient time to be able to audit it, we will go
    back in and test it, because we need to ensure that there has
    been real change, not just a system put into place in which the
    individuals involved will do the same thing that they did
    before, which was not follow up appropriately. So I agree, and
    we will absolutely look carefully at this system, it's a
    significant expense, to ensure that it provides real change and
    isn't just a paper tiger.
        Mr. Womack. Do you have a certain timeframe, a certain date
    circled on the calendar, when you, as the Inspector General,
    have to be confident and certain that the systems that you have
    recommended are fully implemented, are working, because I think
    you said in your oral testimony that you think that the systems
    are pretty well operational.
        Mr. Kotz. Six months after it's fully implemented is the
    time period that we usually look at in order to conduct some
    kind of test or audit. You have to give it enough time to
    ensure that there's something to look at. But at the same time,
    you don't want to give it too much time, because if it's not
    working you want to get to it. So as a rule of thumb, we look
    at six months from the time it's fully implemented.
        Mr. Womack. Thank you very much.
        Mrs. Emerson. Let me ask a follow-up to his question, I
    probably shouldn't do this because it's Ms. Lee's turn, but: if
    we put a new computer system in place that's going to cost $21
    million, and we're hopeful that it's going to work, how would
    that, then, have caught the fact that the Fort Worth SEC
    employee shoved all the Stanford stuff aside for so many years?
    How does the computer system supersede any person like that?
        Mr. Kotz. Right. What happened in the Fort Worth situation
    was there were examiners in the Fort Worth office who believed
    that Allen Stanford was running a Ponzi scheme. They were
    trying to get the enforcement part of the Fort Worth office to
    take action, and the Enforcement Division would not take action
    over a series of years, and the examiners watched the alleged
    Ponzi scheme grow and grow over time, and couldn't get action.
    One of the new improvements in the system is to allow the
    examiners to have access to other folks, so the information the
    examiners put into the system then goes not just to the folks
    in the Enforcement Division in Fort Worth who were unwilling to
    go forward at that time, but to folks in Washington, folks
    other places where if somebody else looked at it, I think it's
    reasonable to believe that if others, other than the folks who
    were in place in Enforcement in Fort Worth, had read those exam
    reports, and had been aware of the significant findings, that
    they would have forced action to be taken.
        Mrs. Emerson. Okay, I appreciate that clarification. Ms.
    Lee?
        Ms. Lee. Thank you very much, thank you for your testimony
    and your service during these very challenging times. We
    congratulate Chairwoman Emerson again, and I want to associate
    myself with the remarks of our Ranking Member and, I mean our
    minority member, I said a Ranking Minority Member, and I want
    to just, say to you we look forward to our continuing work
    together. This has been a Subcommittee that has been very
    bipartisan in our work, and of course our goal is to make sure
    that the mission of the SEC and the other agencies are really
    serving the people of this country, so, congratulations again.
    And also, to you Mr. Kotz, let me just thank you for the
    thorough investigations that you have conducted, and say that I
    think that has restored some confidence in the SEC's
    enforcement mechanisms. And I want to make sure, though, that
    the budgets that we look at allow you to continue with our
    efforts, and would be very reluctant to support any budget
    cuts; of course I know we're going to have to deal with that.
    But I think the SEC really is on the right track now. And so,
    thank you very much.
        I know out of the Dodd-Frank Bill. The Congressional Black
    Caucus members on the Financial Services Committee made sure
    that each of our agencies had the Office of Minority Inclusion
    as part of their new mission. Could you kind of tell me, or do
    you know where that is, in terms of the SEC now?
        Also, in addition to that, I always want to know what the
    diversity numbers look like in all of these agencies as it
    relates to professional staff, as well as the types of--if you
    contract out any of your services, the contracts' amount, and
    to whom. I mean, do you contract with small and disadvantaged
    businesses, if so, how much? And what are you doing to ensure
    that the recruitment and training of the SEC goes into
    historically black colleges and universities to ensure a
    diverse staff?
        Mr. Kotz. Okay. We have not done an overview, per se, of
    the new office with respect to Dodd-Frank. I am aware of the
    office, I couldn't tell you right now what the status is
    because that isn't something that we've looked at. A lot of
    these new offices under Dodd-Frank are in the process of being
    implemented so it would be premature for us to look at. You
    know, certainly I can speak with respect to my office.
        My office takes diversity matters very, very seriously. We
    have a very high percentage of employees in our office from
    minorities, and women as well. When we do contract out, our
    office we generally contract out with smaller entities, we
    have, you know, generally smaller projects as well. So it isn't
    an analysis that I have done overall in the SEC, and I think
    that others, the Chairman and others, could speak to that. I am
    aware that this new office was placed in under Dodd-Frank, I am
    aware that there is an effort to staff it up, but I couldn't
    tell you the exact stats.
        Ms. Lee. Okay, well I guess, would your office, then, if
    it's possible to get sort of a report or breakdown of your
    staffing patterns and the contracting patterns, you know, the
    type of businesses by ethnicity, gender, you know the standard
    reporting.
        Mr. Kotz. Sure.
        Ms. Lee. I'd like to see that.
        Mr. Kotz. Sure, absolutely I can get that to you.
        Ms. Lee. Okay. And also let me just ask you in the
    implementation, who will be responsible for making sure, I
    mean, will yourself as IG be responsible for making sure that
    the implementation of the Office of Minority Inclusion is what
    it should be, and that it adheres to the law and the
    requirements, and who would oversee that?
        Mr. Kotz  That's absolutely under our purview, you know,
    where the SEC has a requirement, we compare what they're doing
    to what the law requires, and if we find that there is not
    sufficient regard to the regulations and the separate
    requirements, then that would be an audit function. And so, you
    know, that is an office that certainly, again, once it's put in
    place and the SEC comes forward and says ``We've done what we
    were supposed to do,'' that would be the subject of an audit
    for us to ensure that it's actually happening appropriately.
    And if it doesn't, we would report back to you that it's not.
        Ms. Lee. Would we have to ask you to report back? I mean,
    should I ask you this question next year, or, how should we----
        Mr. Kotz. No, no, no. No, no. No, no. No, I mean, you know,
    again, the only proviso being we have to make sure that the SEC
    has an opportunity to staff it appropriately----
        Ms. Lee. Right, I understand that.
        Mr. Kotz. But no, you wouldn't have to ask, it would be in
    our semi-annual report that we would send to Congress.
        Ms. Lee. Okay, Okay. Thank you very much, thank you Madame
    Chairwoman.
        Mrs. Emerson. Thank you so much, Ms. Lee. Mr. Diaz-Balart?
        Mr. Diaz-Balart. Thank you very much, Madame Chairwoman. A
    couple questions, and fully, frankly, kind of piggybacking on
    what you mentioned, you asked. Jo Ann mentioned that the SEC's
    budget had doubled since, I guess since the Enron incident. And
    yet, we still had these Ponzi schemes that were, again, that
    had been tipped on, but no action had taken place. In the case,
    for example, of the Stanford Ponzi scheme, between 1997 and
    2005, supposedly it grew from 250 million to 1.5 billion, and
    the lack of action on behalf of the investors by the SEC, as
    noted in your report, frankly cost a number of my constituents
    their entire life savings, because, again, I do have
    constituents that were affected by that.
        So, since your report, a number of changes have taken
    place, and you mentioned some of them. Enforcement practices,
    policies, whatever. But my question is, how much confidence can
    we actually have that it's been taken care of, and that
    something like this would be caught in the future, that another
    Stanford Ponzi scheme would be found, and what other things
    does the SEC need to do? I'm going to just ask you two real
    quick questions, that is one.
        Mr. Kotz. Right.
        Mr. Diaz-Balart. Level of confidence that you have, or that
    we should have, on that. And the other one, again piggybacking
    on the chairwoman's question about the tips and complaints, the
    21 million dollars. When they go out and get this new system,
    do they first consult with the private sector as to what
    systems are already available for--I understand it's a unique
    kind of area, but there may be others that do things that are
    similar in the private sector that already have systems, do
    they have to recreate the system or were they able to look at
    something that already existed and kind of adopt it? That would
    be my other question, and thank you Madame Chairwoman.
        Mr. Kotz. Okay. Sure, as to the level of confidence, you
    know, you cannot guarantee that the next one won't be missed. I
    mean, I can tell you, I have a level of confidence with respect
    to the specific issues that were both in the Madoff and the
    Stanford situations. In other words, the mistakes, the failures
    that were made by the SEC and those particular issues that we
    have put forward recommendations to fix those; And with the
    recommendations being implemented, I believe those same
    circumstances would not occur. Now of course, you have to
    ensure that there isn't some other situation, because obviously
    you can't just deal with the particular situations. So I mean,
    we have to stay vigilant, we have to stay skeptical. I believe,
    personally, that the SEC is in a much better position than it
    was when I first started as Inspector General, when these
    scandals took place. But we need to ensure that we continue to
    review and look at them carefully to make sure that there isn't
    something else happening that we would potentially miss.
        You know, with respect to this particular system, I wasn't
    involved, per se, in putting together that system. I will tell
    you that one of the recommendations we made arising out of
    Madoff, was more discussion with the private sector. In the
    Madoff case, folks in the private sector, there was sort of a
    whispering campaign, people knew there was something funny with
    Madoff's returns. I think a lot of people didn't think it was a
    Ponzi scheme, I think a lot of people thought it was some sort
    of insider trading or whatever.
        But people thought there was something suspicious about it,
    and yet that information was not really brought to the
    attention of the folks in the government, and I don't think the
    government folks had the same suspicions. So, there's a wealth
    of information out there in the private sector, and that
    information needs to be provided to folks in the government,
    because they have a better, sometimes a better finger on the
    pulse of what's going on.
        One of the things we recommended rising out of Madoff was
    for there to be more communication, more information brought,
    more incentives for folks in the private sector to bring
    forward that case. When we talked to folks who had suspicions
    about Madoff, we said, ``How come you didn't bring it to the
    SEC's attention?'' And they said, you know, ``What good would
    it do us? What does it do for me? Why should I? Now I might get
    sued.'' You know, ``My name will be involved in something, I
    may get sued. So there's no benefit for me, there's only a
    negative; why would I do that?''
        And so I think that the SEC needs to create incentives to
    get that information in, to learn about it. These folks agreed
    that they would give seminars to SEC folks about how, you know,
    how operations particularly work. And so I think that that's
    something that's an excellent idea, and I encourage the SEC to
    do that.
        Mrs. Emerson. Mr. Serrano. Your turn.
        Mr. Serrano. That quickly?
        Mrs. Emerson. Well, unless you want me to go to Mr. Bonner
    first.
        Mr. Serrano. You can, Mr. Bonner.
        Who under my chairmanship got the best attendance award, do
    you remember that?
        Mrs. Emerson. He did?
        Mr. Bonner. I hope to live up to that standard, now that I
    am back on the Subcommittee. Thank you, Madame Chair. Mr. Kotz,
    you have had an impressive career.
        Mr. Kotz. Thank you.
        Mr. Bonner. Working with the Peace Corps----
        Mr. Kotz. Right.
        Mr. Bonner [continuing]. USAID, and now the SEC, so you
    probably have a better vantage point than some people do
    because you've had the chance to see three different government
    agencies, with different roles and responsibilities. But
    especially as the Inspector General, you've had a chance, in
    this instance, to see up close perhaps some things that worked
    well in other agencies that you were in that may--that those
    ideas could be brought over to the SEC.
        I have a few questions that I'd like to get your comments
    on. And never to try to correct the Chairwoman, but by my math,
    the budget of the SEC has actually tripled, almost, over the
    last decade. It was $377 million in 2000, and by the
    President's budget request last year, that was 2010, was 1.1
    billion, so----
        Mrs. Emerson. You are correct. I believe I said their
    budget has more than doubled.
        Mr. Bonner. But, regardless, it's a sizable increase.
        Mr. Kotz. Right.
        Mr. Bonner. And so, while I've acknowledged you've had a
    lot of very important roles in government. Put yourself in our
    shoes and help me, as a guy from Mobile, Alabama, go back home
    when I do a town hall meeting, and explain to my constituents,
    some of whom, like Congressman Diaz-Balart, have lost in the
    Stanford scheme especially, this is an agency that has had its
    budget doubled or tripled over the last decade, depending on
    when you start the calendar. And yet, we have been--it's the
    agency that was asleep at the wheel for some of the biggest
    failures that had direct responsibility. How could I explain to
    my constituents, we need to give them more money, which is what
    the Commissioner is actually asking for, every Commissioner is,
    as Mr. Serrano said, would like more--we need to give them more
    money, and yet they've had a triple increase over the last
    decade, and they were asleep at the wheel during three of the
    biggest, with, if you count Bear Stearns and Lehman, four of
    the biggest issues that we've dealt with since the Commission
    was created. How would I explain that to my constituents?
        Mr. Kotz. I understand, certainly, I'm a taxpayer, too.
        Mr. Bonner. I know you are.
        Mr. Kotz. And, you know, the amount of money we're talking
    about is over a billion dollars, incredible amounts of money.
    The only thing I would say is that the SEC has to take action
    against, sometimes, very powerful, very rich, very well-funded
    interests. You know, Bernard Madoff had a tremendous amount of
    sums available to him to fight the SEC. So I'm not sure I could
    give you a specific thing to explain to a taxpayer, even like
    myself, why more money would be given to an agency that missed
    so many things. At the same time, I think it's worth noting
    that in order to keep up with the fraudsters, in order to
    ensure that there is compliance, the amount of money that those
    folks spend dwarfs anything the SEC could get, whether under
    the previous budget or under these budgets. You know it's a
    very difficult mission, I think, the SEC has, in order to stay
    ahead of what's going on in certain places in the private
    sector, and they need sort of the tools to be able to deal with
    the Madoffs and the Stanfords. And I don't think it's only a
    matter of money. And let me say this, the idea that they would
    solve the problem of Madoff by putting in a $21 million system,
    that's not going solve it; it's not just about more money to
    solve all problems. I think there needs to be, and you know,
    we're ensuring that there are significant changes in how about
    they go about doing their work, not just sort of, write a
    check, and now you have a new system and everything's fine. But
    I think it is important to realize what they're up against, and
    they are up against some very heavily-funded entities.
        Mr. Bonner. Let's go back to a comment you made earlier in
    response to a previous question, because I want to understand
    this. At the Fort Worth office, there were employees of the
    Securities and Exchange Commission who were suspicious, but
    they were not able to get anyone else in that office to be
    interested in it, and they didn't have any other avenue; there
    was a firewall where they couldn't call someone in another
    office, perhaps in Washington or New York, and say, ``Hey,
    we've got a problem here, no one is answering the phone, the
    building's on fire, but we can't get anyone to respond to us.''
        Mr. Kotz. Yeah, I mean, they didn't utilize it. They
    certainly could have, and we asked them how come they didn't.
    You know, sometimes you don't want to go over people's heads,
    sometimes there's an effect if you do that. I mean, certainly
    there was a director of enforcement in Washington that could've
    been gone to. I think the new system tries to make it easier
    for that to happen so it isn't dependent on a particular
    individual. I mean, maybe that is a failure even of the
    individuals who were suspicious, and found evidence of the
    Ponzi scheme, that they should have pushed it even further and
    gone above their heads to the head of the Enforcement Division,
    and then to the Chairman, and then to Congress, if they needed
    to, to ensure that something was being done.
        Mr. Bonner. The new tips and complaints system is $21
    million. The New York Times article on February 2, it actually
    cites that, in one of your reports, that you identify that
    there was more than $15 million in office space leased in
    Manhattan. I don't think that's in my friends' district. I
    think the gentleman is from the Bronx, is that correct?
        I wanted to make sure I drew that distinction. But $15
    million for space in Manhattan, where no SEC employees worked
    for five years?
        Mr. Kotz. Yeah, yeah that's outrageous.
        Mr. Bonner. What are some other examples that you might
    share with us? Because, again, we're in a pickle. We're trying
    to dig out of a fourteen and a half trillion dollar hole that
    we're in.
        Mr. Kotz. Right.
        Mr. Bonner. And the last thing any member of this
    committee, Democrat, Republican, left coast, west coast, south
    coast, wants to do is to cripple an agency that has a very
    vital role, but, boy, that's a lot of money that someone lit a
    match to.
        Mr. Kotz. Right. No, there are other examples, particularly
    in the office and leasing area. We looked at a case involving
    the San Francisco lease where the SEC sort of delayed in making
    a decision on what action to take, ended up paying a holdover
    rate that was significantly higher than market rate. There was
    a situation not too long ago where the agency decided to
    conduct a re-stacking, move 1,700 employees to different places
    in the office so they would be more efficient and more
    productive. We did a survey, that folks in the SEC said mostly
    they communicate by e-mail and phone anyway, so they don't
    necessarily think that moving them to a different spot is going
    to make any difference. They believed it was a waste of money.
    We found there was no cost-benefit analysis done to ensure that
    it was appropriate before it was done. You know, we were very
    harsh in our report on that. There have been some areas in
    procurement and contracting where contracts have been
    mismanaged, where the invoices haven't been carefully
    scrutinized to ensure that the government's not getting ripped
    off. Sometimes you have situations where you have an initial
    contract come in at a relatively low rate, and so that entity
    gets the bid, but then there are so many modifications that go
    forward that it ends up being much higher than originally. So,
    you know, look, we have found instances where there is waste,
    and where there is, we have been very strong in recommending
    that action be taken.
        Mr. Bonner. Just one final question. How many people do you
    have in the IG's office, and how many people are there at the
    SEC, although I should know that, I apologize I don't.
        Mr. Kotz. Yes. There's I guess a little under 4,000 FTEs at
    the SEC. We have 18 full-time employees right now in our
    office, there's another few that we are hiring--in the process
    of hiring. So we have a relatively small office. And frankly,
    many folks have said, ``Why don't you have more people?'' But I
    feel like, if our office isn't efficient, then, you know,
    there's no office that should be efficient. The office of the
    Inspector General has to be efficient, and if we can do what we
    need to do with 18 people, then we don't need 40 people.
        Mr. Bonner. That's a good philosophy. Thank you, Madam
    Chair.
        Mrs. Emerson. You're welcome. Mr. Serrano.
        Mr. Serrano. Thank you. In your testimony, you stated
    additional funding will be requested to ensure that the SEC has
    sufficient resources to implement many of the recommendations
    that have arisen, and will arise out of the audits, reviews,
    and investigations. With that stated, are we playing with fire
    to even contemplate cuts to the SEC? We don't want to be
    sitting here a few years from now talking about the next Madoff
    scheme, knowing that we didn't give the agency the tools to
    prevent another such scandal.
        Mr. Kotz. Yeah, I do think that is a concern. And there are
    times, you know, our reports come in, we do investigations, we
    do audits, we make recommendations. And there are times where,
    in a budget situation the agency will come back and say, ``We'd
    like to do it but we simply can't.'' You know, in that
    situation there's not much we can do. I mean, the agency gets
    to decide where they want to allocate their resources. And so
    there are times where that is the response. Sometimes we come
    back and say, ``We want you to do it anyway, find the money for
    it.''
        But it is a concern, because in order to fix things,
    sometimes they require change in policies, change in people,
    but sometimes they also require additional resources if
    something is not staffed up enough. For example, in the Madoff
    situation, in one of the complaints that they were working on,
    they were analyzing the complaint, and they decided to take
    those resources and put it somewhere else because there was
    another issue that was even more pressing. And so the
    individuals who were working on the Madoff exam stopped,
    started working on something else.
        And so, you know, if we come back with a recommendation and
    say, ``You need to ensure you have sufficient people working on
    this,'' and they say, ``we don't have the money to do it,'' it
    sometimes can be a concern.
        Mr. Serrano. Right. By the way, Madame Chair, just as an
    aside to Mr. Bonner, nobody being in that place is an issue, in
    Manhattan. Fifteen million dollars of rent, that's cheap in
    Manhattan.
        The issue is why nobody's there, not how much. That's, in
    Manhattan, you all know that's very cheap. How much can you
    tell us about the Constitution Center, the 900,000 square feet
    that were leased--and then the CR comes along and
    implementation. Now first of all, your understanding is that
    this space was to meet the new responsibilities of the SEC in
    general or specifically with Dodd-Frank?
        Mr. Kotz. I think it was both. We are conducting,
    currently, an ongoing investigation of all those issues----
        Mr. Serrano. Right, and I know you can't comment fully,
    but, whatever you can tell us----
        Mr. Kotz. I mean, and we're going back actually prior to
    the decision to go forward with the Constitution Center lease.
    We're going back to prior decisions that were made or not about
    space. We're looking at the entirety of the SEC's space
    decisions over time. What we believe happened in that case was
    the SEC believed that it was going to get certain funding; it
    needed people to house, and so went forward and made the
    decision to lease that space, which was 900,000 square feet
    and, you know, a very large amount of space.
        What we're looking at is, you know, was there a sufficient
    analysis done? Were there studies? You know, when you expend
    government funds, you have to ensure that it's done
    appropriately. There are processes that have to be put into
    place. There are studies that are be done--has to be a
    reasoned, you know, and thorough decision. Sometimes decisions
    are made, sometimes they're the right decisions, sometimes
    they're the wrong decisions. We look to make sure that it was
    reasoned decision, and so we're going back--I took testimony on
    that earlier in the week. We're working very hard to ask the
    SEC, ``What was your thinking? Why did you make that decision?
    What analysis did you do to support that decision? Could you
    have gotten a better deal somewhere else?''
        And so we're looking at it very carefully, and we hope to
    have a full report of it within a short timeframe.
        Mr. Serrano. Thank you. We await that. Let me ask you on
    one of my favorite subjects again. What kind of involvement
    does the SEC have, direct physical involvement, with the
    territories? I mean, are there field offices, if you will, in
    the territories? What is the exchange? And also, you know, one
    of America's best kept secrets is in addition to territories,
    we also have associated republics, like Palau and Micronesia,
    and so on. Is there any involvement with that? And I'm not
    including Hawaii; I know there's some comment about--Hawaii is
    a State.
        Mr. Kotz. You know, I can't say we have looked at that
    particular issue. Maybe that is something that----
        Mr. Serrano. That was a personal Democrat-Republican joke,
    you know, that Hawaii's a State.
        Mr. Kotz. As I said, we haven't looked at that particular
    issue; maybe that is something we need to look at, you know, so
    I don't know that I could tell you exactly, you know, I'm
    certain that there is some coverage. I don't believe that
    there's necessarily a field office----
        Mr. Serrano. Right.
        Mr. Kotz. But, you know, that is something that maybe we
    need to look at too----
        Mr. Serrano. Because I know that people in the territories,
    just like all Americans, get up in the morning. And there are
    some folks in those places, just like some folks in the States,
    that invest in the market and I'm sure there are some folks who
    are maybe trying to figure out ways to be cute in the market
    right now.
        Mr. Kotz. And, absolutely.
        Mr. Serrano. And so, how do we keep tabs on that, and how
    do we protect the investors in those areas? Or do they all deal
    through New York, or Miami, or----
        Mr. Kotz. Yeah, I mean, I think that's something that we
    should be looking at to ensure that there are appropriate
    procedures in place so that you can get feedback, and you get
    information from folks out there.
        Mr. Serrano. All right.
        Mr. Kotz. I appreciate that.
        Mr. Serrano. I would appreciate that too. Thank you.
        [The information follows:]

        [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Mrs. Emerson. Thanks, Mr. Serrano. Let me ask you another
    couple questions about this Constitution issue because it's
    just shocking to me. I realize that since you're still
    investigating it, there are some things that you can't say, but
    it's my understanding that the SEC has been able to release
    600,000 square feet of that space, and are keeping 300,000
    square feet as a hedge against another lease that's coming due
    in October. 300,000 square feet of space is a lot, and it's not
    cheap, I know. Just by having it sit there until October, to
    me, doesn't sound very efficient.
        Mr. Kotz. Right.
        Mrs. Emerson. Have you all actually made concrete
    recommendations to the folks at SEC on their leasing practices?
    Or are you waiting to do that until the investigation is
    complete?
        Mr. Kotz. We looked at leasing issues, sort of on an audit
    side before, made some recommendations with respect to that. We
    will wait until we finish our investigation to make
    recommendations with respect to the 300,000. I'm not sure that
    at the end of our report, we will recommend that they hold on
    to any part of Constitution Center.
        And I'm also not sure that there are finalized decisions on
    that, yet. I know that the SEC has been making efforts to try
    to get rid of some of that space. I don't know that,
    necessarily, they have made a final decision----
        Mrs. Emerson. I see.
        Mr. Kotz [continuing]. To hold onto 300,000. It may very
    well be that we recommend that they don't hold onto any of it,
    and it may very well be that do that on their own anyway. There
    is a facility out in Virginia; there was some talk about moving
    the folks from Virginia out to Constitution Center, but I think
    we have to look at the costs of that, whether that's effective
    and efficient or not.
        You know, there are sort of things on both sides.
    Washington, D.C. is more expensive than Virginia, but if you
    have folks in Virginia, you have this shuttle service that goes
    [inaudible] so the question is, how much lost time is there on
    the shuttle? How much does the shuttle cost? I mean, all those
    things need to be looked at carefully. We need to ensure that
    the SEC is making, you know, good, thorough decisions on all
    these matters, and I think certainly, given that we're in the
    middle of this investigation; the SEC is looking carefully at
    all its different options before going forward with anything
    with respect to those leases.
        Mrs. Emerson. I know, having worked in the private sector
    for many years here in Washington, D.C., and knowing how much a
    square foot of office space is, this is alarming to me.
        Mr. Kotz. It is an incredible amount.
        Mrs. Emerson. And that was 14 years ago.
        Mr. Kotz. Yeah, well we're asking the question, ``How on
    earth could you have thought that you would need 900,000 square
    feet of space? I mean, you know, in the budget climate we're
    in, how is it possible for you to think that?'' And so, you
    know, we're going to get the answers. You know, we haven't made
    any determinations; we're still in the middle of the
    investigation, maybe there are good answers. But you know,
    we're going to go forward, and we'll report back what we found.
        Mrs. Emerson. I appreciate that. Speaking of leases,
    though, do you have any other concerns outside of Constitution
    Place or Constitution Center at this time?
        Mr. Kotz. You know, but we've looked at a couple of areas,
    we've found some concerns, we found that there weren't policies
    in place that are appropriate. We have to make sure that the
    people involved have the expertise that's necessary. Right now,
    we're looking at Constitutional Center. Again, we're looking at
    numerous spacing decisions in Washington, D.C. We know that
    there is new space that they're looking at in other cities; we
    may be looking at them eventually.
        You know, we feel this is an area that is of concern, and
    so we have to look at all aspects of it. If there's, you know--
    if it's the same people making the decisions, then wherever
    they're making the decisions, we have to look carefully at
    those decisions.
        Mrs. Emerson. Okay, so there are 11 regional SEC offices. I
    understand the need to have one in New York, perhaps even
    Boston, and maybe one on the West Coast. Is it efficient to
    have all of the SEC offices spread out around the country? It
    may well be, and perhaps you can make me feel more comfortable
    about that.
        Mr. Kotz. Yeah, I mean, I don't know that we've analyzed
    that point, but that again may be one that we need to look at.
    There is certainly, as time goes on, you know, the ability to
    communicate without being in the same place, you know, one of
    the--we have the suggestion program that is going on, and one
    of the suggestions was to have fewer people, for example, in
    New York City. Let them be out in Long Island or New Jersey
    where it's cheaper. Do you really need everybody to be in
    Manhattan? You know, one--two buildings, certainly not, maybe
    not even one building. And so maybe there are ways. Again, I
    don't know that we've done enough work.
        You know, we look very carefully when we conduct our
    audits; we're very thorough before we come up with the
    recommendation. But I do think it is worth looking at in
    today's age, whether there can be inefficiencies that way.
        Mrs. Emerson. It just seems, to me, that we do so much with
    tele-health and everything else today. Some of these spots just
    doesn't seem particularly necessary, but then maybe you can
    convince me otherwise, if in fact, those people are needed and
    the office space is cheaper than it is in DC.
        Mr. Kotz. Right.
        Mrs. Emerson. I would be curious to know if that's
    something that could be looked at.
        Mr. Bonner. Madam Chair.
        Mrs. Emerson. Yes, sir.
        Mr. Bonner. While we're talking about it, I am confident
    that there's rental space available in Mobile, Alabama for much
    cheaper than Manhattan----
        [Laughter.]
        Mrs. Emerson. I've got a great big factory in Dexter,
    Missouri that'd be happy to take them----
        Mr. Bonner. Just wanted to put that on the record.
        Mr. Serrano. Let the record show that I try to build you a
    courthouse, but----
        Mr. Bonner. And I'm proud to fill it right here.
        Mr. Serrano. Okay.
        Mr. Bonner. Thank you.
        Mrs. Emerson. Ms. Lee.
        Ms. Lee. Thank you very much. Let me just follow up with
    that by asking you what the dollar amount is in terms of the
    markets that you supervise, and investigate, and have to look
    out for?
        Mr. Kotz. Yeah, I don't know that I know a total dollar
    amount of the markets. I mean, I do know that, you know, one of
    the things the SEC looked at is in terms of sort of information
    technology budgets. You know, and I know that many of the
    additional funds that the SEC was seeking to get was in the
    area of information technology. And I understand that, you
    know, that the amount of money spent by large companies on
    information technology is, you know, many, many, many times
    more than the SEC's budget with respect to those areas. I'm not
    sure I could give you a total figure, but certainly as I
    indicated before, there are individuals with tremendous
    resources. I mean, Bernard Madoff was running a $50 billion
    Ponzi scheme. And so they have access to tremendous resources
    which can be used to sort of fight the SEC in going forward,
    and committing fraud, and other misconduct.
        Ms. Lee. You must know about how much of the $50 billion,
    for example, you know, in, that--bottom line is, you have
    responsibility for that $50 billion.
        Mr. Kotz. Right. Right, absolutely.
        Ms. Lee. Okay. So, how much? $100 billion? $200 billion?
    How much do you think that the SEC has responsibility to
    oversee or to be responsible for?
        Mr. Kotz. I would think it would be certainly over a
    trillion dollars, in terms of all the funds out there, but I'm
    not sure that I could give you a specific number.
        Ms. Lee. That's over a trillion. Okay, so, and what's the
    full staff--how many people total in the SEC?
        Mr. Kotz. A little less than 4,000, I think, full-time
    employees.
        Ms. Lee. 4,000. Less than 4,000. And you have how many,
    again?
        Mr. Kotz. 18 full-time employees right now, and we have--
    we're hiring four more.
        Ms. Lee. Twenty-two----
        Mr. Kotz. Twenty-two.
        Ms. Lee. For maybe over a trillion dollars, maybe.
    Certainly $500 billion. Somewhere close to that.
        Mr. Kotz. The SEC has a very important, very difficult
    mission----
        Ms. Lee. Yeah, but with 22 people to kind of watch over,
    that seems to be very few. I mean, I would think you'd need
    three times that amount to protect us and the American people
    from these fraudulent scam artists.
        Mr. Kotz. Right. Certainly.
        Ms. Lee. You know? So, the--Chairman Rogers, I think that
    the 13 percent budget cut has been proposed, and I know I heard
    your answer earlier about you really haven't evaluated these.
    But what would it do to your office? Just your office?
        Mr. Kotz. Well, so, again, we have 18 full-time employees;
    we're trying to hire four more. They're important positions. If
    something like that were to go through, it very well may stop
    us from being able to hire those four people. I mean, you know,
    we have five investigators and six auditors. We do a lot of
    work with that, but, you know, we had somebody who recently
    left us, took a higher paying job. There's no way we could
    compete financially with the job this person got.
        We want to replace the position; it's an important position
    to replace, so there's certainly the possibility that if the
    budget cut is severe, that we won't be able to replace that
    person. And you know it would have an impact on our operations
    going forward. You know, we are lean and we are efficient, but
    we do need the bodies to be able to perform the work.
        Our complaints have gone up over time and we need to be
    able to assess them all.
        Ms. Lee. And you have to protect investors, right?
        Mr. Kotz. Yes, absolutely. And that's certainly the mission
    of the SEC.
        Ms. Lee. You've got at least $500 billion you've got to
    protect with 22 people.
        Mr. Kotz. Right.
        Ms. Lee. Maybe 18. Sure, Okay. Thank you very much.
        Mrs. Emerson. Mr. Diaz-Balart.
        Mr. Diaz-Balart. Thank you, Madam Chairwoman. You mentioned
    a little while ago, in the back-and-forth, you know, money is
    not always the answer, obviously. And going back to some of the
    roles of the SEC--could part of the problem be that the SEC's
    faculty has been given too many issues to look at, too many
    things on its plate and that--to the point where they can't do
    any of them well because they're spread so thin? I mean, could
    that not also be an issue?
        Mr. Kotz. I think it's certainly a possibility. And one of
    the things that we try to focus on is that if the SEC is going
    to take on something, it needs to be able to do it well. And
    you know, one of the things we saw in the Madoff situation was,
    you know, the SEC would do these exams or investigations, and
    they would not do thorough ones. And so it would actually send
    the wrong message.
        I mean, we had--I talked to somebody in the private sector
    who was suspicious about Bernard Madoff. He said, ``Well I knew
    it wasn't a Ponzi scheme.'' I said, ``How did you know it
    wasn't a Ponzi scheme?'' He said, ``Because I knew that there
    was a complaint to the SEC that Bernie Madoff was running a
    Ponzi scheme. And so, if there was a Ponzi scheme, the SEC
    would have caught it. So I knew it's not that.''
        Well in fact, the SEC did not do a competent job in that.
    And in fact, both Bernard Madoff and Allen Stanford would use
    when they spoke to folks who would be skeptical about
    investing, they would say, ``The SEC was just here. You know,
    they gave me a clean bill of health.'' And so, sometimes it is
    a concern when you conduct an investigation, and you don't
    necessarily staff it fully. You don't do it appropriately;
    you're almost better off not doing it. You know, I don't know
    that I've looked at all the issues--I certainly haven't
    analyzed all the new responsibilities under Dodd-Frank--but I
    do think that that is something to be cautioned about.
        Mr. Diaz-Balart. I think what you're saying there is that
    some people get so dependent and so reliant on government that
    frankly, other things that would naturally take place, don't
    take place, because oh, it's you know, government, in this case
    the SEC, is going to take care of it. It's all fine; they're
    going to take care of it, so therefore, individuals don't do
    their part that they would otherwise do. Is that basically what
    you're saying?
        Mr. Kotz. Yeah, but I think that perhaps that the natural
    skepticism of Madoff, you know, the fact that he was having
    these continuous returns over time was lessened because they
    figured the government was watching.
        Mr. Diaz-Balart. Going kind of on the same point, and I
    know it may be an oversimplification, but you know, you would
    think that there are sometimes things that would trigger people
    to like, take notes. I know that if, you know, you use your ATM
    in the gas station twice, you know, like if I fill up my car
    and my wife's car and all of a sudden get a call or an e-mail
    saying, you know, ``Is that really you? Is there fraud there?''
        Mr. Kotz. Right.
        Mr. Diaz-Balart. And that's, you know, whether it's a $100
    transaction, which is like three gallons of gas now, or whether
    it's, you know, $4 on a--or I should say $10 for a cup of
    coffee in certain places, you know, you'll get that. And
    obviously they have systems to do that. And, going back to the
    $21 million expense that they're going through, is that--again,
    you would think, and from, you know, your report, there were
    some of those triggers that just weren't acted on, but somehow,
    the credit card companies, and I know it's kind of a different,
    but yet related situation. They have triggers and they have--
    and they act on them. And, you know, why can't--the question
    that I get a lot, is why can't the federal government do what,
    frankly, every single credit card company does?
        Mr. Kotz. Right, well----
        Mr. Diaz-Balart. In that sense.
        Mr. Kotz. Yeah. No, I agree. I mean, the Federal government
    has to be held to the same standard, you know, the credit card
    company doesn't do its job, somebody else takes over. And so
    the federal government has to be held to that same standard,
    and simply putting it into a system is not enough. They have to
    ensure that the triggers are appropriately looked at. You know,
    they have to make sure that they have the right skill set of
    individuals being involved. One of the issues that we looked at
    in the Madoff case, was, you know, there was some very
    intelligent lawyers came out of very, very impressive law
    schools, but didn't know enough about trading to be able to
    analyze these carefully.
        Perhaps you got in somebody who had worked, you know, on
    the trading floor for many years. That person might have been
    in a better situation to identify these issues, rather than
    somebody who was, you know, a smart person. And so, the SEC
    needs to do more, clearly, than just put in a new system that
    costs $21 million. But, we are working on those issues as well
    and trying to recommend that they put together the right skill
    sets.
        Mr. Diaz-Balart. Well, I appreciate that, and if I may,
    Madam Chairman, just on the same point, because it seems that
    obviously one of the obvious things that I've learned is that
    sometimes it's not how much money is spent but how that money
    is spent. And, so--and it's going back to the fact that if
    there's one area where, I think, taxpayers cannot be told that
    it's because there wasn't enough money, it's frankly the SEC
    because of that tripling of the budget.
        So, I just want to make sure that, because it's so easy to
    just--and you haven't done that, on the contrary. But, for some
    of us to say, ``You know, we just need to spend more money,
    spend more money,'' well here's the case where a ton more money
    has been spent and yet, you've been able to find areas where
    that money was not well spent----
        Mr. Kotz. Right.
        Mr. Diaz-Balart [continuing]. Was not certainly focused on
    the right area. Obviously, one of the things that we need to do
    is obviously listen to you more often. A lot of times, we get
    the reports and we just don't act on them as well. So, anyway,
    thank you.
        Mr. Kotz. Thank you.
        Mrs. Emerson. Thank you, Mr. Diaz-Balart. Mr. Womack.
        Mr. Womack. Just a couple of follow-up questions. And,
    forgive me if I show my rookie nature to this panel and to
    perhaps, the subject matter that we're talking about here. But
    when recommendations go out of your office, when the Office of
    the Inspector General makes recommendations to the SEC for
    improvements to the systems that are designed to protect
    American investors, what are the consequences for the failure
    of the SEC to act on those recommendations to your
    satisfaction?
        Mr. Kotz. Well, that information is essentially reported to
    Congress. And so, in our semi-annual reports to Congress, we
    chronicle the recommendations that we made and how many
    recommendations are open. And you know, if necessary, we will
    come forward to a committee like this, and say, you know, in
    addition to providing the semi-annual report, because I know
    you both get lots of semi-annual reports, to maybe highlight
    the fact that there's a concern that recommendations are not
    being implemented.
        You know, we are very strict in our implementation. We
    require, initially, a corrective action plan to ensure that
    it's started. Then we require documentation to ensure that it's
    finished, and then only then do we agree to close it. And we
    report where it's not closed. So, you know, I certainly believe
    it's my obligation to bring to your attention, if that is the
    case, where we are--we're recommending many, many different
    actions, and they're not being taken, and there's no good
    reason provided why they are not being taken. So, I--my job is
    to bring that to your attention and to see how you all and
    others can help us assist in that process.
        Mr. Womack. Another question is more in the area of the
    competency issue at the SEC level. There's an argument out
    there that it's got too many lawyers and not enough subject
    matter experts in the areas where their jurisdiction falls.
    Comment on that. I'd like to know, do we have the right people
    in the seats there that have the proper expertise to be able to
    see what a good part of the American public has been able to
    see from a distance.
        Mr. Kotz. Yeah, I think that was an issue that we found in
    some of our investigations. As I said, concerns that folks do
    not have the experience to understand the issues, even though
    they may be lawyers, they may be smart, they may be hard
    working. I mean, many of the folks who worked on the Madoff
    matter actually worked very hard, worked very long hours, but
    missed sort of very obvious things.
        I know that the new director of Enforcement has looked to
    set up these sort of specialized groups to ensure that there
    are folks who have specific, specialized experience, that one
    can go to. When the Ponzi scheme investigation was done in the
    SEC, from Harry Markopolos's complaint, the individuals who
    worked on that investigation had very little, if any experience
    in conducting Ponzi schemes.
        They didn't know how to conduct a Ponzi scheme. They were
    very smart, they were very hard working, they tried very hard,
    but they didn't know how to conduct a Ponzi scheme
    investigation. And so, I believe that they're putting in place,
    sort of specialized groups, so you have a resource to go to.
        But I think part of that may very well be, in addition,
    hiring other folks. Now there was a time where it was difficult
    for the SEC to recruit, say, Wall Street folks, because they
    were making a lot more money, there were big bonuses, there was
    no way they were going to come work for the SEC.
        You know, with the economic times, that--I don't think that
    that's an excuse anymore, frankly. Because the times are tough
    on Wall Street, at least they have been. And perhaps there's
    more of an opportunity to get those people. And so, I
    absolutely agree that we need--the SEC needs to get in the
    people who understand how the fraudsters work, not just people
    who are very smart, and are trying hard and hard working.
        Mr. Womack. I would agree with that. The gentleman from
    Florida was talking about triggers just a minute ago, and at
    the risk of sounding like a broken record in part of my earlier
    line of questioning--and I will use metaphorically the TSA,
    although I'm not necessarily endorsing the activities of the
    TSA.
        But, when they developed a system to find, say, a gun in a
    bag that might be put on a conveyor belt, the best way to test
    whether the effectiveness of that system was to basically put a
    gun in a bag and put it on the platform and let it go through
    to see if it does its job. And my strong recommendation, my
    strongest recommendation is for any of the processes, the $21
    billion TCR or whatever system that has been recommended and it
    is in place, that we put the gun in the bag and check the
    system. And that's the only way that you can restore consumer
    confidence, investor confidence that we have in place fail-safe
    systems that are designed to protect, and in fact, do protect
    the investor.
        Mr. Kotz. Yeah, and that's an excellent idea. I'm not going
    to say specifically that I'm going to do that, because the
    SEC's probably listening--but, in order to test the system, you
    have--that's an absolutely excellent idea, you know. In other
    words, to see specifically if a complaint comes in, what
    happens to it?
        Mr. Womack. And I just want to follow up with what the
    gentleman from Alabama said. I believe there are market rates
    in Arkansas that are even more competitive than Mobile, Alabama
    and certainly, much more competitive than Manhattan.
        Mrs. Emerson. You notice, he didn't say Missouri.
        Mr. Serrano. Madame Chair, it's a good thing I don't
    represent Manhattan. I may be offended by that.
        Mrs. Emerson. Yes, but you represent Yankee Stadium, Joe,
    which is quite lovely real estate.
        Mr. Serrano. Yes. The salaries there are quite high.
        Mrs. Emerson. And the ticket prices are outrageous.
        Mr. Womack. I will take exception to the gentleman from New
    York. He's complaining about Cardinal baseball, and let it be a
    matter of the record here, that Madame Chairwoman is joined by
    a die hard St. Louis Cardinal baseball fan.
        Mr. Diaz-Balart. Those are fighting words.
        Mr. Serrano. I like the Cardinals.
        Mrs. Emerson. Just not as much as the Yankees. All right,
    so playing off of everything that my colleagues have talked
    about with regard to staffing, and I actually really like Mr.
    Womack's idea about testing the systems at the SEC. I think
    that's a great idea.
        Right now, there are 23 offices that currently report
    directly to the chairman of the SEC, and I think Dodd-Frank
    will add even more offices that--if you look at the functions
    of the office on the charts--seem to mirror, to some extent,
    existing offices already within the SEC.
        We know, as we've just been discussing for quite some time,
    that there was poor coordination between the offices within the
    SEC. So, have you all actually considered doing an internal
    review of the entire SEC structure, not just focused on Madoff
    or Stanford?
        Mr. Kotz. Yeah, I think that's a good idea. I mean, you
    know, perhaps, particularly as you say, with respect to Dodd-
    Frank, once the SEC puts in all those offices, we need to
    ensure that those offices are not doing the same thing that
    another office is doing. So I think at that point in time is
    probably a good time to look at an overview and to ensure that
    both, there is communication between offices, but also that
    there isn't duplication of effort.
        Mrs. Emerson. Well, I know that there is, if I remember
    correctly, something within Dodd-Frank with regard to
    whistleblowers, but yet there already is a function within the
    SEC that does that. I think perhaps four of the five offices
    that Dodd-Frank recommends putting in place mirror something in
    the title. So it seems to me that, if those existing offices
    can be refashioned, and the people have the right skill sets,
    that it's absolutely wasteful to set up all new offices that
    mirror the same thing that the other offices are supposed to be
    doing already.
        Mr. Kotz. Right. No absolutely, absolutely. That's
    something that we have to be very careful about. I think
    anytime you have legislation, new legislation, particularly as
    comprehensive as Dodd-Frank is, you have to ensure that it gets
    acclimated into your own environment in an efficient way, and
    not just sort of added on. I mean, a lot of those situations--
    there's statutory requirement that somebody report to the
    chairman, and I think that's why there are many, you know,
    situations where the offices report to the chairman's office.
    But we have to make sure that they're all doing different
    things, and are not duplicating efforts.
        Mrs. Emerson. Well, and 23 direct reports is really a lot
    for any organization.
        Mr. Kotz. Yeah.
        Mrs. Emerson. I want to flip over to a totally different
    subject, which is fascinating and scary at the same time. High-
    frequency, or algorithmic trading--and specifically, I want to
    refer back to May of last year when the Flash Crash occurred. I
    think by some accounts, computer-aided high-frequency trading
    now counts for 70 percent of total trading volume, and so there
    is much more influence by the algorithms rather than actual
    traders.
        Do you think that the SEC is currently able to keep up with
    these new ways of trading? Is this something that you all are
    looking into?
        Mr. Kotz. Yeah--there have been some complaints that came
    in about what happened in May. We have begun to look at it. I
    mean, the SEC actually has done a lot of its own analysis on
    how it happened, why it happened, came out with a report. So we
    haven't sort of duplicated their process in that way, but I
    think that is something that does need to be looked at in the
    future. I mean, I think things are getting more complicated,
    more difficult, and we have to ensure that the SEC's able to
    keep up.
        Mrs. Emerson. So, within their report, do they talk about
    how they could better detect those kinds of issues in the
    market?
        Mr. Kotz. I haven't thoroughly analyzed the report, but I
    believe that that is part of it. I believe they looked at, you
    know, what happened, why it occurred, and what we can do in the
    future to move forward appropriately.
        Mrs. Emerson. Okay, because it's a fascinating issue, but
    it's also somewhat intimidating and hard to track.
        Mr. Kotz. Right.
        Mrs. Emerson. It begs the question as to whether or not
    there are obsolete regulations that might need to get thrown
    out, and perhaps Congress should look at this whole issue,
    because of the manipulation that can occur.
        Mr. Kotz. Right, right. No, absolutely. That's a real
    concern.
        Mrs. Emerson. All right, thank you. Mr. Serrano?
        Mr. Serrano. I just want to first of all ask unanimous
    consent to submit some questions for the record.
        Mrs. Emerson. Without objection and we will all, I believe,
    have questions to submit for the record. I forgot to say that
    earlier, so thank you.
        Mr. Serrano. Okay. And just one follow-up question on the
    issue of the territories. So you said that you were not aware,
    which I understand because I'm not aware myself either. I was
    not asking a question that I knew an answer to. So you will
    look at it, and you will report to the Committee?
        Mr. Kotz. Yes, absolutely.
        Mr. Serrano. Okay.
        Mr. Kotz. Absolutely.
        Mr. Serrano. Because I'd like to know what our relationship
    is with the SEC, and how they deal with that, and just what's
    going on out there.
        Mr. Kotz. Okay. No, absolutely.
        Mr. Serrano. Which, by the way, it's a general pattern
    throughout the federal government that in so many cases, the
    territories are sort of an afterthought.
        It's true in funding. If you look at the way we fund, we
    fund using a formula for the 50 States and then you have to
    bargain to get the territories, you know, a certain amount of
    money and it's never based on population like in the other
    States and so on. So I'd like to have a better understanding of
    that.
        Mr. Kotz. Okay. Good, good. Thank you.
        Mr. Serrano. Thank you. Any timeline on that, I don't want
    to give you more work to do.
        Mr. Kotz. Well, no. I'd be happy to get back, you know, in
    a short timeframe. Just initially what's done, if there's a
    more thorough analysis----
        Mr. Serrano. Okay.
        Mr. Kotz [continuing]. That's required, I'll go forward.
    But I can get back in a few weeks just generally what's
    happening.
        Mr. Serrano. That's great, that's great. Thank you. I have
    no further questions.
        Mrs. Emerson. Thanks, Mr. Serrano. Mr. Diaz-Balart, more
    questions?
        Mr. Diaz-Balart. None.
        Mrs. Emerson. Mr. Womack?
        Mr. Womack. None.
        Mrs. Emerson. Ms. Lee?
        Ms. Lee. One more. Let me ask, now the FDIC is responsible
    for the oversight of--as it relates to the new rules governing
    credit cards? Is it the FDIC?
        Mr. Kotz. I'm not sure, sorry.
        Ms. Lee. Okay. But whichever agency it is, you know, we'll
    talk to them about this, but, you know, the credit card
    companies now have found new ways to scam the system.
        Mr. Kotz. Right.
        Ms. Lee. So I'm wondering now as it relates to Dodd-Frank,
    how--well, I do know. The traders in some of the financial
    institutions are really busy now developing ways to game the
    system.
        Mr. Kotz. Right.
        Ms. Lee. Now, given that, what's your staffing like to try
    to anticipate these new games that are being put together?
        Mr. Kotz. Yeah, I mean----
        Ms. Lee. So you can do this on the front end and how do you
    recognize what they are? Because let me tell you--the credit
    card companies and the new scams that they're running are just
    as serious as the ones before.
        Mr. Kotz. Right.
        Ms. Lee. And consumers are really paying the price now.
        Mr. Kotz. Right. No, I mean, it's very difficult I think to
    stay ahead of the curve with respect to those kinds of things,
    with respect to fraud. And I think the SEC needs to not just
    react sort of when they get a complaint. They put this new
    system in, they react to complaints. They also need to be
    proactive. And I know that's something that the Enforcement
    Division is looking at. I know that that's a priority for them.
    But I absolutely agree that they need to sort of look for the
    next fraud before it happens, anticipate it, and set up systems
    to deal with it.
        Ms. Lee. Well, what's the staffing that's required for that
    and how do you anticipate, knowing that this is taking place
    right now, how do you do that within the current staffing
    patterns? And again, I think you should have a 50 percent
    increase myself to really protect consumers and investors from
    what has taken place given the magnitude of your job. And so
    how are you going to do this?
        Mr. Kotz. Yeah, you know, I think it's difficult. I think
    you need the bodies who are focused only on sort of the new
    risk areas, the proactive measures and not have them, you know,
    if they're sort of dealing only with complaints that are
    brought in regarding past issues, they don't have the time and
    resources to be able to look at those things. So I think that
    where you have significant budget cuts, I think that that's a
    concern.
        Ms. Lee. And I hope this committee will really look at that
    very carefully because I can see a new wave of fraud, new games
    that are being played and put together right now that we don't
    even know what they are. And you're going to have to look at
    what the dynamics are and what they look like and then be able
    to prevent them from taking place.
        Mr. Kotz. Right, right. Absolutely.
        Mrs. Emerson. Thank you so much. I want to thank all my
    colleagues. Mr. Kotz, thank you so very much for being here
    today. We really appreciate your direct answers and we look
    forward to working with you.
        Mr. Kotz. Thank you very much.
        [The information follows:]

        [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                                                Tuesday, April 5, 2011.

                        GENERAL SERVICES ADMINISTRATION

                                    WITNESS

    MARTHA N. JOHNSON, ADMINISTRATOR, GENERAL SERVICES ADMINISTRATION
        Mrs. Emerson. The hearing is going to come to order. I
    would like to welcome my colleague and friend, Mr. Serrano and
    Mr. Womack as well, and particularly we want to welcome you,
    Administrator Johnson. Thank you very much for being here
    today. I also want to mention for our colleagues that we have
    several of the GSA regional administrators here. Thank you all
    very much. I know that you are the ones who have the up close
    and personal face time with our offices and you all do a great
    job. We really appreciate you being here and I hope that the
    time that you spend in D.C. is productive. Certainly it is a
    crazy time and I suppose it is possibly an interesting time for
    you all to be here.
        GSA directly provides or has contract vehicles for a wide
    range of services for federal agencies. Some of these services
    are easy to understand such as buying supplies, finding and
    leasing office space or constructing and maintaining
    courthouses. Other services are less well-known, such as
    managing a public key infrastructure, conveying or auctioning
    excess lighthouses, or providing information to the public
    through new media tools and technology. When done well, these
    services are invisible and unappreciated. When done poorly,
    these services are ugly reminders of waste and inefficiency.
        For fiscal year 2012, the GSA requests $9.8 billion in
    budget authority and obligational authority, of which $9.5
    billion is for the Federal Buildings Fund. The remaining $332
    million in funds are for, among other things, an Office of
    Inspector General, the management of GSA, and notably, $38
    million for an initiative to streamline acquisition management.
        The Federal government's gross debt currently exceeds $14
    trillion and is expected to reach $26 trillion in 2021. The
    government will never be entirely debt-free, but I am committed
    to reducing the rate at which we incur debt.
        As such, this committee's goal is to reduce spending under
    this subcommittee's jurisdiction to fiscal year 2008 levels.
    GSA will undoubtedly be a part of meeting that goal through
    reductions in its own budget, through innovations to reduce the
    expenses of all federal agencies and I know that you are
    working towards that goal, as far as trying to use innovation
    to provide efficiency. We are thankful for that, once again and
    thank you for being here, and welcome, Administrator Johnson. I
    do appreciate your service and look forward to your testimony.
    But now let me recognize my friend, Mr. Serrano, for any
    opening statements he has to make.
        Mr. Serrano. Thank you Madam Chair, and you will notice, I
    will not make any comments about the St. Louis Cardinals at
    all.
        Mrs. Emerson. I know. I am ashamed of how poorly they are
    doing, what can I tell you?
        Mr. Serrano. I am a Yankee fan, so it is fine with me.
    Actually, I feel bad.
        Mrs. Emerson. Well, I am sure it is. Do you feel badly?
        Mr. Serrano. I do. I only feel good when the Red Sox lose.
        Mrs. Emerson. Well, at the moment of two against one, but
    since your team is winning and ours is losing.
        Mr. Womack. I am not saying a thing.
        Mr. Serrano. Okay, Colonel. Thank you, Madam Chair. I, too,
    would like to welcome GSA Administrator Martha Johnson. The
    General Services Administration plays a primary role in
    procuring goods and services, as well as managing facilities
    for other parts of the federal government. Because of this, the
    GSA has the responsibility of minimizing property costs, as
    well as the cost of goods and services for their clients, the
    other agencies of the federal government.
        As we go forward in a tight budget climate, it is important
    to know that agencies like the GSA are doing their utmost to
    ensure that the federal government is operating as efficiently
    as possible. I am also interested in learning more about the
    contractor performance database, which, according to press
    reports, is expected to go live on April 15th. This database
    will provide lawmakers and the public with important
    information about the reliability and past performance of the
    federal government contractors.
        I think I speak for everyone here when I say that the
    Federal government should not be using contractors who cannot
    get the job done on time, on budget, and in line with their
    bids. This database will help ensure greater public
    accountability for those contractors who fail to meet these
    goals. Lastly, we are now just a few days away, it seems, from
    a possible government shutdown. Because the GSA operates as the
    landlord for so many federal buildings, a possible shutdown at
    the GSA would potentially have a much broader impact on the
    many federal buildings that house other agencies.
        Administrator Johnson, as you answer questions today, I
    think it would be helpful to learn more about the effects of a
    government shutdown on GSA's operations, and what plans the GSA
    has in place, should a shutdown occur. Once again I welcome
    you, and I thank you for being here. Thank you, Madam Chair.
        Mrs. Emerson. Thank you so much, Mr. Serrano. Administrator
    Johnson, if you could keep your opening remarks to five minutes
    or so, that way we will have more time for questions. We
    welcome you, and thanks for being here.
        Ms. Johnson. Thank you very much, Madam Chair, Ranking
    Member Serrano, and distinguished members of the subcommittee.
    Thank you for inviting me to appear before you today to discuss
    GSA's Fiscal Year 2012 Budget Request.
        Our Fiscal Year 2012 Budget continues efforts that we
    started last year to transform GSA into an innovative change
    agent for the government. GSA is a strategic partner for
    federal agencies that helps them make efficient and effective
    use of resources, collaborate with and engage with the public,
    and make government more nimble, agile, responsive, and
    adaptive.
        GSA is building a government that works better by changing
    the way we acquire, manage, and dispose of our assets, and by
    accelerating open government through new transparency tools and
    practices. We believe that open government is good government,
    and we have requested limited funding increases that will
    enable us to engage citizens even further, in so doing, receive
    better feedback about vital federal programs. We are also
    requesting targeted investments in federal buildings and land
    ports of entry to modernize the nation's infrastructure, create
    jobs, and grow trade and commerce.
        GSA's Fiscal Year 2012 Budget priorities align with our
    goal of supporting a government that works better through a
    three-part strategy of supporting innovation, building customer
    intimacy, and creating operational excellence. The two primary
    drivers of this strategy are first, our focus on achieving a
    zero environmental footprint and second, our dedication to
    fostering an open and transparent government.
        The Zero Environmental Footprint goal, or ZEF, is GSA's
    commitment to eliminate our impact on the natural environment,
    and use our example and our government-wide influence and
    positioning to reduce the environmental impact of all federal
    agencies. ZEF focuses GSA's efforts and resources to
    concentrate on reducing our consumption of energy, water, and
    other resources, eliminating pollution and reducing
    inefficiencies from all of our operations. As numerous examples
    from the private sector demonstrate, pursuing sustainability
    across our enterprise will help us stretch our budget dollars
    further and develop best value to the taxpayer and our agency
    customers.
        GSA is also building expertise, technology, and processes
    for open government, and is putting transparency,
    participation, and collaboration at the center of government
    operations. We are publishing unprecedented amounts of
    government data and information online and through mobile
    applications to communicate government performance and services
    to citizens.
        GSA is helping the government be more responsive by
    expanding citizen participation through shared information,
    crowd-sourcing tools and techniques, virtual workplaces, and
    collaborative protocols. Our efforts in open government have
    provided federal agencies with the tools and expertise to make
    a more visible and accessible government that is better able to
    encourage and engage the talent and contributions of our
    citizens, industry, academia, and our own civil servants.
        To conclude, your approval of GSA's Budget Request for
    Fiscal Year 2012 is a vital step towards helping GSA deliver a
    more effective and efficient government. Our request advances
    the administration's goal of winning the future through
    strategic investments in innovation and infrastructure, while
    cutting waste and excess. I look forward to continuing this
    discussion on the Budget Request with you and the members of
    the subcommittee.
        [The information follows:]

        [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Mrs. Emerson. Thank you so much, Administrator Johnson. I
    am going to go ahead and start. We have been joined by Mr.
    Diaz-Balart and Mr. Bonner. And so I will try to keep my
    questions to five minutes as well.
        The Bowles-Simpson Fiscal Commission proposed government-
    wide reduction in travel, printing, and vehicles. Can you share
    with us, how much does GSA currently spend on these activities
    for itself and what you are doing to help other federal
    agencies save resources in these areas?
        Ms. Johnson. The actual numbers of what we spend I will
    have to provide for the record.
        [The information follows:]

                  Travel, Printing, Motor Vehicle Expenditures

        What does GSA currently spend on travel, printing, and motor
    vehicles?
        GSA response: GSA obligated $69 million for travel, printing, and
    motor vehicles in FY 2010. Of that amount, approximately $50 million
    was for travel, $13 million was for printing and reproduction, and $6
    million was obligated to operate the GSA-internal motor vehicle fleet.

        Ms. Johnson. We are attacking travel with great vigor. Our
    own projections are to cut our own travel $11 million this
    year, and to reduce that through a number of techniques.
        First of all, we are working much more with a mobile
    workforce notion, which, I think, gives us much more
    flexibility and technology, so people can communicate across
    the country without picking up and going there. Second, we are
    installing some good telepresence, videoconferencing
    capability, which I think will get people to stay off
    airplanes. One of the things is you really want to have a good
    capability, so that your instinct is to get on the video
    conference, rather than get on an airplane. A change in
    behavior is part of this as well.
        So, through our FAS, acquisition service, we are creating
    important tools so that people who do travel have better
    options and better prices. So, as usual, we are working on more
    efficient travel, when it is necessary.
        In printing, I think we are right at the cusp of moving
    from really a paper-dominated government to an electronic-
    dominated government. And we are right in the center of that.
    We are reducing the publications we offer by quite a good
    number, although I am going to have to supply that to you. We
    are also, through our online capability, publishing data and
    making much more available to the public that way. And I think
    that is encouraging all of us, again, to shift behaviors to
    move online. So, through all of these shifts in travel and
    moving more towards technology, I think we are on the glide
    path towards much more efficiencies.
        [The information follows:]

                              Printing Operations

        The Administrator committed to provide the number of print
    publications that GSA is eliminating or reducing.
        GSA Response: GSA print operations are managed by the Office of
    Citizen Services and Innovative Technologies (OCSIT). OCSIT promotes
    and manages the distribution of Federal print publications to the
    public; however, actual printing and print distribution is primarily
    accomplished through the Government Printing Office distribution
    facility in Pueblo, CO. OCSIT supports print distribution by creating a
    variety of direct marketing materials and a quarterly Consumer
    Information Catalog. OCSIT also publishes the annual Consumer Action
    Handbook (CAH) and its' Spanish equivalent, the Guia del Consumidor, to
    provide consumers with critical information on purchases, problems, and
    complaints.
        In FY 2010, GSA promoted and distributed more than 22.9 million
    publications to the public through the GPO distribution facility in
    Pueblo, CO. Ninety-eight percent of these publications were prepared
    for other Federal agencies, to meet specific requirements and pass on
    critical information to citizens. GSA printed and distributed an
    additional 9.7 million publications through quarterly distributions of
    GSA's Consumer Information Catalog. GSA plans to reduce the number of
    Catalogs it produces and distributes by more than 30 percent in FY 2011
    by moving from quarterly to semiannual distribution. This transition
    will reduce GSA printed documents by 3 million pieces.
        GSA is working with customer Federal agencies to find ways to
    reduce print publications, but has not set specific targets for
    reducing their print publications. GSA has had recent successes in
    making Federal publications available through online document sharing
    tools. GSA currently offers 100 agency publications each on Scribd, a
    free online document sharing tool, and Google Books and the GPO
    Bookstore website. Publications on Scribd received 40,000 page views in
    FY 2010 and, in the first ten days that agency publications were posted
    on Google books, GSA received 2,000 orders for printed publications and
    500 on-line views. GSA plans to make 500 publications available
    electronically through Google, Scribd and other partnerships by the end
    of FY 2011, and expects this will allow Federal agencies to eliminate
    or reduce print publications in the future.

        Mrs. Emerson. Okay. I will appreciate you getting that
    information back to us. On page nine of your testimony, you
    mentioned FSS Size Solution for Domestic Shipping and Parcel
    Delivery Services and the work that you all are doing to reduce
    costs. Given the fact that we also have jurisdiction over the
    U.S. Postal Service, and it is in such dire need of either new
    funds or trying to reduce its expenditures since it is way in
    the red, do you work with them and is this part of what you all
    are doing to try to save costs?
        Ms. Johnson. The parcel service, direct parcel service, is
    one of our many cooperative buying programs that we are sort of
    facilitating. We are moving away from, clearly, our old mandate
    of being the sole supplier of these things, to organizing the
    agencies into kind of a cooperative buying process. We are
    doing it for office supplies, for wireless service, for print
    services, eventually for software, in a more concentrated way,
    and domestic parcel delivery.
        The process is to go out and to ask industry, the post
    office, who can come in with the best bids and then to
    orchestrate the agencies to agree to a certain volume of
    purchasing. So, in that process they are among the competitors,
    if you will, for our consideration.
        Mrs. Emerson. So the Postal Service will be competing with
    UPS, with FedEx, or whomever as part of this, because it just
    seems to me that we should be encouraging them to be able to
    increase volume so that they are not in such dire financial
    straits.
        Ms. Johnson. That is a good point, and I can learn more
    about how we consider them, and what sort of conversations we
    had with them.
        Mrs. Emerson. Would you? I would appreciate it because when
    you have got an agency, or an entity of the government that is
    almost $3 billion in the hole, you have got to try to figure
    out: Okay, are there things that we can do. And obviously a
    federal partnership, since it is a public-private entity
    anyway, anything that we can do to help them, as long as they
    can meet the same price threshold.
        Ms. Johnson. Exactly. Offer the same value, which is what
    we can then be the arbitrators for.
        [The information follows:]

                                 USPS Services

        How did GSA consider the US Postal Service in the Express Ground
    and Domestic Delivery Service FSSI BPA, and did GSA have any
    conversations with the USPS when developing, competing, or awarding the
    BPA?
        GSA response: GSA had several conversations with the US Postal
    Service (USPS) when developing the Express and Ground Domestic Delivery
    Services (ExGDDS) FSSI BPA, and worked with all potential offerors,
    including the USPS, to ensure they were well-positioned to participate
    in the solicitation.
        Early in the ExGDDS procurement, GSA determined that using the GSA
    Schedules program was the best way to fulfill the goals and objectives
    of the FSSI. GSA worked with USPS to help them become a Schedule
    provider for the first time.
        GSA conducted extensive market awareness discussions with USPS, as
    well as the other interested suppliers, during the solicitation
    development and market research phase. GSA used that industry feedback
    to develop a solicitation that was keenly competed among GSA Schedule
    participants.
        Ultimately, GSA selected United Parcel Service (UPS) as the source
    that provided the best value to the government based on price and other
    technical evaluation factors. The evaluation criteria used for the
    procurement were technical approach, past experience/past performance,
    corporate qualifications, and pricing.

        Mrs. Emerson. Okay. Well, then let's have a further
    conversation about that if we could. Mr. Serrano.
        Mr. Serrano. Thank you. Let's talk about one of our
    favorite bills, H.R. 1. What is the impact on your agency? The
    bill proposes no funding for construction or acquisition of
    facilities, a cut of $676 million from fiscal year 2011
    requests, and very little funding for repairs and alterations,
    a cut of $423 million. So, what would be the impact? If it were
    enacted what would it do to the impact on federal buildings,
    current projects, and construction jobs?
        Ms. Johnson. Our building's projects are in sort of a
    number of tranches. We work with the judiciary and we have a
    couple of those projects, we have a number of construction
    projects under way. We also do a great deal of land ports of
    entry right now. Federal office buildings; everything from
    federal centers to negotiating office space and work
    environments, and the whole portfolio will be impacted. And it
    is difficult to know how the priorities work out until you
    actually know how much you are dealing with overall. The
    repair-alteration piece to it is of huge concern because our
    inventory is a huge valued asset, and any degradation of that
    just puts us that farther behind. So, while we try to be very
    good stewards about using the resources that we have available,
    holding to that line will reduce our ability to continue the
    repairs and alterations that we want to do, and schedules we
    want to keep.
        Mr. Serrano. Now what would happen to projects that are
    near completion? For example, buildings that are almost ready
    for occupation but would not receive the final installment of
    construction costs?
        Ms. Johnson. We are going to have to manage it at the
    portfolio. If the funds are limited, we will need to look at
    each of the projects we have and determine where we will suffer
    the least, if we were to slow down, or extend the schedules, or
    do any kind of change of program. So it is really a comparison
    problem. Clearly, the priority is to start with the safety and
    security of the workers. So if the work that we are doing has
    to do with that, we need to get that taken care of. But then it
    is a trade-off; if you have a whole bunch of money and you have
    got one project that is nearing completion or four that are at
    another stage, you just have to make all of those trade-offs.
    And we do this all the time. This is the nature of portfolio
    management.
        Mr. Serrano. Right. If there's something that both parties
    agree on, and I venture to say this out loud, it's that the
    economy will show that it is doing better when more jobs are
    added to the economy. The majority party also believes that,
    through very dramatic cuts and new jobs, you would turn the
    economy around. Some of us believe that some of those cuts can,
    in fact, make us lose jobs that already exist. Is there any way
    of knowing the impact on jobs, how many jobs you would lose if
    these cuts went through?
        Ms. Johnson. I could explore that and provide that for the
    record. I think we could make some estimates around that.
        Mr. Serrano. I appreciate that. I am going to ask you about
    the potential shutdown. No, first let me ask you, a project
    that is very much a part of this committee, over the last few
    years. What would be the impact, again, I know that you cannot
    really outline exactly what would happen if H.R. 1 becomes law,
    but what would be the impact on the St. Elizabeths campus in
    Southeast DC for the Department of Homeland Security? That has
    been a project that has been mentioned quite a bit.
        Ms. Johnson. Quite a bit; it kind of dominates our thinking
    in many ways. It is the largest building project we are engaged
    in right now. It has a number of phases of work. Essentially,
    if we had a smaller budget we would have to slow down the
    overall project. Right now, we are engaged in working through
    the Coast Guard's headquarters, and we would work very hard to
    try to stay on schedule and be as creative as possible to do
    that. But I think we are going to be needing to adjust on all
    fronts, if we are compromised on our budget.
        Mr. Serrano. I have one last question, Madam Chair. I know
    we have other members. Again, related to H.R. 1; the impact of
    a potential shutdown of the government. As the government's
    landlord, what happens to GSA operations if very few of your
    tenants are able to work after this Friday?
        Ms. Johnson. We clearly are responsible for a major asset
    for the government, and need to be sure that it is secure, and
    where there is necessary work going on we need to be supportive
    of that. If there are hospitals that need to stay open, or
    other kinds of facilities, and we are engaged in them, although
    we do not do hospitals, we would be supporting the work of
    whichever division is still engaged. And I suspect it would be
    quite minimal. But our facilities play a part in supporting
    those vital missions and I do not think we should be the link
    in the chain that would be compromising that.
        Mr. Serrano. Okay, but there is a plan in place?
        Ms. Johnson. We have a regular plan, ours was renewed a
    couple years ago. It is sort of a routine thing, what to do,
    because we are so vital to everyone in the government, and so,
    yes, we have a plan in place.
        Mr. Serrano. Right. Thank you, Madam Chair.
        Mrs. Emerson. Thank you, Mr. Serrano. Mr. Womack.
        Mr. Womack. Madam Administrator, help me out with something
    here. Government-wide policy, if my numbers are correct, in
    2008, it was $52 million and some change, and then in 2010, it
    was nearly $60 million, and your 2012 request is $105 million.
    I did some quick math on that. If I am right, that is about one
    and three quarters times the 2010 amount. Help me out with
    government policy. Why such an exponential increase in the
    request, there?
        Ms. Johnson. The bulk of that is responding to the pleas
    and cries from across government to be sure that our
    acquisition workforce is trained and as professional as
    possible. And the acquisition workforce over the last couple of
    decades has not had the attention it needs. It is a complex
    job. It has had a huge amount of turnover. And we are all
    sensitive to the fact that, as it gets more complex, we need to
    be sure that those people, our contracting officers, and the
    people part of the procurement process are really well trained.
    So the bulk of that is leaning in the direction of the
    acquisition workforce.
        There is a piece for cyber security, a large portion for
    the Integrated Acquisition Environment, some policies around
    that, and a couple of other minor things. But that is the piece
    that is most special and dear to my heart.
         Mr. Womack. But to nearly double the budget?
        Ms. Johnson. Well, there are a couple other pieces to it,
    but that is a chunk of it, yes.
        Mr. Womack. Wow. There has been a lot of discussion at the
    federal level about the amount of property we own. My
    understanding is that there are 1.2 million different pieces of
    perperty, if my numbers are correct. It is my understanding
    that a number of properties have been designated as excess or
    underutilized. How many of these have been designated as
    excess?
        Ms. Johnson. This is where I begin to sound like a
    dictionary; there are differences between excess, surplus, and
    underutilized. There is a database that indicates there are
    some 14,000 pieces of properties that are identified as
    individual pieces that are excess, I believe, is the word. We
    have 170 that we are currently working on disposing and those
    are ones that are working through the rather elaborate process
    to be sure that no one else can use them.
        Mr. Womack. Is that 170 of the 14,000?
        Ms. Johnson. Yes. But the 14,000 are subsets of other
    properties. For example, flagpoles and fences are separately
    designated if you are talking about a whole base. And so you
    have dozens of properties in one cluster, which, if it came to
    us as a disposal, it would be the whole collection. So it is
    not apples and oranges, and that is where we get everybody a
    little bit confused.
        Mrs. Emerson. How many buildings would be involved in the
    14,000?
        Ms. Johnson. Buildings in the 14,000; that gets to, is a
    shed a building? I would have to supply you that designation.
    There are properties, there are radio towers, there are fences,
    there are flagpoles, so it is a real collection.
        [The information follows:]

                                Federal Property

        How many of the 14,000 Federal real property assets identified as
    underutilized or vacant are buildings (instead of flagpoles, fences,
    etc.)?
        GSA response: The Administration has identified 12,217 excess
    properties in the United States. Of that amount, 9,070 are buildings.
    The remaining 3,147 properties include undeveloped land, airfields,
    utility systems, roads and bridges, and a variety of structures other
    than buildings.

        Mrs. Emerson. Excuse me for interrupting both of you. So
    one flagpole would be one of the 14,000?
        Ms. Johnson. Yes, it could be.
        Mrs. Emerson. But it is not necessarily?
        Ms. Johnson. It could be that is specifically denoted.
        Mrs. Emerson. Would a gate be a thing, too?
        Ms. Johnson. It could be.
        Mrs. Emerson. Could you get us a list of the 14,000?
        Ms. Johnson. We have all of that. Now, let me explain that
    that is a database that is developed by each agency posting
    what it considers to be in that category. So this is something
    we collect, and we can share it, it is not something we share
    generally, because of security reasons. So we will share it.
        [The information follows:]

                    List of Underutilized Vacant Properties

        The Administrator committed to providing the Committee with a list
    of all 14,000 underutilized or vacant properties. (Rep. Emerson,
    transcript lines 420-425, page 21)
        GSA response: A separate file is attached, listing 12,217 excess
    properties, including the likely disposition outcome of the properties.
    This file is also available on-line at link: http://www.whitehouse.gov/
    issues/fiscal/excess-property-map.

        Mr. Womack. Do we have too many buildings?
        Ms. Johnson. We have 170 we need to be moving on, so yes, I
    think we are always in a position of needing to adjust our
    inventory. Whether it is down or up is really a question of the
    individual, localized needs. For example, during the census
    process, we do not want to own census offices, but we need to
    go out and lease fairly small entities around the country to
    house that. So it ebbs and flows, if you will. And on any given
    day we always have properties that we need to be disposing of,
    and we always have needs that we need to be fulfilling. We do
    spend a tremendous amount of effort on trying to be sure that
    federal workers are housed first in owned property, if at all
    possible, and keep the consolidation and the adjustment moving,
    but of course that is always a matter of funding, because
    consolidating is not free.
        Mr. Womack. My mother-in-law was into arts and crafts. She
    never sold a piece. So when I visited her home, and I love her
    dearly, it is all still there. And the way we acquire property,
    and hold onto property, and have 14,000 pieces, and in our
    pipeline only 170 to move right now, kind of reminds me of an
    organization that might hoard property. That seems to me to be
    a terribly inefficient way to run government, particularly when
    a government like this government is borrowing 40 cents on the
    dollar for everything it spends. So I am concerned about the
    amount of inventory that we have, and with each piece of that
    inventory, if it is not being appropriately used, there is a
    lot of care and well-being, and a lot of other factors that go
    into its management, and so I would challenge you to continue
    to press on that issue.
        Finally, this question; GSA has a set of requirements for
    new construction and renovation to be certified as U.S. Green
    Building Council's LEED designation. I understand that the LEED
    standard is internationally recognized, but I am also aware
    that there are other green building rating systems. And so, my
    question for you is; would it cost less to implement and allow
    for examination of the full life-cycle of building materials if
    we developed through some other process? Why do we only
    recognize one standard?
        Ms. Johnson. The Energy Independence and Security Act asked
    us to lean toward one standard, to designate one that we would
    use, and asked us on a regular basis to review and see if that
    was the best one. We have, therefore, chosen LEED, and that has
    become quite a well-known standard, and I think there is a real
    value in that. At the same time, you never want to get sleepy
    and sit on one standard or one norm without really testing and
    seeing what other options you have. We have also been looking
    at another standard. Green Globe, I believe, is what it is
    called. And we have been looking at that a little bit in some
    of our regions, and in preparation for the sort of formal
    review, we have been gathering data.
        I completely sympathize with the situation of standards
    emerging right now in the sustainability and green world. We
    are really at a time when we are learning a lot, and they are
    changing, and we need to be very adept at taking in the new
    information and science that is coming along to tell us which
    standards are helping us the best. So while LEED is a
    predominant one now, we are keeping our ear to the ground. And
    we also work in conjunction with the Energy Department. Be sure
    we are not just willy-nilly moving around on consumer
    standards. We want to be sure we are really grounding it in
    something. So we are in good partnership with them about it.
        Mr. Womack. I would caution the organization about putting
    all of your eggs in one basket, particularly when this is an
    emerging area of society today. There are others out there that
    can do similar things in a much more cost-efficient way. And I
    yield back now.
        Mrs. Emerson. Thank you so much, Mr. Womack. Ms. Lee.
        Ms. Lee. Thank you very much. Good morning. Let me just say
    a couple of things. First off, thank you so much for being
    here, I know your agency, you are faced with many, many
    challenges right now. And also, I know and recognize that we
    all understand the need to consolidate and streamline the
    operations, and also procurement activities for the entire
    federal government. The concern in the streamlining and
    consolidation is that we may be shutting out small business
    opportunities. First of all, in my last life, I was an 8(a)
    contractor. And getting on that GSA schedule was horrendous,
    first of all. It is almost impossible. But secondly, once on
    it, it never led to any opportunities at all. And so, I want to
    find out exactly what is taking place now to help small
    businesses, especially 8(a) businesses, small and disadvantaged
    businesses, minority and women-owned businesses, weed through
    this process, because certainly, a hundred years ago it was
    very difficult. I am hearing it is still extremely difficult.
    Secondly, let me just ask you about this lumping of
    subcontracts together. In the effort to consolidate, lumping
    these subcontracts, oftentimes preclude smaller businesses,
    minority and women-owned businesses, from those opportunities.
    So how do you allow for the full participation in this whole
    notion of consolidation? And if you have any data on how you
    are doing with regard to 8(a) contracting, I would like to see
    that.
        [The information follows:]

                                8(a) Contracting

        Please provide data on GSA 8(a) contracting.
        GSA response: In FY 2010, GSA conducted almost 7,500 8(a) contract
    actions with a face value of over $841 million.

        Ms. Johnson. Well, the top line with regard to small
    business, I am actually very proud of what we are doing with
    small business, because I do agree with you. Working with the
    federal government is a big challenge, especially for small
    businesses. There is a whole industry, that has grown up, of
    consultants that will milk a small business.
        Ms. Lee. Rip a small business off.
        Ms. Johnson. Right. And we certainly are not happy with
    being in a position where we are creating that kind of a niche.
    We have an Office of Small Business Utilization, which works
    closely with the SBA, and also helps us, as GSA, with our
    purchasing so we are, I think, making some good tracks and this
    is the kind of thing where you want to get to the place where
    it is hand-over-hand, so that you are repeating your
    performance every year. About 29 percent of our contracting
    goes to small businesses; it was $2.3 billion in 2010. I am
    delighted that $1 billion of that was to small disadvantaged
    businesses, which means I think we have done some tremendous
    outreach. And I can provide you more statistics about that
    performance and that story.
        [The information follows:]

                    Small, Disadvantaged Business Contracts

        The Administrator committed to providing more statistics on GSA
    contracting with small and small, disadvantaged businesses.
        GSA response: GSA awarded over $9 billion in contracts in FY 2010,
    and almost $3.15 billion, or 34.8 percent, was awarded to small and
    small, disadvantaged businesses. GSA FY 2010 small business awards
    greatly exceeded the agency target of 27 percent.
        Through March 2011, GSA had awarded over $500 million to small
    businesses, or nearly 30 percent of year-to-date obligations of $1.8
    billion.
        Contract data comes from the Federal Procurement Data System
    (FPDS).

        Ms. Johnson. Your comments ring absolutely true. I am quite
    concerned about small business getting approved to work with
    the government and then not having any business, getting the
    fishing license, but no river with any fish in it. And I think
    we need to be honest and straight up with small businesses
    about the potential markets, and help them understand. We do
    have mentoring programs, and we are working hard at doing more
    and more training. The mentoring program that we began last
    year has really given us a good model for helping work with
    small businesses and giving them a possibility to work their
    strategy out. I worry about small businesses that find the
    government in their business plan to be the dominant partner,
    because I think that makes them very vulnerable to the swings
    in government spending and budgets. So it is important to
    counsel small businesses so they will be viable and they will
    be successful. So, a number of different pieces to this, and I
    can certainly give you more.
        Ms. Lee. I appreciate that, but I do know that the big boys
    have contracts with the government; they negotiate the
    extensions, they rely on the federal government for their major
    contracts and perpetuity. But when it comes to small
    businesses, and small minority and women-owned businesses, we
    are told, you have got to break loose at some point. I mean
    that is the whole goal of the 8(a) program, which is fine, to
    become independent and break off from the federal government.
    There is a double-standard for the small businesses and then
    for the big businesses because they certainly continue to get
    these big contracts.
        Ms. Johnson. One of the things that we want to do, and is a
    big push on the part off the SBA, as well, is to be sure we
    understand what this picture is, because one of the
    difficulties in our measurement system is that we can measure
    prime contractors, but understanding the click throughs, and
    they can be two, and three, and four, and how much small
    business we are reaching, and how that happens, and what kind
    of business they are getting. That is a big challenge there, in
    trying to get that data and have it be proper. And that is what
    we are surveying our shoulders against.
        Ms. Lee. That is really historical. I mean, really a hard
    one to crack. And finally, let me just ask, the consolidation
    of these smaller contracts; that is inconsistent with the goal
    of trying to ensure full participation for small and
    disadvantaged businesses, because they certainly cannot compete
    with the big companies on consolidation.
        Ms. Johnson. I need to give you a more detailed brief on
    that later for the record. Again, it goes to really
    understanding what is going on at that next level. How much
    inappropriate bundling is going on? How much appropriate
    bundling is going on, where you can get some efficiency and
    build some partnerships? So it is a fairly complex issue, and
    let me supply you a more thoughtful brief on it.
        Ms. Lee. Thank you very much, thank you Madam Chair.
        Mrs. Emerson. Mr. Diaz-Balart.
        Mr. Diaz-Balart. Thank you very much, Madam Chairwoman.
    Madam Administrator, good to see you. Let me first also
    apologize right now because I am going to have to step out
    right after these questions because there is another hearing,
    as you know, so I apologize to you as well. The GAO placed GSA
    a thousand years ago, I think it was 2003 in the real property
    management. And it is real property management and it is high-
    risk category. Is it still there? Are you still in that high-
    risk?
        Ms. Johnson. I believe we have been released from that.
        Mr. Diaz-Balart. You have been? So there are parts that
    have been released. Are there parts that are not released?
    Okay. That is good to hear, because it has been there for a
    million years.
        Ms. Johnson. I met with the head of the GAO about this, and
    he indicated that we were moving forward and making good
    progress.
        Mr. Diaz-Balart. Good. And obviously, going back to what
    Mr. Womack was talking about, there is some question as to,
    excess property, under-utilized, inefficiently utilized
    property. The flip-side of that is when you get rid of it. Do
    you get rid of it when the market is really, really bad, in
    which case the taxpayer gets hit, as well? But having said that
    is there at least a plan for those if, in fact, part of the
    reason why we still have a lot of space that we are not
    disposing of, is there at least a plan? Is there a threshold
    that you say, when the market reaches this level, if we get
    this much money, we will get rid of these properties. Is there
    a plan for that? Because I understand that, I guess in 2009,
    GSA disposal of 800,000 square-feet, generating $1.8 million,
    which is good, but supposedly there are 54 million square-feet
    of under-performing and non-performing assets. So again, I
    understand the issue with the market. How do you deal with
    that, is there a plan to make sure that when the price reaches
    a certain level, you already have the facilities ready to go,
    et cetera?
        Ms. Johnson. We do not do the analysis quite that way.
    Obviously, real estate is a very localized issue. So some
    markets can be quite robust and others can be in a quite
    different position. So our analysis and our profit is dictated
    by law, and it has to do with an agency coming to us and
    declaring a property ready for disposal. So they need to come
    to us, and frankly, there is expense involved in disposing of
    properties, and in tight budget times, that is a difficult
    proposition. When they do come to us, we need to be sure that
    no one else in the government needs it, that we go through all
    of the routine of: do the homeless need it, or does local
    government need it? And only then do we begin to enter into a
    point of negotiating on the open market. So even if we were
    able to figure out the market in advance of all of those
    clearances, it really is at that point that we focus on trying
    to get the best deal.
        I agree with you, I am not interested in fire sales. That
    does not serve the taxpayer. I am also very interested in
    moving property that we need to move. I think this has been a
    long-standing problem, almost intractable in some people's
    minds since President Nixon probably. It is something we work
    at, and I think our approach to it is to be sure that we are
    going through the process of seeing the entire opportunity for
    a piece of property, that is kind of our role. And then helping
    work through all of the remediation, or whatever needs to be
    done to that property to make it sellable and command a good
    price.
        Mr. Diaz-Balart. But are there more aggressive efforts? And
    you mentioned that some of those are not you, it is from the
    agencies, or others who may actually be the operatives. Because
    in the meantime, as Mr. Womack mentioned, we are still paying
    for the operating costs. We are still paying for maintenance,
    et cetera, so it is a double-whammy. So how aggressive can you
    be?
        Ms. Johnson. I think there are a couple of ways of going
    about this. One is, we have committed to developing strategic
    plans with agencies, because they do not have strategic real
    estate plans and they have huge amounts of property and we need
    to help them, with our expertise around that. There is also a
    concerted effort by the administration to engage in property
    disposal. And we will be, we hope, working very closely, and
    providing our expertise, and our staff, and support, and data,
    to that effort. It is a fairly ambitious goal and it is meant
    to do just this, to drive it. We still are in a situation of
    honoring the various legal constraints, which are absolutely
    appropriate in terms of the taxpayers value, to be sure that it
    is available for homeless, state, and local, et cetera,
    historic education. But I think that the administration is
    quite aggressive on this one. And we are happy to be playing
    along as a good partner in this.
        Mr. Diaz-Balart. Good. And if I may, finally, Madam
    Chairwoman, an issue that I know is as frustrating to you as
    anybody else. Obviously, renting is not a good use of taxpayers
    money. For long-term, the DOT building here is one of the
    examples that is always used. But the fact that DOT is there,
    we are renting, we are going to be paying for that many times
    over, as opposed to if we would have just purchased it, built
    it. But it is an issue of scoring. And it is not your issue, it
    is not something you control, the way OMB and CBO scores it. Is
    that something that you are dealing with? Because this is,
    again, a good market to either purchase or build right now, and
    we could save a ton of money for the taxpayers, but you have
    got the scoring issue. Are you pursuing that? Is that an issue
    that the White House and you are jumping on OMB and CBO? Or is
    that something that we are just not dealing with at this time?
        Ms. Johnson. We are always eager to find the best deals
    that we can. The lease portion of our portfolio just tipped
    over the 50 percent mark, which I think is even more
    accelerated. Everybody is concerned about this. The scoring
    rules and the ability to enter into public-private partnerships
    do create some constraints for us. I think that they are based
    in some real serious understanding by the administration of
    risks that we need to be careful about, and at the same time,
    there are long-term costs associated with low-risk profiles. So
    it is always better to figure out a way in which we can own
    inventory, but collecting the necessary resources to build is a
    pretty formidable project. And at the same time, we still need
    to have some flexibility, so the whole leasing and renting
    structures offer us that. It is complex. We want to be on the
    side of saying we would like to have an owned inventory that is
    well maintained, receiving rents, and we would like to be as
    aggressive about that as possible, understanding the
    proportionality with leasing for agility.
        Mr. Diaz-Balart. Thank you. Thank you, Madam Chair.
        Mr. Serrano. Madam Chair.
        Mrs. Emerson. Mr. Serrano.
        Mr. Serrano. I just, if I may, with respect to you, Mr.
    Bonner. What Mr. Diaz-Balart brings up is an issue I brought up
    when I was chairing this Committee. It is really a serious
    issue, one we should really concentrate on. I know folks
    somewhere deal with these numbers, and they tell us it does not
    work this way. But for us to be leasing makes no sense
    whatsoever. We should own. It turns out that even when we lease
    we end up having to take care of the property anyway. If your
    relationship is like mine with my landlord, it is a big deal.
        Mrs. Emerson. If you will yield just for a second. One
    thing that you said in your testimony, I think it was on page
    14, you are requesting a new obligational authority for $5.3
    billion of rental space to provide 201 million rental square
    feet of lease space makes me very uncomfortable. I will come
    back to this during my questioning. I think we all tend to
    agree.
        Mr. Serrano. Yeah. I am really nervous about that. The fact
    that government leasing tipped over 51 percent, you said, and
    that should not be. I just sent out a tweet saying we are here
    with the biggest landlord and now you are telling me you are
    the biggest renter.
        Mrs. Emerson. You had better, you are going to have to re-
    tweet your tweet.
        Mr. Bonner.
        Mr. Bonner. Madam Administrator, can you give us an update
    on the Federal courthouses that are on the GSA list for
    construction? And I say this in full disclosure, that when Mr.
    Serrano was Chair and Mrs. Emerson was the Ranking Member, this
    Committee had worked to help put a new Federal courthouse in
    Mobile, Alabama on their list. And I have thanked the Chairman;
    it is the Jose Serrano Federal Courthouse in Mobile, Alabama.
        But I want to make sure that I understand your testimony.
    It looks like you have got funding of $199 million for a
    Federal building and courthouse in Hawaii. Is that the only new
    project you have got in the budget?
        Ms. Johnson. Yes, as you can see, our budget is dominated
    by St. Elizabeths, and some FBI, and some remediation projects.
    And with regard to courthouses, we have one repair and
    alteration project for the Federal building in Los Angeles
    which does include bankruptcy courts. But the only full
    construction project that we are putting in the budget this
    year is the one in Hawaii.
        [The information follows:]

                     Construction Projects--FY 2012 Budget

        GSA, in the FY 2012 President's Budget, is requesting $198,650,000
    for a repairs and alterations project at the Prince Jonah Kuhio
    Kalanianaole (PJKK) Federal Building and Courthouse in Honolulu,
    Hawaii. This is not a new construction project.
        GSA proposes the second of a two-phase modernization project for
    the PJKK Federal Building and Courthouse located at 300 Ala Moana
    Blvd., Honolulu. The PJKK Federal complex was constructed in 1977 and
    consists of a nine-story Federal Building connected by an enclosed
    bridge to a five-story courthouse. The complex houses approximately 70
    agencies in 862,269 gross square feet (GSF) and serves as the main
    Federal center in the Hawaii and Southern Pacific areas.
        Phase I was funded under the American Recovery and Reinvestment Act
    of 2009. Phase I includes design services for the entire two-phased
    project (each phase was designed as independent projects) and multiple
    construction components including: repair/replacement of HVAC, fire and
    life safety, plumbing, and electrical systems in the courthouse;
    renovation of the courthouse and Federal Building second floor
    including public lobbies, common area corridors, and restrooms.
        Phase II construction components include: additional repair/
    replacement HVAC, electrical, communication, fire protection, plumbing,
    and conveyance systems; sealing the building envelope and replacing the
    windows with energy efficient, blast protective glazing; realignment of
    the building layout to allow for the expansion and consolidation of
    multiple tenant agencies' space; conversion of portions of occupied and
    vacant space into mechanical rooms and an atrium for day lighting and
    air return; improvements to the interior tenant space; plaza repairs;
    and site security improvements.
        Phase II Design ($13,500 thousand) was funded by the American
    Recovery and Reinvestment Act of 2009. This request is for Phase II
    Construction ($185,050 thousand) and Management and Inspection ($13,600
    thousand). The estimated total project cost for Phase I and Phase II is
    $319,650 thousand.

        Ms. Johnson. Now, obviously the list from the courts is
    long and they have put their priorities forward, and we do our
    best to work with that in the constraints we operate in.
        Mr. Bonner. Well, my question is based, really, from an
    informational standpoint. We have had a healthy, robust debate
    over the last few years about what role Congress should play in
    directing agencies with earmarks. And earmarks are a bad name
    in much of America. If you could tell us, and the people back
    home throughout the country, how GSA determines that project A
    has greater value than project B, and especially if we are
    restricted in terms of self-restriction, but we are restricted
    nonetheless, in terms of the advice and encouragement we can
    give you. How do you make those decisions?
        Ms. Johnson. First of all, with respect to courthouses, we
    work very closely with the administrative office of the courts.
    And they have a priority list that they have to work on months
    themselves, which truly helps us. You really do not want to be
    the mediator of all your customers and their particular
    petitions. But working within that, then we need to make the
    trade-offs in our budget between the judiciary, and then, of
    course, the other significant and important projects in the
    rest of the federal portfolio, notably, now, as I have said,
    the Department of Homeland Security, the land ports of entry,
    the FBI, a number of security-related repairs and alterations.
    And that is also crowding the agenda, if you will.
        So we do this in part by trying to understand where an
    invested dollar will receive the most value. Where is the need
    the greatest; where are there other solutions? And, of course,
    we look across our portfolio in many of these cases and try to
    find out how we can be working within the portfolio we have.
        I do think the security issues, and those are some of the
    demands by the court, they really are in need of being assured
    that they are working in a safe environment. Those make
    buildings rather distinguished, unique, and that means we end
    up, I think, investing, perhaps more.
        We are trying to work with the courts more and more, using
    steady conversation, and other techniques for being sure that
    they are secure and safe. And there are other ways that we can
    go about this as well, within a tight budget.
        Mr. Bonner. So the project would have been on the court's
    list for years to get to this point?
        Ms. Johnson. It could be, yes. I would be happy to supply
    you with the encyclopedia on that. But no, I would be happy to
    give you the listing of the courthouse projects.
        [The information follows:]

                            Courthouse Project Plan

        The Prince Jonah Kuhio Kalanianaole (PJKK) Federal Building and
    Courthouse in Honolulu, Hawaii that is in the FY 2012 President's
    Budget is a repairs and alterations project, not a new construction
    project.
        The Courthouse Project Plan, as approved by the Executive Committee
    on behalf of the Judicial Conference of the United States, includes
    only new construction projects. With that said, the PJKK Federal
    Building and Courthouse repairs and alterations project would not be
    listed on the Courthouse Project Plan.

        Mr. Bonner. I know years ago, when the courthouse in Mobile
    was of interest, a courthouse in Little Rock all of a sudden
    jumped to the forefront, and it just so happened that we had a
    President from Arkansas, and the fact that we have got a
    courthouse in Hawaii, I just wanted to make sure that it has
    been on the list as a priority for a long time.
        Ms. Johnson. Yes, it has been. And we are in the process of
    doing a fair amount of construction of other courthouses. So
    each year is just a snapshot.
        Mr. Bonner. The other thing that would be of interest to me
    would be, how much of your request for new funding is going to
    be centered in Washington, DC, versus how much is going to be
    centered elsewhere, even if you count Homeland Security as a
    part of that, I am sure that is going to weigh it heavily.
        Ms. Johnson. I do not have the numbers. I can do the
    percentages, but our projects are St. Elizabeths, the request
    for 2012, the State Department Headquarters, and the Interior
    Department; and work on those three buildings. The rest is
    around the country, ranging from the land ports of entry on the
    northern and southern borders, data centers for the FBI in
    Virginia, upgrades to the Los Angeles federal building. And so
    it is dispersed around the country. I can get you those exact
    percentages.
        [The information follows:]

        [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Mr. Bonner. Okay. And then, lastly, could you, and I
    apologize, this may be in your testimony, I just did not see it
    at the top, the Chairman of the Full Committee brought to our
    attention, a few days ago, in another hearing, that the
    discretionary amount of spending, including the stimulus, we
    have an increase of 84 percent over the last couple of years;
    again, including the stimulus. How much of the stimulus, if
    any, did GSA occupy? And how does your budget request compare
    with five years ago and 10 years ago?
        [The information follows:]

                             Budget Request History

        How does your budget request compare with 5 years ago and 10 years
    ago?
        GSA response: The FY 2012 President's Budget requests $617 million
    in net budget authority for GSA. GSA net budget authority was $759
    million in FY 2006 and $457 million in FY 2001.

        Ms. Johnson. You mean the Recovery Act Stimulus Bill?
        Mr. Bonner. Yes.
        Ms. Johnson. The Recovery Act gave us about $5.5 billion,
    divided across investment in our fleet and preponderance in our
    building. It was a tremendous boost. It did a number of things.
    It really rejuvenated a great deal of our inventory, it greened
    it, it made it much more efficient, across the board. We have
    been able to upgrade buildings and start other buildings. We
    had a long list of projects that were ready to go.
        In fact, what was really interesting about it was that, as
    we worked down the list, the market was such that we were able
    to get much more competitive bids and the dollar went farther.
    So we were able to work down our list quite a bit.
        So 18,000 jobs is what the tally is so far for that
    stimulus work, and we are really shovels in the ground now. A
    lot of that is in major construction, now, so we are going to
    be continuing to see some real stimulus as a result of it.
        I have heard all kinds of numbers about the sort of backlog
    that we were working with before that, in the range up to 20
    billion, in terms of what we needed to do to revitalize the
    inventory. And it is like a car, if you do not do preventative
    maintenance it just begins to hiccup. And I think our buildings
    have been long in the tooth, and needed that. So we were able
    to do upgrades, and we were able to do the sustainability
    investments that have made them much more efficient,
    operationally, so I can get you the actual 10 years ago, 5 year
    ago numbers.
        Mr. Bonner. It would be interesting. Mr. Serrano, again,
    made a point with his questioning about H.R. 1. And while H.R.
    1 passed the House, it did not pass the Senate, and so
    therefore, in some ways, it is still a number that is in flux,
    if you will, as negotiations go forward this week in terms of
    whether we can avoid a government shutdown.
        Senator Kyl and I have long believed that Washington is
    disconnected from real America because we talk about trillions
    or billions, and most families cannot really put their arms
    around that amount of money. And yet, Senator Kyl came up with
    an analogy on H.R. 1 that you would be looking at a budget of
    $10,000, not billions or trillions, but if you had a $10,000
    budget, you would be looking to try to cut $28 out of that.
        I think if most American families were given the
    opportunity, they could find $28 in savings of a $10,000
    budget. That is the equivalency of the amount of money we are
    talking about. And yet, when we get into it, whether it is $61
    billion, or $100 billion, or however you look at it, it seems
    like an impossible task to cut that much money.
        So as the largest landlord, and as someone who has
    responsibilities the GSA does, and we all benefit from that
    with our district offices, and depend on the professionalism of
    your staff, it would be helpful for us to make sure that we
    understand that everyone is looking to try to find ways to save
    money at a time where we are not going to get out of this hole
    this year, or next year, or probably in the next couple
    decades. And that is the thing that a lot of people have not
    focused on: The hole is so deep it is going to be a long time
    getting out of it. But everyone, including GSA, is going to
    have to do their part. Thank you, Madam Chair.
        Mrs. Emerson. Thank you, Mr. Bonner. I have got a lot of
    questions; I do not even know where to begin. Let me just go
    back to the courthouse issue for process purposes only. So you
    all have the Hawaii courthouse on your request list. And Mr.
    Bonner said his Mobile, Alabama courthouse was ahead of the
    Hawaii courthouse. Yet all of the funds have not been
    appropriated yet for it, so why would you not just want to
    finish up the one, before we get started on another?
        Mr. Serrano. Can I interject something, Madam Chair?
        Mrs. Emerson. Yes, sir.
        Mr. Serrano. You and I take very seriously, and I think it
    is important to say this: Notwithstanding what you hear these
    days, every member of Congress, if they could have a brand new
    courthouse in their district, would have it. But in addition to
    that there are areas where it is very much needed. When I was
    Chair, and I realize that being Chair is totally different from
    being Ranking Member, we took seriously the need for Mobile,
    Alabama courthouse. And I am surprised that it would have
    disappeared from the list, and a new one would appear. Granted
    that the Chairman of Appropriations and the Senator is from
    Hawaii; and granted that the President was born in Hawaii;
    notice how I got that in?
        Mrs. Emerson. We all know that, Joe.
        Mr. Serrano. Right. Okay. So I can understand. If I was
    President, Puerto Rico and the Bronx would be in good shape.
    But I take this very seriously. I do not know why his
    courthouse disappeared from the list, and I am concerned. And I
    think we should know, and I think we make serious points when
    we say this, because we took very seriously, we just did not
    hand down a courthouse here and there to make people happy.
    This was done in a very studious way.
        Mrs. Emerson. It is a problem; how does that happen? And if
    Mr. Bonner was not sitting here I would still ask the same
    question, because I cannot figure out how that process works.
        Ms. Johnson. Let me give you a little bit, and then I will
    probably need to give you some more afterwards. But first of
    all, the Hawaii courthouse is not a new construction; it is a
    rehab, so that puts it on a slightly different list. It is a
    competing bid for, not for new construction money, but repairs
    and alterations; if I have got that right. So those are two
    different buckets.
        I can explain what I understand to be the process, which
    is, you get a tranche of money, and you are trying to move down
    the list and if something is so big that it does not fit in,
    you need to move to the next one so the priorities and the
    money are two moving lists.
        Mrs. Emerson. Right, I understand that.
        Ms. Johnson. And I will provide you more detail on the
    particulars of the Mobile, Alabama case.
        [The information follows:]

                         Mobile, AL Courthouse Project

        The Administrator committed to provide more detail on why GSA is
    not asking for additional funds for the new Courthouse project in
    Mobile, AL.
        GSA response: The initial design for the new U.S. Courthouse in
    Mobile, AL was completed in December 2004. Since then, design
    requirements have changed because of reduced space needs from courtroom
    sharing, other tenant changes, increased focus on energy performance,
    and the need to better mitigate potential threats from severe coastal
    storms. As a result, GSA now needs to redesign the courthouse before
    proceeding with construction. GSA is planning to start the redesign and
    proceed to the completion of concept stage. Once the concept stage is
    completed, GSA will have a better cost estimate and in the future will
    request the necessary funds for construction.

        Mrs. Emerson. In all the stove piping, it just seems to me
    that there just needed to be another round of funds provided
    for this courthouse, and then there would be enough and you
    could get it done. But to drag it out makes it cost more; we
    all know that, yet perhaps not if it was being done this year
    because you would still get a lot of bids. The construction
    industry is still in very dire straits. So that would be an
    opportunity to do that. I just worry about how that whole thing
    works.
        Mr. Bonner. Well, Madam Chair, if I might add that I
    appreciate you raising it, and I appreciated the Ranking
    Member's comments as well. I really was hesitant to even bring
    it up, quite frankly, because we are in a very vulnerable
    position. If it looks like we are advocating and directing you
    to do something, then we get in a lot of hot water in newspaper
    editorials, and back home. We are in a very awkward position,
    though, and that is why I was asking the question. Just to
    understand the process of how one goes to the top of the list.
    I know there are different pools of money, and different
    buckets, if you will, but I appreciate the Chair and the
    Ranking Member.
        Mrs. Emerson. Well, and it was not just to benefit you, it
    was really to understand the process, just because of when
    Hawaii popped up on there, I am thinking, wait a minute, we
    just did this other one, but we have not got it all figured out
    yet, and so for our clarification.
        Mr. Serrano. And I want to clarify that, also. This is not
    about telling you what to do. It is about the Committee had
    made a decision, that decision was well-received by everyone,
    and then, all of a sudden, it drops out of the list. So I would
    like to know, just in terms of what I did in the past. What
    success did I have? Why would it go off the list?
        Mrs. Emerson. Exactly.
        Ms. Johnson. Yes, I think the process should be
    transparent.
        Mrs. Emerson. Yes, and we could have another meeting on
    that sometime, post this hearing; that would be great.
        Mr. Bonner. Madam Chair, one more thing.
        Mrs. Emerson. Yes, sir.
        Mr. Bonner. The seats in the courthouse in Mobile are going
    to be coming from the old Yankee Stadium. I do not know if that
    means anything or not to the former Chairman.
        Mrs. Emerson. They are not going to be very comfortable,
    then.
        Mr. Serrano. I cannot afford one; they are selling for $750
    apiece.
        Mrs. Emerson. They are not worth it. Well, they are, for
    historic purposes. For historic purposes, they are.
        The old St. Louis seats, when we got our new stadium there,
    are very uncomfortable, I just want you to know.
        Mr. Serrano. When was the last time somebody in St. Louis
    sat in a seat and celebrated a World Series Victory?
        Mrs. Emerson. Thank you, in 2006.
        So, let me come back to property disposal. Thank you, Mr.
    Bonner. Of the $15 billion in estimated savings that we were
    talking about in the civilian property BRAC, is the three
    billion from when the President issued the memorandum directing
    agencies to produce no less than three billion in cost savings
    by the end of fiscal year 2012, from assets, sale, proceeds, et
    cetera, is this three billion part of your $15 billion?
        Ms. Johnson. Yes, well, the $15 billion is not all ours. I
    mean, GSA is only one piece.
        Mrs. Emerson. Right, okay.
        Ms. Johnson. Yes. That is all additive.
        Mrs. Emerson. That is an easy question, yes or no. Perfect.
    Thank you. Let me ask you about independent leasing, in
    particular some issues we have had with the Securities and
    Exchange Commission, and the fact that they have leased
    hundreds of thousands of square feet in anticipation of
    something that has not yet been stood up, if you will. And the
    incredible cost, waste of money that was.
        But we have got the SEC, we have the Federal Deposit
    Insurance Corporation, FDIC, and other financial regulatory
    agencies who do have independent leasing authority, so they do
    not have to go through you.
        Would there be any benefit from those agencies requesting a
    proposal from you all before soliciting a lease of their own,
    if only to, number one, depend on the expertise that you all
    have developed, but, number two, to serve as a point of
    reference?
        And since lease negotiation and management is not really
    the primary mission of those agencies, how does independent
    leasing authority ensure the safety and soundness of the
    financial market?
        Ms. Johnson. Let me begin by saying that we are quite proud
    of our expertise, and we are more than willing to offer it to
    any agency that is requesting it. We do look at the whole
    federal government as our customer, and they certainly have the
    right to exercise their independent leasing authority.
        We feel, frankly, the business case that we need to make to
    agencies, particularly when it comes to office buildings, that
    we can probably get the best deals and be smooth about doing it
    and that agencies insist on using their own leasing authority
    speaks something to their feelings that they know their mission
    more and want to move in that direction. We can be even more
    aggressive with agencies, being sure that they know our value.
        Mrs. Emerson. I would think that it would just make sense;
    having worked in the private sector and, at least, been a part
    of a senior staff that was involved in negotiation, I was not
    directly doing it. I mean, it was laborious, and nitpicky, and
    certainly, we were fortunate to have someone working for us,
    because none of us had the expertise to be doing this.
        Ms. Johnson. Well, it does require huge expertise. And
    sometimes people lose sight of that, and do not appreciate
    that, and see that as more bureaucratic than actually just the
    curlicues you need to go through. But I think it is that
    balance between their really wanting to be on top of what they
    have, and what they control, and what their mission is, and
    their delivery, and understanding that they have a lot of
    services they can avail themselves of.
        Mrs. Emerson. Yes, and it might be helpful for you to give
    us some recommendations.
        Ms. Johnson. Showcase what we could do for them.
        Mrs. Emerson. Yes, that would be helpful. And perhaps it
    would be helpful for you to be a little bit more aggressive on
    that front.
        Ms. Johnson. Well, that is really a top priority for me, to
    be sure, that we are out with customers. I talk about customer
    intimacy, and it is true. We need to visit people, know that
    they know what we can do.
        Mrs. Emerson. All right. And it helps you as an agency
    prove your worth, if you will. Let me just ask something really
    quick here because this is something I am not quite sure I
    understand. It was brought to my attention and it was one part
    of GSA I was not familiar with previously. And that has to do
    with the services that you give to other agencies with regard
    to financial advice. I think there are six little agencies for
    whom you provide that advice. What kind of education or
    professional credentials do GSA's financial advisers have? Are
    they chartered financial analysts, or Series 7 license holders,
    or risk managers? I am just a little curious about this.
        Ms. Johnson. There are a handful of agencies for whom we
    provide financial administrative services. And it is truly a
    mechanical service of being sure that they are recording what
    interest they are getting and receiving it. It is not financial
    advice, so we do not provide that kind of training. This is not
    about going to a financial adviser the way I would as an
    individual. I think those organizations are usually limited in
    government securities anyway, so there is a fairly tight range,
    and so we are completely and only a gearshift mechanism so that
    they do not have to do the administration. That is what we
    offer. It is not advice. It is not advice.
        Mrs. Emerson. It is not advice whatsoever. Okay. Is that
    something that you want to continue doing?
        Ms. Johnson. Well, we offer a lot of administrative
    services to agencies. And there are many small agencies that
    need all kinds of things. And I think it again positions GSA to
    sort of have to do everything for everybody. I am happy to do
    that, and I think it continues to demonstrate our value. When
    it is completely administrative like that, it is not a burden
    to us, but it would be to them. It is well within our capacity.
        Mrs. Emerson. How many people do you have in that office?
        Ms. Johnson. Oh, I do not even know. I will find out.
        Mrs. Emerson. I am just curious, because there is no way in
    your budget that I could figure that out.
        Ms. Johnson. I think it must be part of our financial
    services.
        Mrs. Emerson. Okay. I appreciate that. I have a few more
    questions, but go ahead, Mr. Serrano.
        [The information follows:]

                          Financial Advisory Services

        How many people are in the office that provides financial advisory
    services?
        GSA response: GSA provides a full range of accounting and financial
    services for 52 small Federal agencies and commissions. GSA services
    include: Accounts Payable, Accounts Receivable, Payroll, Travel
    Payments, Travel Relocation Audits and Payments, Collection of Debts,
    Billing, and Preparation of Daily Cash Deposits. In conjunction with
    these services, GSA also provides standard general ledger
    reconciliation, payment processing, systems analysis, training, and
    financial reporting.
        GSA services include trust fund accounting. When requested by
    customer agencies, GSA will also request that Treasury withdraw earned
    interest and deposit it in spending accounts. GSA transmits requests on
    a regular schedule that is determined by Treasury and the customer
    agency. GSA does not make decisions about what investments to make or
    when to make them. GSA provides this service for six customer Federal
    agencies: the Barry Goldwater Scholarship Foundation, Christopher
    Columbus Fellowship Foundation, Japan-United States Friendship
    Commission, Morris K. Udall Foundation, US Institute for Environmental
    Conflict Resolution, and the Eisenhower Exchange Fellowship.
        GSA provides accounting and financial services to all agencies and
    commissions with 23 accountants and accounting technicians. GSA
    accountants require a bachelor's degree in accounting. GSA accounting
    technicians require specialized experience in accounting or bookkeeping
    but do not have an educational requirement.

        Mr. Serrano. Thank you. You could not tell me a job loss
    figure. So I want to give you a number based on some
    information I have gotten. I have been told that the effect of
    H.R. 1 would amount to about 16,000 jobs lost through the
    economy through your agency. Is that wrong? Is it near the
    number?
        Ms. Johnson. That sounds high to me.
        Mr. Serrano. Well, what sounds right to you then?
        Ms. Johnson. Well, 16,000 jobs, that is, we have created
    18,000 jobs with our Recovery Act money, which is in the
    billions. So it just does not quite sound proportional. But I
    certainly will record that and double check.
        Mr. Serrano. Well, I would like you to double check it and
    maybe, at a later time, tell us how many, because whenever
    people come before us and we discuss the impact of the cuts
    that are taking place, and this H.R.1, while Mr. Obama said it
    was just a number that was floating out there, it does not get
    better every day. That number actually gets worse every day in
    terms of cuts. So I would really appreciate if you could, at
    one time soon, maybe before this hearing ends, but I do not
    think that will happen, just give me a sense of how many jobs
    you are going to lose. Every other agency that comes before us
    tells us that they are going to lose jobs. Are you going to
    leave here today telling me you are the only agency that is not
    going to lose jobs?
        Ms. Johnson. I am sorry, were you asking about the number
    of GSA employees that would lose jobs?
        Mr. Serrano. Private sector construction jobs.
        Ms. Johnson. Oh, yeah, that is what I thought you meant.
        Mr. Serrano. But you do not know?
        Ms. Johnson. Not right off the top of my head.
        Mr. Serrano. Okay, will you find that for us? Could you
    give us an estimate? Something we hear a lot about on this
    subcommittee is cost overruns and poor performance by
    contractors. Often these are the reasons cited when big IT
    contracts fail. What is GSA doing to provide more transparency
    and accountability on the part of contractors, and how will the
    upcoming contractor performance database help agencies make
    more informed choices about awarding contracts?
        Ms. Johnson. This is an important project. Its nickname is
    FAPIIS, F-A-P-I-I-S, and it is about taking the database that
    we have for internal uses to monitor contractors and what kind
    of record they have of performance. And to now turn it into a
    public-facing database. Clearly, you do not just turn a switch
    and have the public looking at your internal contracting
    database directly, so it is something that we have been working
    on. It will be released in April. And there are a couple of
    things: I think it is very important for the public to be able
    to see, and have much more of a transparent view of our
    contracting. And in fact, one of the things that I needed to
    elaborate on earlier with Mr. Womack's question, is that the
    Office of Government-Wide Policy is embarking on it, and some
    of the budget money that we are requesting is for the
    integrated acquisition environment, which is to put all the
    contracting data in a place that is together and easy to get to
    and connects with the same tag number, so that people can track
    through the numbers stated. So, first of all, we need to be
    more transparent altogether, and this FAPIIS database is part
    of that effort to allow people to see into the database. But
    for the most part, we have an Inspector General capacity, we
    have contract managers, and I must say that our contractors are
    honest and have integrity, and are solid performing. It is
    important to them to know we have an eye on them, but I want to
    be careful not to disparage the tremendous work of the
    construction industry management and the whole surrounding
    contracting database that the contractors are setting up with
    the government.
        Mr. Serrano. Okay. Now, we touched on this subject before,
    but I just want to take you there again on this whole issue of
    leasing versus construction. What factors does GSA take into
    account in deciding whether a particular facility should be
    matched with the right federal construction, ultimately,
    because I think you heard from all of us, and we are concerned
    that you are now 51 percent leasing. We should own the property
    instead. It is the American Dream and it affects federal
    government, too.
        Ms. Johnson. There are, of course, many considerations, and
    these are probably no surprise to you. For agility reasons,
    there are agencies that, at times, need short-term space. The
    census is the great example of that. They are not ones for
    which we would think about having permanent facilities. On the
    other end, we have the judiciary, which we know is going to be
    around for hundreds of years.
        And so, we do want to be sure that wherever possible we are
    building for them and securing that kind of facility. And then
    there is a retaining level. So the trade-offs are the need for
    flexibility, the amount of people that need to be in and out,
    and oftentimes this is in conjunction with a built space, like
    with the Department of Homeland Security. We have a number of
    people in a number of lease spaces. We are trying to
    consolidate them into an owned space, and so they are temporary
    quarters. In many cases in cities where there are lots of
    available office space, and office space does not have special
    security, it does not need all the kinds of things that some
    federal missions require, then it is strictly a financial
    trade-off, what makes the most sense. And then the fundamental
    issue is getting the money ahead of time and altogether to be
    able to build the building and to be able to put the case
    forward, and go through that whole process. So sometimes there
    is just plain agility in terms of delivering space to people.
        Mr. Serrano. Let me ask you something further on this. At
    every agency and every corporation and any group, there are
    always decisions being made through a lot of in-house lobbying,
    as we have it here in Congress, about budget funding. And we
    have stated, we believe in consolidating, we believe in cutting
    waste, but cutting for the sake of cutting, just to reach a
    bottom line does not make any sense. On this issue, inside GSA,
    is there a leasing lobby versus a construction lobby? I mean,
    people who are giggling in the background here, are they broken
    into two different groups?
        Ms. Johnson. Not in my office. Not in my office.
        Mr. Serrano. Because I am trying to figure out how these
    things are decided. Because we obviously went too much into
    leasing in the opinion of this committee, and so how did that
    happen? Was it just a coincidence? Were some decisions made and
    no one paid attention to where that was going, and it did not
    matter? Or was there a group inside saying, leasing is the way
    to go?
        Ms. Johnson. No. There is not an inside lobby. These are a
    matter of business decisions constrained by the amount of
    appropriations and the schedule we have. I do want to tell you
    one story, because I want you to understand that I believe in
    this deeply, that we should be in federal space wherever
    possible, and that we need to be inventive and innovative about
    how to get there, because the workspace is changing. We are no
    longer in a world where everybody needs their ten square-feet
    of office cube. We are more able to work virtually; we are more
    able to work in a number of different places. So GSA is
    committing in the renovation of its headquarters, which
    typically houses about 2,000 people. As we go through the
    renovations, and we are dispersed into some swing space, and
    when we return to that building, we are taking all of GSA in
    the D.C. area into that building so that we can house 6,000
    people, and we can give up all the leases. We want to
    demonstrate that it is possible not to just consolidate by
    squeezing, but to maximize the use of our space because work is
    changing. And it is a real Judo, this is a whole new way of
    working, and I think this, of course, is an opportunity to use
    our property much more wisely, and in our case, get out the
    number of leases. So I am trying to set that example, too. I
    just want you to know my heart is in this. There is no leasing
    lobby.
        Mr. Serrano. Okay, thank you. Madam Chair, the Cardinals
    Park, is that leased from the city, or is that owned by the
    Cardinals?
        Mrs. Emerson. I guess it is owned by the taxpayers, Mr.
    Serrano, because we had to pass a bond issue to pay for part of
    it.
        Mr. Serrano. They will pay it back. Thank you.
        Mrs. Emerson. Not affordable, but yes. Yet they are all
    sold, so what can I tell you? Ms. Lee.
        Ms. Lee. Thanks very much. Let me ask you a couple things
    about how the rental rates are determined for, say, the federal
    building. Many of us choose to have our Congressional offices,
    in the Federal Building, or in the GSA building. However, the
    rents seem to be a bit exorbitant compared to what the rents
    are in commercial space. I have resisted moving into commercial
    space, because I like being in the Federal Building. But every
    time this comes up, I have to look at this very closely,
    because I do not know how you all determine whether you go up,
    or down, or base your rates on fair market fluctuations, in-
    rates, rental-rates in the region, and city. How is that
    determined?
        Ms. Johnson. I am going to summarize, and then I need to
    get you more information, because it is not a simple question,
    if you will, and there is a lot of process underneath it.
        [The information follows:]

                                GSA Rental Rates

        How is rent determined in Federal buildings?
        GSA response: By law, GSA rental rates must approximate commercial
    charges for comparable space and services. GSA calculates rental
    charges for Federally-owned space based on independent appraisals, and
    rental rates for leased space are based on actual lease costs, plus a
    fee.
        GSA calculates rental charges for Federally-owned space based on
    the appraised value of the building. Rental rates are established for
    five-year periods, and include a ``shell rate'', which remains constant
    during the five-year period, and a ``base year operating rent'', which
    increases each year. GSA appraises space at least every five years;
    however, GSA may appraise space more frequently, to reflect changing
    market conditions, new tenants, varying schedules in the occupancy
    agreement expirations, or for backfill of vacant space.
        Rent for leased space is a pass-through of the underlying lease
    contract, plus the cost of any building services not performed through
    the lease and a lease fee. Both the operating costs and the real estate
    taxes that GSA pays to the lessor are passed through to the tenant
    agency.

        Ms. Johnson. Federal buildings where we have 5,000, 10,000
    employees, and how we charge rent to those agencies is based on
    a number of factors. It is obviously about the cost of the
    building itself. But when we own a building, and we are not
    paying a mortgage and interest on it; it is sort of an
    interesting business case calculus.
        When we are putting people in the leased space, those rates
    are directly paid to the lessor, and so those are also market,
    those are what we have been able to negotiate, and hopefully as
    good and as competitive as possible. So it depends on whether
    you are in leased or owned space, and then how that owned
    structure is managed through the building fund, in order to
    build the building fund and cope with the business case where
    the building is already paid for and we are not trying to
    rebuild it, but we do need to keep an eye on building out
    further inventory across the federal government. So it is an
    integrated set of issues when it is a Federal building, when it
    is an owned building.
        Ms. Lee. Leased.
        Ms. Johnson. Leased buildings are market set, we are on the
    market, and we are leasing space on the market. They are
    negotiating with us, we get a deal.
        Ms. Lee. Okay. I think then, just for the ninth
    Congressional District, I believe we are federal, it is owned
    by the Feds.
        Ms. Johnson. Okay.
        Ms. Lee. I think we own it, the Federal government.
        Ms. Johnson. Okay.
        Ms. Lee. And we are paying you the money.
        Ms. Johnson. Yes, those rents are not as easily traceable
    to an individual negotiation in market and there are a lot of
    pieces to it. There are a lot of pieces to it.
        Ms. Lee. Okay. Yeah, I would like to, at some point, see
    it.
        Ms. Johnson. Like the Marshals Service.
        Ms. Lee. Yeah.
        Ms. Johnson. And the security, and all of that.
        Ms. Lee. Security, I mean, I know all that.
        Ms. Johnson. They are huge expenses.
        Ms. Lee. I also know there is other space where the
    security would be almost comparable, and other kinds of
    services that are lower. But, again, I would just like to kind
    of understand a little bit better.
        Ms. Johnson. Of course. Of course.
        Ms. Lee. Thank you.
        Mrs. Emerson. I might say we have the same sort of issue
    with which we are dealing right now, so I understand that. I
    want to talk about a new subject. No more leasing. Well,
    actually, I take that back. No more building leases. But you
    talk, in your testimony here, about, you say GSA also plans to
    pilot plug-in hybrid electric motor vehicles in the federal
    fleet, but lacks statutory authority to purchase them. So, why
    do you not talk to us a little bit about this, it is of great
    interest to me, given the fact that we do now, actually, have
    companies in the United States who produce, not that they are
    getting ready to produce, but they do produce electric trucks,
    electric cars, and why is it not possible for you to purchase
    these?
        Ms. Johnson. It is not that we cannot purchase them, it is
    that the pricing level is arbitrarily low.
        Mrs. Emerson. So why do you not explain this?
        Ms. Johnson. So what we need to do and what we are asking
    for is a rising of the statutory price limitation on what we
    can spend on vehicles. We have over 450 types and models of
    vehicles. So there is a lot of complexity to the fleet. We buy
    our fleet, for the most part, and then lease them to agencies.
    So an agency would lease a car, a truck, or runaround from us.
    So we are seeking to buy electric vehicles. Now, we are also
    exploring the possibility of leasing them to see if that is a
    better business case. Electric plug-ins are a new item on the
    market. OEMs, at this point in our conversations, are not
    interested in a leasing conversation. And I personally think it
    is part of the fact that it is a new product, and they want to
    negotiate and then have them just move on through the cycle.
    They do not want to reclaim them, for the most part, there
    might be other instances. But we are looking at whether we
    should be buying them or leasing them, but the price limitation
    is keeping us from buying them.
        Mrs. Emerson. Okay, so say there was, the price limitation
    was lifted, given the new technology, you would be able to
    consider leasing them. I understand there is the whole issue of
    how do you determine the residuals on an electric vehicle
    versus how it works on a regular, traditional car or truck,
    whether it is gas or diesel. But the wear and tear is much less
    on an electric vehicle, at least as far as the pieces inside
    go. Not that there are too many, you just need to pop new
    batteries in there, and put new tires on, and maybe change a
    hose or two. So what precisely do you need? You say you need to
    have the price limit lifted. And then, do you have to have
    special legislation enabling you to do a lease versus the
    purchase?
        Ms. Johnson. No.
        Mrs. Emerson. Okay.
        Ms. Johnson. What we have to do is figure out if the OEMs
    will do a deal like that, and figure out if it is the better
    business option.
        Mrs. Emerson. Okay.
        Ms. Johnson. So we are going to be looking at that, and
    when you are doing that pilot, and there are sort of
    distortions to a business case, that we would then obviously
    redo it, if we went into any kind of volume purchasing.
        Mrs. Emerson. Okay.
        Ms. Johnson. Or leasing.
        Mrs. Emerson. Because I would think that, based on
    projecting out, the higher cost at the front end saves you
    money at the back end, especially with the price of fuel right
    now, whether it is gas or diesel. I mean, it is getting a
    little bit out of hand.
        Ms. Johnson. Well, we are delighted that our fleet is as
    efficient as it is, and we are saving a tremendous amount on
    fuel because we have so many alternative fuel vehicles. Two
    thirds of the fleet purchases are in that direction. And that
    is why we want to experiment with the hybrids. See how they
    function in altitudes, see how they function in muggy climate,
    in cold climate, all that.
        Mrs. Emerson. Sure, sure.
        Ms. Johnson. And we certainly want to get the best value we
    can, and right now it would be about a hundred, but I think we
    could command a deal. But we have got to figure out what that
    is.
        Mrs. Emerson. And, but you have to have the statutory
    authority?
        Ms. Johnson. For the pricing, yes, we are a little bit
    caught there.
        Mrs. Emerson. What is the upper limit?
        Ms. Johnson. I do not know. I do not remember.
        Mrs. Emerson. I do not know what it is.
        Ms. Johnson. Do you know?
        Mrs. Emerson. Okay. No, that would be, I would be
    interested.
        Ms. Johnson. I would be happy to keep you up on that.
        Mrs. Emerson. If you can get some more information on that.
    It could, in the long run, end up saving an awful lot of money.
        [The information follows:]

                           GSA Motor Vehicle Pricing

        What is the amount of the Statutory Price Limitation on motor
    vehicles?
        GSA response: The statutory price limitation, established by
    section 702 of Division C of Public Law 111-117, limits the price a
    Federal agency may pay for a new motor vehicle to no more than $13,197
    for a passenger vehicle (excluding buses, ambulances, law enforcement,
    and undercover surveillance vehicles) and excluding station wagons,
    which have a maximum price of $13,631. Law enforcement vehicles may
    exceed the statutory cap by $3,700 and special heavy-duty vehicles may
    exceed the cap by $4,000.
        Section 1575 of the FY 2011 Appropriations Act (P. L. 112-10)
    created an exception to the Statutory Price Limitation for any vehicle
    that is a commercial item and which operates on emerging motor vehicle
    technology, including but not limited to electric, plug-in hybrid
    electric, and hydrogen fuel cell vehicles. However, unless extended,
    this exception will expire on September 30, 2011.

        Ms. Johnson. Yes.
        Mrs. Emerson. In an urban or metro environment. Those
    electric vehicles cannot pay for themselves in a rural area,
    like where I live. But certainly where Joe lives, you would be
    able to save a lot of money, I believe.
        Mr. Serrano. Some folks in my district, in the Hunts Point
    Produce Market, it is important to the northeast and beginning
    to move in that direction. You are right, the problem is the
    initial cost. It is not like buying a Chevy.
        Mrs. Emerson. Right, it is interesting, there is a company
    in Missouri, in Kansas City, I live diagonally across the state
    from there. But a company that got some Recovery Act monies,
    and instead of building the factory there, they had the factory
    and they used it to encourage the private sector to purchase
    these vehicles, and gave them a discount. And so now Frito Lay,
    for example, has every single one of its medium box trucks all
    electric now.
        Mr. Serrano. That was a great program, the Recovery Act.
        Mrs. Emerson. Well, I am not saying that it was, I am just
    saying that this was an innovative use of stimulus funds.
        Mr. Serrano. I could not help myself.
        Mrs. Emerson. I know you could not, I know you could not.
    But I will say this about you guys got a new stadium in New
    York and we got a new one in St. Louis, but it still costs $175
    to get a ticket to go to a Yankees game. It is ridiculous.
        Mr. Serrano. That is in the bleachers.
        Mrs. Emerson. Bleachers. Yeah, that is pretty high up
    there.
        Mr. Serrano. Yeah.
        Mrs. Emerson. One-hundred and seventy-five dollars. I know,
    because, but, needless to say, it is not something a normal
    family could do. Anyway, let me ask you about the Federal Food
    Donation Act, which is kind of near and dear to my heart. The
    final regulations were incorporated into the Federal
    Acquisition Rules in 2009. Do you all monitor how many times
    the food donation clause is exercised by other agencies?
        Ms. Johnson. I am not sure we do, but I will double check.
    I do know that we are monitoring, when we are letting another
    concession, whether or not they are giving us a business plan
    that would show some sort of sensitivity to donate.
        Mrs. Emerson. Okay. So how do you work with the vendor
    community to encourage the donation of the food that otherwise
    gets trucked in a landfill or what have you?
        Ms. Johnson. Well, a couple of different ways. Because
    there are no cost contracts it is more by example than by
    people being eager and interested. But I think that is where,
    by requesting a business plan that incorporates that, we are
    signaling it is important to us. And therefore, we are going to
    be paying attention to that as we let the contracts. And I
    think that is a good place to have some leverage.
        I will also say that there is a lot of interest on the part
    of the federal workers, and the administration is very keen on
    wellness. So there is this whole notion of, let us look at the
    cafeterias and get some better food and better processes for
    environmental sensitivity to them.
        Mrs. Emerson. Well, I am just curious because I had been
    talking, a couple years ago, to the Commander of Fort Leonard
    Wood which is an Army post in Missouri, again not my district,
    but with regard to the Federal Food Donation Act. They have so
    many catering opportunities there and otherwise the food just
    goes to waste. So they have actually taken it upon themselves
    to go into some kind of memo of understanding with a couple of
    our food banks in that particular part of the state, and it is
    working really well. It just seems so sad, and particularly
    with so many people hurting during the economy we need to take
    advantage of every opportunity to save good food, and not waste
    it.
        Ms. Johnson. I agree, and I think it is through our model
    in our profile on this that people can see it is important to
    us.
        Mrs. Emerson. Yes, and thank you. I just hope you all will
    keep promoting this because it is very important.
        Okay, I have one last question then I have several for the
    record that I would like to ask you all to try to reply within
    30 days. I hope that is not pushing it too much.
        The Dodd-Frank Act created numerous new offices and among
    those are the Consumer Financial Protection Bureau, the Office
    of Financial Research and the Federal Insurance Office. Have
    these offices, to the best of your knowledge, do you know if
    those offices have approached GSA for assistance with leasing
    space or contracting for administrative services such as
    personnel or accounting?
        Ms. Johnson. Yes, we have been, from the front, trying to
    be supportive and helpful in getting them up and going, and I
    believe we are moving forward on some leasing work with them.
    And we have also been advising them about technology and how to
    think about setting up an office in these days. There are so
    many more ways of doing it in thinking about cloud computing,
    and the technology available, so we have been doing a fair
    amount of discussion with them about possibilities.
        Mrs. Emerson It is interesting because we have parts of all
    these other existing regulatory agencies that are going to move
    into that Consumer Financial Protection Bureau, and so it is
    going to have some kind of an impact, I should think, on space
    requirements of the existing agencies. So I do not know how you
    juggle everybody, but have you been approached by the other
    agencies, not by the Consumer Financial Protection Bureau, but
    the agencies that have large chunks of personnel who would be
    moving into that?
        Ms. Johnson. I am not briefed on that. I will get that to
    you.
        Mrs. Emerson. Okay.
        [The information follows:]

                Consumer Financial Protection Board Space Needs

        Has GSA been approached by agencies other than the Consumer
    Financial Protection Board (CFPB) who will be required to transfer
    large numbers of personnel to the CFPB for assistance with space or
    other administrative services?
        GSA response: The Treasury Department has requested that GSA obtain
    space for the Consumer Financial Protection Bureau (CFPB). GSA is not
    aware of any contacts from any other agencies for space needs resulting
    from the establishment of the CFPB.

        Ms. Johnson. But I certainly know we have been working with
    the Consumer Financial Protection agency specifically.
        Mrs. Emerson. All right. Because part of the Comptroller of
    the Currency goes there.
        Ms. Johnson. It would normally be part of our regular
    routine to support agencies as they are freeing up space and
    identifying that and continuing to move people around.
        Mrs. Emerson. Right, but since they are moving large chunks
    of people it seems that you would now have extra space
    available, and I do not know if it is an owned building or a
    leased building. So any more information that you would be able
    to provide, I would be grateful.
        Ms. Johnson. I would be happy to.
        Mrs. Emerson. All right thanks. Mr. Serrano.
        Mr. Serrano. Thank you. I have just one more question, but
    I do have a bill that gives tax breaks for businesses in areas
    that do not meet the clean air standards to purchase electric
    vehicles.
        Mrs. Emerson. Well, let me take a look at that.
        Mr. Serrano. See how we do business, it is amazing. Thank
    you for bringing us together.
        Ms. Johnson. My pleasure.
        Mr. Serrano. One last question. The budget request contains
    $34 million for electronic government projects. We heard from
    Commissioner Steven Kempf about GSA's efforts in this area,
    along with GAO, and OMB. H.R. 1 cuts this request to $2 million
    which would ensure the projects like the IT-dashboard stop
    operating. What is the impact of H.R. 1 on these projects and
    how does GSA anticipate that these projects will eventually
    return money to the American taxpayer? What is the rate of
    return on these projects?
        Ms. Johnson. These projects are near and dear to my heart
    and they are in jeopardy with the current budget situation. The
    open government, the publishing of data, the USAspending.gov on
    some of the other dashboards, and so on, are, I think,
    incredibly critical new tools for the American public to know
    what is happening with their government. And the public is
    getting accustomed to this; we have millions of people coming
    to USA.gov. In the course of a year it jumped 30 percent in one
    year so it is beginning to be viral, how many people are
    depending upon understanding their government online. So I am
    quite concerned that our dashboards and our public facing
    services are in jeopardy.
        I do not have an exact ROI, I do not know how you would
    calculate an ROI for the value of open government, but I can
    speculate that the confidence that people will have in the
    government will only increase if they can see what is
    happening. And they will provide us the feedback and the raised
    hands when they see things funny in the data and they can raise
    questions. It just makes us so much more interactive and it
    gives us the power of the citizenry to help us to view what is
    going on. The ROI for that I do not know how to put it in
    dollars and cents to give you some understanding of the
    expenditures.
        Mr. Serrano. Right.
        Ms. Johnson. But for relatively little money to be that
    transparent is huge.
        Mr. Serrano. Yeah, we appreciate that transparency is
    important. There seems to be a contradiction here and again,
    that is where the budget cuts get in the way. A lot of folks of
    this country on both sides of the political spectrum are saying
    we need to know more about what government is doing and how it
    is doing it. And yet you see committee meetings, and committee
    hearings, and in all honesty not the Chairwoman, but other
    people on this committee say we got to cut that. Why do you
    need that website? For instance we had this website for the
    Consumer Product Safety Commission where you could put up a
    complaint and the private industry would come on and say, No
    that is not true, or that never existed, or that report is not
    true. We think that is good, but some people do not want that
    information out there so it is very confusing. I want to thank
    you for your testimony for my part, but remind you of three
    things. One, I still think we are going to lose jobs to the
    private sector; I wish you could get back and tell us. I
    realize that federal agencies now find themselves in a little
    difficulty with a Republican House and, I think, a Democratic
    Senate.
        Mrs. Emerson. Most Republicans would vote Democratic.
        Mr. Serrano. Right. Sarcasm is not my strength; I do not
    know about the Senate. You do not have to comment on this, but
    I know that people are kind of balancing their comments but I
    think Republicans and Democrats want to know if 16,000 jobs
    would be lost or 10,000 jobs or 5,000 jobs; that helps both
    sides.
        Secondly, I hope that you can begin to show us that owning
    is better than leasing. And lastly, and very carefully because
    we do not tell you folks what to do, but I am interested to
    find out why the Mobile Alabama courthouse dropped out of
    sight. I am all for Hawaii. Thank you so much.
        Mrs. Emerson. Thank you, Administrator Johnson for being
    here today and I look forward to following up on several items.
    I understand we all are trying to live in a climate where we
    are using every dollar as wisely as possible, and I appreciate
    the work that you all are doing to become more efficient and
    less unwieldy, if you will.
        Anyway, please always know that you can call upon us, and I
    certainly will look forward to you getting back to us on
    several items not the least of which is, not only to answer our
    questions that we submit, but also on things that we can be
    helpful with regardless of the subject matter.
        Ms. Johnson. Did you have questions for the record?
        Mrs. Emerson. We do have questions for the record so they
    will be given to you, and then if you could get back to us in
    30 days.
        Mr. Serrano. I have questions for the record.
        Mrs. Emerson. And Mr. Serrano has questions for the record.
    My guess is that my other colleagues will also have questions
    for the record.
        Mr. Serrano. Mine will be in Spanish, try that.
        Mrs. Emerson. And, anyway, we also appreciate the fact that
    your regional administrators are here, and I can certainly say
    that our regional administrator from Kansas City is very well
    liked by our office and has gotten off to a very good start.
        Mr. Serrano. Can I ask a quick question? Is the New York
    region still New York, New Jersey, Puerto Rico, and the Virgin
    Islands? That has to be one of the greatest, shall we say,
    political decisions made in the 1950s.
        Mrs. Emerson. So, Mr. Serrano wants to know if you will
    take them on a field trip when you go.
        Mr. Serrano. I mean, if you look at the map right? I mean
    we are all for it in New York we think it had to do with a
    certain community in growing numbers in the 1940s and 1950s.
    But when that decision was made people said, It makes sense to
    us, in New York. But does it make sense in the rest of the
    world? New York, New Jersey, Puerto Rico, Virgin Islands, I
    love it.
        Ms. Johnson. Well, you are very fortunate.
        Mr. Serrano. I am sure Florida wanted it.
        Mrs. Emerson. Anyway, thank you again, very much.
        [The information follows:]

        [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                                                Tuesday, March 1, 2011.

                            INTERNAL REVENUE SERVICE

                                    WITNESS

    DOUGLAS H. SHULMAN, COMMISSIONER, INTERNAL REVENUE
        SERVICE
        Mrs. Emerson. The hearing will come to order.
        Thank you so much, Joe, for being here today, and I want to
    thank Commissioner Douglas Shulman of the Internal Revenue
    Service. I would like to also say, and I guess we will have
    other Members come in, but consider yourself lucky. It is just
    us today, a nice intimate setting. But we are going to have to
    adjourn this hearing before floor debate begins on the
    continuing resolution at noon because we are not supposed to
    conflict with it.
        Last month we had two very productive hearings with agency
    inspector generals, but this is our first agency budget
    hearing. So you are number one, and so we really appreciate so
    much you being here today.
        As my colleagues have heard me say before, and when H.R. 1
    was considered on the floor, the Federal Government's $14
    trillion debt compels the Appropriations Committee to reduce
    Federal spending to fiscal year 2008 levels. This will require
    a 17 percent reduction in spending from fiscal year 2010 for
    this subcommittee, and I am committed to holding as many
    hearings as possible and learning as much as we can so that we
    can make informed and the most judicious recommendations and
    reductions possible.
        When I think of the IRS, I guess when everyone thinks of
    the IRS, I am both deeply appreciative of the work that you all
    do, but I am also very concerned. The 24-hour/7-day work that
    you do around the clock to assist taxpayers comply with their
    obligations and the work that you all do to pursue tax cheats
    who undermine our voluntary system is very good. You have
    really improved and I am very pleased with that. I know you are
    proud of the work that your staff has done.
        On the other hand, I am concerned quite a lot about the
    growing number of social programs being implemented through the
    Tax Code. These programs significantly increase the IRS'
    expenses and reach into the private lives of Americans. For
    example, the fiscal year 2012 budget includes nearly half a
    billion dollars to implement the health care law. Say what you
    will about the health care law, but half a billion dollars is a
    lot of taxpayer money; and future requests for more funding are
    forthcoming, I have no doubt.
        So, once again, I want to thank you so much, Commissioner
    Shulman, for being here. I appreciate the good work that you
    are doing, and I look forward to your testimony.
        With that, let me ask my brother and cochair here Mr.
    Serrano for his comments.
        Mr. Serrano. Well, thank you. And this wouldn't be a proper
    hearing if I didn't say something about the Cardinals.
        Mrs. Emerson. Okay. I am ready.
        Mr. Serrano. People will be paying a lot of taxes in the
    next 10 years.
        Mrs. Emerson. I don't know, what do you think about the
    idea of a 10-year contract, though? When you are 31 years old,
    that is a bit much.
        Mr. Serrano. You should only get a 10-year contract when
    you are in Congress.
        I would also like to welcome Commissioner Shulman to
    today's hearing. He has testified before us several times
    before, and I look forward to hearing what he has to say about
    both the fiscal year 2012 budget request for the IRS and the
    impact on the IRS of the numerous remaining funding issues for
    fiscal year 2011.
        At the outset I must note that we are in a very strange
    situation here today. We are here to review the proposed 2012
    budget request without having finished the fiscal year 2011
    appropriations process. Moreover, there is a stark contrast
    between the levels included in the House Republican CR for 2011
    and the President's fiscal year 2012 budget.
        The President's budget robustly funds the IRS for fiscal
    year 2012 for what I believe are good reasons: The IRS collects
    the vast majority of revenue that allows our government, the
    Department of Defense, and the Department of Education to
    operate. It helps to ensure that our Tax Code, which everyone
    agrees is extremely complicated, is administered in a fair
    manner, and it helps to prosecute those who seek to cheat the
    United States Government. Unfortunately, we must compare this
    robust request with the funding level provided in the House-
    passed continuing resolution. That resolution cuts IRS funding
    by approximately $600 million from last fiscal year.
        While I appreciate the sincerity of the belief among my
    friends on the other side of the aisle in their desire to
    reduce spending, I think such cuts to the IRS budget are very
    misplaced. It makes little to no sense to impose harsh budget
    reductions on the very agency that raises the vast majority of
    revenue. Should the House-passed funding level actually become
    law, I think the end result will be fewer taxes collected from
    tax cheats, fewer services for taxpayers, an increase in the
    tax gap, and ultimately an increase in our deficit over the
    next year.
        Finally, I would be remiss if I did not discuss the other
    possibility should the House and Senate not come to an
    agreement on a continuing resolution. It should not be news to
    anyone here that we are now 3 days away from a possible
    government shutdown. Even with the potential of a 2-week
    continuing resolution, we are likely to be in the same place in
    the near future. Any shutdown would have a serious impact on
    the numerous services and activities that Federal agencies
    normally engage in.
        Should such an event come to pass, I am interested to find
    out what services the IRS will have to shutter and what the
    impact will be on tax enforcement, tax returns processing, and
    taxpayer refunds.
        Mr. Shulman, I put a lot before your plate, but we have
    worked together for a few years now, and I know of your
    commitment and your talent and your ability. So we stand ready
    to listen to your testimony.
        Mrs. Emerson. Thank you, Joe.
        I would like to recognize you, Commissioner Shulman, for 5
    minutes. If you can keep it at that, and then we will have lots
    of questions for you. Thanks.
        Mr. Shulman. Thank you, Chairwoman Emerson, Ranking Member
    Serrano, Ms. Lee, for having me before the Subcommittee to talk
    about the budget environment and the 2012 Budget Submission by
    the President in particular.
        The 2012 budget was crafted during a time of fiscal
    austerity and belt tightening. What that means to me and this
    Agency, and in our dialogue with OMB, is finding savings where
    we can, and then investing in strategic priorities that will
    help the tax system improve.
        Against this backdrop I think the budget makes clear that
    the IRS is vital to the functioning of the government and
    keeping our Nation and our economy strong. In 2010, we
    collected $2.3 trillion in revenue. For every dollar the IRS
    spends, about $200 comes in to the Federal Government. We
    processed 140 million returns and put $312 billion of refunds
    into the economy.
        I think it is in recognition of this critical role that we
    play that the 2012 budget has judicious investments in our core
    programs, as well as funding for new provisions in the Tax
    Code.
        The budget also tries to keep the balance between service
    and enforcement, and makes sure we administer the law in a fair
    way.
        I will also note the budget has the necessary funding to
    finish our core taxpayer account database, our centerpiece of
    our modernization program, for this upcoming 2012 filing
    season. If we finish this core database and get funding for it,
    it will mean faster processing of all returns, expedited
    refunds for 140 million individual taxpayers, and enhanced data
    security.
        I want to emphasize that, because of our unique revenue-
    raising functions, the investments in our budget more than pay
    for themselves and directly contribute to deficit reduction.
        I also want to point out that this budget, like last year's
    budget and the budget before that, includes significant
    efficiency savings. So even though we are asking for a net
    increase, in this budget we have $190 million of targeted
    efficiency savings. In this current environment, I challenged
    our leadership and everyone at the IRS to find savings where
    they can, recognizing the situation we are in.
        Let me briefly turn, before I conclude, to a related
    matter, which is H.R. 1, the continuing resolution to fund the
    government. Under the House version, the total fiscal year 2011
    funding would be $603 million below the 2010 enacted level. I
    would be remiss in my responsibilities as IRS Commissioner if I
    didn't spell out the effects that such a large reduction would
    have on our ability to carry out our mission, to the fiscal
    health of the Nation, and the integrity of the tax system.
        If H.R. 1 were enacted, the IRS would need to make
    substantial, immediate cuts to its enforcement programs. We
    estimate that an action of this magnitude would reduce direct
    enforcement revenue this year by about $4 billion. In other
    words, a dramatic reduction in IRS funding would actually
    increase the deficit by about seven times the magnitude of the
    proposed reduction. Moreover, such a conspicuous drop in
    enforcement activities could have an impact on longer-term
    voluntary compliance.
        We would also be forced to dramatically reduce the
    resources to taxpayer services, leading to millions of
    unanswered telephone calls, delayed processing of
    correspondence, and potentially delayed processing of refunds.
        With that said, I want to be clear that I recognize the
    challenging environment that we are in. I appreciate that this
    Committee has to make difficult choices on behalf of the
    American people. And so, I look forward to a constructive
    dialogue over the coming weeks and months, and I very much
    appreciate the continued support that this committee has shown
    the IRS.
        So that concludes my testimony. I think I kept it under 5
    minutes.
        [The prepared statement follows:]

        [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                              AFFORDABLE CARE ACT

        Mrs. Emerson. You did great. Thank you very much. And I
    appreciate the fact that you have broken down for every dollar
    spent, this is how much you bring in. That is helpful for all
    of us to know.
        My first set of questions is going to be about the health
    care law. This is the first request that the IRS has made to
    Congress for it. You say in your written testimony, that some
    of the provisions of the bill went into effect immediately upon
    enactment, such as the small business health care tax credit,
    the qualifying therapeutic discovery credit and expanded
    adoption credit. Consequently, you all must have already spent
    some funds on health care in both fiscal years 2010 and 2011.
    So can you tell me how much you all have already spent, and how
    many employees worked on health care in fiscal years 2010 and
    2011, and what source of funding you used for that first
    question?
        And then, second--well, anyway, why don't you go ahead and
    answer that.
        Mr. Shulman. Sure. As you mentioned, there were a number of
    immediately effective provisions: a tax on tanning services, a
    credit for small businesses to help them ensure that their
    employees have health care, $1 billion in tax credits for
    therapeutic discovery grants to help innovation in health care,
    and a branded pharmaceutical manufacturers annual fee. There is
    also the need, because we have until 2014 for full
    implementation to build a lot of infrastructure, as reflected
    in our 2012 budget. We need to immediately start planning,
    looking at our core systems, trying to figure out things like
    how we reconcile the concept of household income, which will be
    the trigger for credits, et cetera.
        So we did begin immediate implementation. During 2010 and
    2011, up to this time, we have planned about $60 million, and
    the funds came from the authorizing legislation. There were
    funds in that. The exact number of people I would have to get
    back to you on. I don't have that number.
        [The ACA personnel information follows:]

                                 ACA Personnel

        During Fiscal Years 2010 and 2011, the IRS has spent approximately
    $60 million in Affordable Care Act implementation costs. The Department
    of Health and Human Services (HHS) allocated these funds to the IRS out
    of the funds provided in the authorizing legislation (PL 111-148). As
    of February 28, 2011, the IRS hired 428 additional personnel
    (cumulative for FY 2010 and 2011) to implement the tax law provisions
    of the ACA. In addition to people specifically hired for ACA
    implementation, existing program staff have spent time managing the
    implementation of various tax law provisions in the ACA.

        Mrs. Emerson. Okay. Was there any money transferred, say,
    from HHS or----
        Mr. Shulman. There were funds in the authorizing
    legislation for implementation.
        Mrs. Emerson. So are there any HHS funds included in part
    of the 2012 budget?
        Mr. Shulman. No. The 2012 budget submission is all IRS.
        Mrs. Emerson. You referred to H.R. 1 in your testimony, and
    you outlined all of the negative ramifications should it ever
    become law. Let me ask you, because of the prohibitions that
    would not allow the IRS to expend any funds to implement the
    new health care law, what other budgetary resources then would
    you have to implement and enforce health care, and do you know
    how much more HHS could actually transfer?

                          AFFORDABLE CARE ACT FUNDING

        Mr. Shulman. Well, I think you are referring to some
    language, which has been brought to my attention, forbidding us
    from spending money in that bill for implementation.
        Mrs. Emerson. Correct.
        Mr. Shulman. First, I would note I think the President has
    been pretty strong about his commitment to this law, and so
    that prohibition obviously would have to be passed by both
    Chambers of Congress and signed by the President. So we haven't
    really done contingency planning around that, at this point.
        I should just state it up front, I have been very clear
    that we should run as a nonpartisan, nonpolitical agency. We
    don't write the laws, we implement the laws on the books. If we
    weren't allowed to spend funds on, or if we weren't given funds
    for health reform, I think of it the same way that I think
    about not getting funds for any other law that is passed, and
    we have to make a set of difficult trade-offs. We really
    haven't done that kind of contingency planning.
        Mrs. Emerson. This will be the last set of questions I ask,
    and then I will turn it over to Mr. Serrano.
        Requesting $473 million and over 1,200 new employees for
    the health care implementation is a fairly significant
    increase. I note you have broken it down in the submitted
    testimony very nicely and very specifically. But this is before
    the individual mandate even goes into effect in 2014, and, I
    believe, the last provision of the health care law doesn't go
    into effect until 2018. Have you all done the calculation yet
    to determine exactly how much funding and how many FTEs you are
    going to need to fully implement health care probably through
    2020?
        Mr. Shulman. I don't have those numbers. What I would point
    out is 82 percent of the money we ask for is technology and
    infrastructure. 2012, 2013, leading up to 2014, is going to be
    a big ramp-up, where we have to take our core technology, make
    it work for the implementation of the ACA. I mentioned the
    household income. We need to make sure we have the right
    interfaces with the State exchanges to put out $400 billion of
    refundable credits in real time, and that the eligibility
    requirements can work; we must set up the systems for this new
    concept of reconciliation of those credits at the time people
    file their returns.
        And so I would anticipate that some of the biggest budget
    numbers you will see will be in 2012, 2013, 2014, as we get up
    and get operational, and then there won't be as big investments
    in technology and infrastructure going forward, because that
    will be in place.
        We also have to go into our core tax systems to make sure
    all this works. Then we have to do back-end testing of those
    systems to make sure that there aren't any problems.
        Mrs. Emerson. So the answer, though, is you really haven't
    planned much beyond 2014?
        Mr. Shulman. We haven't done the kind of specific planning
    that would allow us to talk about numbers.
        Mrs. Emerson. Do you know when you may get to that point?

                       AFFORDABLE CARE ACT IMPLEMENTATION

        Mr. Shulman. CBO put out a 10-year estimate of
    administrative costs with the bill. If you look at this number,
    our costs per year are not far off from taking the total and
    dividing it by 10. And so we will go through detailed planning
    each year. Some of it will depend on how things evolve. The
    President yesterday just talked about State flexibility, what
    States decide to opt in, opt out as we put out guidance. So we
    are going through it.
        I will note there is funding in here for the 1099
    provision, which seems to have universal support of repeal. We
    would pull that funding out if that were repealed. So I think
    there is a variety of moving pieces.
        Mrs. Emerson. Once you get into the individual mandate
    piece in 2014, do you envision having to hire a few thousand
    enforcement folks?
        Mr. Shulman. Not for the individual mandate. I mean, the
    individual coverage requirement, as it is called in the bill,
    is actually a relatively small dollar amount. There are
    prohibitions in the bill around using levies, seizures, those
    kinds of things. We would not have any live agents ever talk to
    someone about that. And so I think most of the money for the
    individual responsibility requirement is going to be for
    technology, so we set up the proper billing systems, not for
    hiring lots of people to go out and check on folks.
        Mrs. Emerson. Okay. We will probably talk more about this.
        Mr. Serrano.
        Mr. Serrano. Thank you very much.
        It was not my intention to speak about health care at all,
    but let me make one comment. I don't envy the situation that so
    many agency heads are finding themselves in, because I think
    what you are going to see--and I say this not to be nice, but I
    don't think you are going to see it from Jo Ann Emerson, but I
    think you are going to see it from some folks who are elected
    and not elected--which is to sort of try to find a way to
    intimidate agency heads into not fully implementing on time the
    health care law or laws they don't like. You do that by using
    the bully pulpit both if you are elected, and if you are not
    elected, but have a radio or TV show, you can do that, too,
    sort of rile the people up to say, don't do it.
        For me, it is very simple. And maybe it is because I am not
    a lawyer. I am not putting lawyers down. But it is the law of
    the land, and until further notice, it has to be obeyed, and it
    has to be implemented, and it has to be paid for. And if we
    don't pay for it--I don't want those wars to be going on, but
    we keep paying for it. But that is what we live with.

                            EARNED INCOME TAX CREDIT

        Anyway, let me move on to one of my favorite subjects,
    EITC. You have done a great job in advertising to people that
    are eligible and to use it, and I have participated in many
    activities in my district.
        The question is, what more can be done both by the IRS and
    others to ensure that all taxpayers who qualify for the EITC
    are, in fact, claiming it and receiving it? I believe that may
    who are eligible are still not using it, not taking advantage
    of it.
        And lastly, again, here is an example of some laws that
    people go after. It would seem at times that the EITC is the
    biggest tax issue in the Nation the way it is enforced or how
    the recipients of it are attacked. And so what can we do to
    make more people take part in it; and, secondly, perhaps to
    alleviate some of the concerns other people have about the
    program?
        Mr. Shulman. The EITC is a large refundable tax credit
    which has a set of characteristics. One is it helps lift a lot
    of people out of poverty. Over twenty-five million people got
    it last year. Fifty billion dollars was paid out. But when
    there is a large refundable tax credit, it also becomes a
    target for people who would perpetrate fraud. And so we run a
    program that tries to address both ends of that spectrum.
        To your question around outreach, we hold EITC awareness
    days. We try to educate practitioners. And when I say ``we
    hold,'' we hold thousands of them. We invite Members of
    Congress. We do a lot to promote it. If we think someone is
    eligible, and they are not claiming it, we will send a letter
    to them. There is an automatic letter that goes out, and we
    work with lots of different groups to advertise it.
        I am quite proud of the rate--for a program trying to lift
    people out of poverty, it has a 75 to 80 percent participation
    rate. So it is a very high participation rate.
        On the other end of the spectrum, there is more fraud and
    error in it than I would like, and so we have an aggressive set
    of proposals around reducing fraud and error. In this
    President's budget, we have proposed to increase the penalty by
    five times for preparers, tax preparers, who don't do proper
    due diligence to make sure people meet the eligibility
    requirements. We run very serious audit programs, and we block
    a lot of fraud coming in. We block or retrieve about $4 billion
    annually in error and fraud; and I would note, some of this is
    error, that people--you know, tough economic times. They take
    money out of their 401(k), they don't pay taxes on it, they
    claim the EITC. They didn't know the law. We make an adjustment
    in just the EITC. So all the numbers aren't fraud.
        We also are working with OMB right now to run some
    experiments with some State data to see if that can be used to
    decrease fraud. And the list goes on. We have a preparer
    oversight project, and 66 percent of EITC claims come from
    preparers. We try to get this balance right by doing extensive
    outreach, making sure people know that they can get the credit,
    but we are also very focused on making sure the payments go to
    the right people, and that we combat any fraud. I think both
    ends of the spectrum are important.
        Mr. Serrano. I recall at one time that something like 17
    percent of the taxpayers were EITC recipients, if you will, and
    yet 44 percent of the audits have been conducted on them. Are
    those numbers still the same? Because at that time I claimed
    that that was unfair. It is a touchy thing. No Member of
    Congress should be saying, don't go after somebody who is
    committing fraud. But 44 percent against 17 percent of the
    taxpaying population or tax-filing population seems to be
    unfair. What has happened there?
        Mr. Shulman. The number I carry in my head is 36 percent of
    audits have some----
        Mr. Serrano. I am not going to argue over that.
        Mr. Shulman. Tangential, Appropriations Committee-speak.
    The number had some relation to EITC taxpayers. And, again, it
    is a difficult balance. We are trying to get it right. So, your
    average taxpayer has less chance of being audited than an EITC
    taxpayer because, as I talked to you, it is a big refundable
    credit. As I said, as you go up the income scale, if you have
    over $200,000 in income, you have a higher chance of being
    audited than an EITC taxpayer. And if you have over $1 million
    of income, you have got four times as much chance of being
    audited.
        So there is more auditing of the EITC than your average
    taxpayer below $200,000, but because it is a large refundable
    credit, and we are trying to get this balance right.

                          VOLUNTARY DISCLOSURE PROGRAM

        Mr. Serrano. Your testimony highlights the success of the
    voluntary disclosure program for which 15,000 voluntary
    disclosures were received. What is the IRS's evaluation of the
    performance of the voluntary disclosure program, and what are
    the lessons learned? In addition to resources, what else does
    the IRS need to ensure the success of the international tax
    enforcement initiative?
        Mr. Shulman. As you know, as members of the Committee know,
    I made international tax evasion one of my priorities when I
    came into the Agency. We had an unprecedented agreement with
    the Swiss Government, for the first time in American history,
    to get thousands of accounts turned over from Switzerland,
    really putting a dent in bank secrecy. We have a variety of
    other activities. And as we ramped up the jeopardy of people
    getting caught, we ran a voluntary disclosure program which
    said, ``come in, pay your back taxes, pay your interest on the
    back taxes, pay a very substantial penalty--in this case 20
    percent of your account balance--on top of all this, but you
    can avoid going to jail.''
        Frankly, when I started this, I thought maybe 1,000 people
    would come in. We usually get about 100 people a year through
    voluntary disclosure. As you mentioned, we had 15,000 come in.
    Since it closed, we have had another 3,000 or 4,000 come in. We
    just announced another Voluntary Disclosure program.
        And before I get to lessons learned, we are using that
    information to data mine and then go after other tax cheats,
    because we see patterns of banks, promoters, advisers who
    facilitate this. And you have seen some of that start to
    percolate through the press, so we have now taken that data,
    and are branching out our investigations to both other banks
    and other parts of the globe, and we are going to keep the
    pressure up.
        I think lessons learned are, one, you need to be staffed
    for this. Like I said, we were planning on about 1,000; we got
    15,000, so we had to get ramped up for this.
        Two, the technique of ramping up pressure and then allowing
    for people who want to come in and get right is important. I
    have always said it is great, we have gotten well over 20,000
    people back in the tax system. And they have had to pay the
    price. But what is more important for our tax system is the
    next 20,000 or the next 100,000 people don't even think about
    doing this and are honest, tax-paying citizens for the years to
    come.
        And so I think the real lessons are around how to use your
    enforcement tool to build long-term compliance in the system.
    Because that is the most efficient thing we do. There is a huge
    ripple effect when we find bad actors, bring them in,
    demonstrate the consequences. And the key is to prevent that
    action in the future.

                          DEBT COLLECTION FLEXIBILITY

        Mr. Serrano. I have one more question this round. The whole
    issue of collecting debt during an economic recession, now, we
    know that the people who have haven't paid the taxes or who owe
    taxes no question should pay them, and you should collect them.
    But the taxpayer advocate feels that there is insufficient
    guidance available to the tax-collection employees in terms of
    how best to go about doing it so it doesn't--while collecting
    taxes, it does not create undue hardships on people who may
    have lost their jobs during this recession.
        What can you tell me? What is happening to both do what
    your agency is charged with doing, and at the same time taking
    into consideration that these are not normal times?
        Mr. Shulman. Similar to what I talked about before. I don't
    see conflict between collecting the revenue, but making sure we
    understand the individual circumstances of each taxpayer. I
    have a theme that I use with our employees, which is everybody
    should walk a mile in a taxpayer's shoes, and you should really
    think about each person that comes in. What are their
    circumstances? How do we best deal with them as the Federal
    Government in a way that is fair, in a way that is efficient,
    in a way that has them leave feeling that we are competent,
    respectful, and all of those things?
        And so what we have tried to do is require people who can
    pay need to pay. But the law allows for a set of flexibilities
    around people who are struggling, people who aren't in a
    position to pay, people whose circumstances have changed. And
    over the last several years we have gotten funding to make sure
    that we have increased collection coverage, and this funding
    started before the recession started.
        But I put in place a number of measures, trying to walk in
    taxpayers' shoes. In 2009, we gave our people more discretion
    around not taking collection actions because somebody missed a
    payment. We allow people to get liens removed from houses if
    they were trying to refinance or sell, recognizing that the
    housing prices are one of the big things dragging the economy
    down. Last year we held 1,000 open houses for small businesses
    and individuals around the country. We brought in appeals
    officers, collection folks, customer service people, the
    Taxpayer Advocate Service, and tried to work out issues and
    come to resolutions with them.

                             FRESH START INITIATIVE

        Just last week I announced what I call our ``Fresh Start''
    initiative, where I increased the threshold from which we will
    file liens, recognizing inflation. So we will be filing fewer
    liens going forward. We gave taxpayers the ability--and it was
    one of the things that the Taxpayer Advocate pointed out--that
    if they call and request a lien to be withdrawn, we will
    withdraw it, which erases it from their permanent record. Right
    now we release it, but a lot of taxpayers have said that a
    withdrawal actually helps them get on with their life better,
    get financing, those kinds of things. So once your tax debt is
    paid, we are fine with that. It is a little extra expense for
    us, but we have agreed to do that to try to help taxpayers. We
    have said taxpayers who enter direct deposit arrangement with
    us--there is very little default with electronic deposit for an
    installment agreement--we will withdraw liens. So we won't file
    a lien or we withdraw a lien if you take that extra step of
    hooking up electronically with us.
        And we have dramatically expanded our Offer in Compromise
    program, which is a program that says if there is no prospect
    of collecting tax now with your current assets and income, and
    you don't have prospects for income, we can settle your debt
    for less. We have loosened the criteria on that to allow more
    people to come in, get clean, get a fresh start, and move on.
        And so I am always trying to balance. If you owe taxes and
    you can pay taxes, you need to pay taxes. But if you are in a
    circumstance where you really can't pay, and there is not a
    prospect of payment, we need to find ways to work with you,
    again, to keep you in the system for the long term, and to make
    sure people have faith in the tax system.
        Mr. Serrano. Thank you.
        Mrs. Emerson. Ms. Lee.
        Ms. Lee. Thank you very much, Madam Chair.

                             EFFECT OF BUDGET CUTS

        Let me ask you a couple of things. One is following up on
    my colleague's question with regard to the earned income tax
    credit. In terms of the budget cuts that are being proposed,
    how will that impact low-income wage earners, the working poor,
    and the EITC program? Or will it?
        Mr. Shulman. I think it will probably impact both ends of
    the spectrum. Clearly we will have to make cuts in our outreach
    programs if the kinds of cuts being talked about are severe,
    and so we won't be able to do as much work with partners, and
    we won't be able to do as much communication and outreach. We
    are going to have to look at things like mailings and figure
    out are we sending out those automatic mailings or other
    automatic mailings. We already put a freeze on non-case-related
    travel at the Agency, and that freeze will have to get more
    severe, without any exceptions, and so we will limit people
    traveling out to do those outreach events. So I think on the
    outreach side, it will have an effect.
        It also will have a direct effect on compliance. 36 percent
    of our audits involve EITC cases, so I think you would see
    fraud and error go up in that, and other programs. So I think
    you would see change on both ends, both the compliance side, to
    make sure only people who deserve it or who are qualified get
    it, as well as on the outreach side.

                       EARNED INCOME TAX CREDIT OUTREACH

        Ms. Lee. I do a lot of these events in my district also to
    encourage EITC-eligible individuals to apply, and we in no way
    reach the numbers of people who are eligible, and so we are
    trying to reach more people who qualify. And it sounds like we
    will reach less people now if these budget cuts take into
    effect or go into effect as proposed. Or can you figure out a
    way to increase the recipients, the eligible people filing with
    less money? I mean, is there a way to do that? Because we want
    to make sure everyone files who is eligible for EITC.
        Mr. Shulman. As I said in my opening comments, if the
    budget as proposed right now in the House were passed, we would
    have to make a set of difficult trade-offs. So I can't tell you
    we have gone to the level of detail around EITC-specific
    outreach, how it would affect eligible taxpayers or even
    compliance. But I would tell you it is a big enough program
    that both ends of the spectrum would be affected.

              DIVERSITY OF THE INTERNAL REVENUE SERVICE WORKFORCE

        Ms. Lee. Let me ask the next question. As it relates to the
    diversity of the IRS in terms of people of color and women in
    your workforce, do you have any data that shows how you are
    doing, as well as with regard to minority contracting, whatever
    types of contracts you all let? Are you part of the 8(a)
    program, and how are you doing on that?
        Mr. Shulman. Yes on both fronts, on 8(a) and diversity in
    the workforce. You know, I am a believer in a strong diversity
    office with a set of requirements. For an agency like us, who
    interacts with every taxpayer in the Nation, if we are going to
    be good at service, and, frankly, good at compliance, we need
    to reflect the population. We must really engage, walking in
    the taxpayers' shoes.
        So, I really emphasize that diversity in the Agency is more
    than just a legal requirement. We need to meet legal
    requirements, but it is a strategic imperative for the Agency.
    I think in everything from diversity of race and gender,
    diversity of hiring people with disabilities, we stack up quite
    well against other Federal agencies. For targeted disabilities,
    we have the highest percentage of hitting the targets, and I am
    quite proud of that record. I spend a lot of personal time on
    this issue. Our Director of Diversity reports directly to me,
    and I am quite proud of where the Agency is in that regard.
        As far as 8(a) targets, I can get those to you. What I can
    tell you is we hit most of them. The ones we don't, we have
    specific plans to hit, and we have been getting better as an
    agency. And, again, I spend personal time on this.
        Ms. Lee. So you have a Diversity Officer. Do you have the
    data or the reports that we could access or send them to us?
        Mr. Shulman. Absolutely.
        Ms. Lee. Thank you.
        [The information follows:]

        [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Mrs. Emerson. Mr. Diaz-Balart.
        Mr. Diaz-Balart. Thank you, Madam Chair.
        Thank you, Commissioner. Good to see you.
        Let me first thank Ranking Member Serrano for his statement
    about making sure that there is no intimidation. We also
    realize that we have a mandate or oversight which we take very
    seriously and he takes very seriously, and I know that if there
    were attempts of intimidation, we would all, including Mr.
    Serrano, would be as vocal as when he was, for example, when
    the President called the Director of the CBO to the White
    House. So I know that, and I thank him for bringing that up,
    because I know that we would all be as vocal at least as we all
    were when the President called the CBO Director to the White
    House. And as the ranking member said, clearly that is not the
    intention of this chairwoman.

                               INDIVIDUAL MANDATE

        I wasn't going to ask about the individual mandate, but I
    was kind of hit by a couple of statements. You mentioned before
    that because if the continuing resolution were passed as is,
    that you would have--less people would, in essence, means less
    enforcement, less revenue, correct? In essence. You mentioned
    about how the continuing resolution would affect your ability,
    and you would actually lose revenue.
        Mr. Shulman. That is correct.
        Mr. Diaz-Balart. Because you would have less enforcement
    people?
        Mr. Shulman. I think it would be for a variety of
    circumstances.
        Mr. Diaz-Balart. Yet correct me if I am wrong, but when the
    chairwoman asked you how many people you are going to be hiring
    for the individual mandate, you said not a lot of people,
    mostly technology. Is that also correct? Because if that is the
    case, then why don't you--if you can enforce with not a lot of
    people, with just technology, and you are saving money with
    that. And then why does it hurt you if you have less people
    from the CR? Which one is it? Why don't you then replicate what
    you are going to do with the individual mandates in other
    areas, which is you don't need a lot of people; you are asking
    money for technology anyway. Which one of the two is it? I am
    kind of confused.
        Mr. Shulman. One of my favorite statistics in the world of
    tax is that the Tax Code is four times as long as War and
    Peace.
        We obviously have a huge Tax Code with lots of different
    provisions, and I think each provision of the Tax Code has
    different characteristics and different needs as far as how we,
    as the tax administration arm, implement them. And so we could
    go line by line through the Code and think through what are the
    characteristics of it? What are the requirements put on us?
    What is the lead time against implementing that? How do they
    interact with other pieces of the Code? Each one would have a
    little bit of a different answer. And so while I recognize that
    the individual coverage requirement is a provision in the law
    that gets a lot of attention, I think taking comments about
    that and generalizing them to the whole Tax Code is not really
    apples to apples.

                                    RESEARCH

        Mr. Diaz-Balart. I understand that, Commissioner. You have
    spent a ton of money on research. Have you looked at where you
    can replicate what you want to do with the individual mandate,
    which, according to what you said, is not going to take a lot
    of people, to where could you replicate that to other parts of
    the Tax Code? Or are you telling me that there are no other
    parts of the Tax Code where you can replicate that with less
    people in order to not lose revenue?
        Mr. Shulman. I look at that a bit in reverse. When a new
    provision is put in the Code, like the individual coverage
    requirement or another one, we look at our core programs and
    say, ``which of our core programs are most suited to that kind
    of requirement, and how would we do that?''
        We have a very big program called our Automated Under
    Reporter Program, which is basically a document-matching
    program that has a 22-to-1 return on investment. One of our
    bedrock principles is we don't send letters to you if we can't
    answer the phone call when you call and say, ``what is this
    letter about?'' And so the Automated Under Reporter Program is
    our basic W-2 matching program, which is something very similar
    to what the individual coverage responsibility would have. You
    say what your income is, we get a W-2. It automatically, if it
    doesn't match, sends out a bill to you.
        The vast majority of things get resolved through mail and
    correspondence. Depending on dollar amounts, sometimes somebody
    would show up and do face-to-face audits or do correspondence
    audits, and sometimes they wouldn't.
        The individual responsibility requirement actually starts
    at a very low dollar amount. I think it is $95; it ramps up to
    $695; it is 2.5% of annual household income when fully phased
    in. What I was expressing to the Chairwoman is those aren't the
    cases that get a lot of face-to-face interaction with the IRS.
        And so we are building on lessons learned to try to
    automate as much as we can. We have lots of document matching.
    And this one would be pretty simple: you have coverage, or you
    don't. There is indication you have coverage or you don't, and
    you get a letter. You think about it like a billing system.

                               TAX LAW COMPLEXITY

        Mr. Diaz-Balart. In a C-SPAN interview, you admitted that
    you use a tax preparer for your returns, which makes sense to
    me. I understand, and I do the same thing. You stated that ``I
    find the Tax Code complex. I use a preparer,'' which makes
    sense. I obviously agree with that. Now, it would seem to me
    that the health care bill would only seem to compound the
    complexity of the Tax Code.
        So how confident are you in your understanding of the
    health care law and the vast new responsibilities and the
    powers it is giving to the IRS because of that complexity?
        Mr. Shulman. I am quite confident that we have got a whole
    set of lawyers that have looked closely at the bill. We are
    very familiar with the immediately effective provisions. There
    are a variety of ones. There is lots of planning to go. So I
    think this Agency is incredibly confident at understanding the
    tax law.

                              INFORMATION SECURITY

        Mr. Diaz-Balart. There has been a lot of concern, and
    understandably so, about the new oversight powers of the IRS,
    given the health care law which would really give unprecedented
    access to U.S. citizens' information. And so what assurance can
    you give the American people and give us that that information
    would be kept secure? Now, that is not an issue with your
    agency, per se. We have seen the Wikileaks. So what sort of
    assurances could we have?
        Mr. Shulman. I think there has been some inaccurate
    commentary about the access that we will have to health
    information. I am very clear that as part of this law, the
    Affordable Care Act, our role is to administer the tax
    provisions, not to get involved with health care, per se; that
    you can think of us as the bank, where the money flows to put
    out credits, to collect money, to interface with insurance
    companies and get them payment.
        The only information we will have is fact of coverage, not
    health records, not medical treatment, not information about
    people's health situation. We will have your classic tax
    information about income. And then the only other piece of
    information we will have is fact of coverage: Do you have
    coverage, or don't you?
        Regarding how we safeguard that and other things, we spend
    a lot of money--in our requests every year, we ask for some
    more--around data security. Some of the money in this health
    care request is around our data security office and our
    safeguards office to make sure we not only safeguard the data
    that is within our four walls, but we go out and do aggressive
    oversight of the data, the tax data, that we share with anyone
    else around this law.
        I tell everybody, within my first 2 hours on the job, I got
    sworn in, had a couple of other things happen, and then the
    person who talks about data security and taxpayer privacy came
    and gave me an hour briefing. I mean, this agency takes
    taxpayer privacy and data security very seriously. But it is
    tax data, and the only new data we will get because of the
    health care law--there will be a variety of other tax-specific
    things and financial data at which we are quite adept--will be
    fact of coverage. We are not getting involved in health care
    decisions, health care choices, data about people's health.
        Mr. Diaz-Balart. Madam Chairwoman, if I may, just another
    question. Really it is a two-part question.
        Mrs. Emerson. Certainly.

                                    RESEARCH

        Mr. Diaz-Balart. The IRS spends a vast amount of money on
    research, I believe, I was told. And I am curious as to if you
    are doing research and how much you are focusing on the--kind
    of piggybacking on the previous conversation we just had about
    the individual mandate, about using technology less, are you
    doing research into where you can do more of that, if there
    areas that are applicable that you can do more of that? And
    really the bulk of my question is are you also doing research,
    and what kind of research, to prepare for fundamental tax
    reform? I mean, for years, I guess for generations, we have
    been talking about fundamental tax reform. Are you doing any
    research on that as to what that would mean, how that can be
    done, et cetera?
        Mr. Shulman. We have a very robust research operation. We
    run the statistics of income data operation, which is used
    across the government and by lots of researchers. It is data
    about income in the United States, and it is used for a variety
    of non-tax-related research. Then we have our National Research
    Program (NRP), which really looks at compliance, what are
    trends of compliance. It is a very interesting and complicated
    study about what leads to noncompliance: what is accidental?
    What is because the Code is so complex? What is advertent? How
    do you stop people who are purposely doing that? A lot of our
    planning is informed by that research. I am a big believer in
    being forward-leaning, being innovative, seeing around corners,
    trying to position the Agency long term.
        Kind of sadly, we have gotten quite adept at quickly
    implementing tax law changes at the last minute. I think--and
    you look at fundamental tax reform--I think the President and
    lots of leaders in Congress, both parties, both Chambers, talk
    about the need for simplification. You know, we are big
    cheerleaders for that. The simpler it is, the easier it is for
    us to engage with the American people. So we do a variety of
    planning around that as well.
        Mr. Diaz-Balart. Thank you.
        Mrs. Emerson. Thank you.

                             REFUNDABLE TAX CREDITS

        How many people do you think, or do you know specifically,
    work on refundable tax credit issues or any kind of tax credit,
    whether it is the earned income, education tax credits, or
    child-related tax credits? How many people are currently, even
    approximately, in the IRS are doing that right now?
        Mr. Shulman. We have a dedicated refundable credit office
    who spends a lot of time doing outreach, looking at it, et
    cetera, and I would have to get back to you on the exact
    numbers in there.
        Part of the budget request includes funding for a
    Refundable Credit Compliance Office, recognizing that we need
    to keep making sure that we get the right algorithms, et
    cetera, and we are tightening around that.
        A lot of the rest of the credits are very hard to break
    down because they flow through. It is all part of your tax
    return. As I mentioned before, your income, the deductions you
    take, some of them are stand-alone refundable credits at the
    end of the return, what are called below-the-line items; some
    of them are above the line and flow through.
        We really are organized more around individual taxpayers,
    business taxpayers. We have a Large Business Division, a Small
    Business Division, an Individual Division, and a Tax Exempt
    Division. And then our process flows for both service and
    compliance are more towards the type of taxpayer, to deal with
    all of their tax, their income, their deductions, and their
    credits. We don't really have it broken down that way.
        Mrs. Emerson. But yet when you made your request for the
    refundable credit compliance office, you very specifically
    asked for, $473 million. No, that is for all health care. $213
    million and 453 FTEs, just to implement the refundable health
    care premiums assistance tax, right?
        Mr. Shulman. I was actually referring to something
    different. We requested, I believe, in the $20 million range
    for an office that would loop in EITC and some of the
    refundable education credits, as well as this. As refundable
    credits become something that there is more of, and because
    they are refundable, we want to make sure there is not fraud.
    That is really about research, compliance, filters, technology
    to stop.
        The other thing we are talking about, the infrastructure
    for refundable credits, is really complicated. To give you the
    best example, right now every taxpayer focuses on AGI,
    adjustable gross income. There is no concept of household
    income. So we actually have to take our database of all
    taxpayers and figure out how to link households together, which
    is the eligibility requirement of this new refundable credit.
    And so that request is not for the Office, per se; that request
    is just to get the basic infrastructure up and running. The
    bigger numbers in this budget request are really technology and
    infrastructure.
        Mrs. Emerson. For the refundable credit compliance office,
    that is specific to health care, you have asked for $213
    million and 453 full-time employees. Then for this new office
    to administer all the other refundable tax credit programs, you
    have asked for $31 million and 314 FTEs. So it is kind of weird
    that you have got $213 million and 453 FTEs, and then $31
    million and 314 FTEs in the new office.
        I am just a little bit confused how it is all going to work
    together. And are there not people already working on the
    refundable tax credit, the EITC?
        I will say that I have so many of my own constituents who
    are eligible for EITC. Joe, you may be interested to know, just
    kind of an aside, I actually did an event with the IRS free tax
    file service at a lot of my community hearing organizations
    over the break. At three different locations, we
    teleconferenced or videoconferenced the event because so many
    people and organizations, who help them, want to understand if
    they qualify for EITC. In my district, we have a large amount
    of people who are potentially eligible for EITC.
        But I guess my concern is if you already have existing
    staff working on refundable tax credits, can you not just use
    the same infrastructure? Expand it, if you need to for purposes
    of this health care-related refundable tax credit; can you not
    just do that? Or is it going to be a whole new, separate--or
    does it need to be separate?
        Mr. Shulman. So, let me try to explain. I probably didn't
    explain it as well as I could.
        The refundable credits office that we are trying to stand
    up----
        Mrs. Emerson. That is the $31 million one?
        Mr. Shulman. Yes. That came not as a result of health care;
    it came as a result of me, as Commissioner, saying that we had
    spread refundable credits through the Agency. We definitely
    will pull people in through outreach, but we didn't have a
    dedicated office, we didn't have dedicated research, we didn't
    have dedicated filters, and people who--what they worried about
    was fraud and abuse in refundable credits going out. We will
    definitely pull some people in, but we didn't necessarily
    have--we had a lot more outreach folks spread around. The other
    people were spread through our compliance functions. They will
    eventually be assigned to study the $400 billion in refundable
    credits enacted as part of the Affordable Care Act, to think
    about compliance trends, et cetera. But that is not necessarily
    the direct effect. You know, this Refundable Credits office
    wasn't created as a result of the Affordable Care Act (ACA). It
    is a subset of the initiative to deliver credits accurately,
    which includes the funding to implement the new credits from
    the ACA.
        The refundable credit budget request for the Affordable
    Care Act, which is--the line item is: Ensure accurate delivery
    of the tax credits. There is a small business tax credit that
    is in place that we need to make sure we have some coverage
    around, so we are getting it to the right people and not
    getting it to the wrong people. That credit is a pretty small
    chunk of that request. The large number you are pointing at,
    and I would ask our staffs to reconcile numbers, but I am
    looking at $227 million which includes some additional
    downstream ACA implementation costs. And so you had said----
        Mrs. Emerson. $213 million dollars, and with the 453 FTE.

                          AFFORDABLE CARE ACT CREDITS

        Mr. Shulman. Okay. That number. That is what I was
    describing to you, or I tried to describe to you before. That
    is the funding to implement the $400 billion in refundable
    credits that are in the ACA that will go out over 10 years
    through up to 50 State exchanges, maybe less, as the President
    talked about depending on qualification.
        When people show up at the exchange, they are going to
    figure out whether they are eligible or not right there at the
    exchange. So we need to build technology to interface with
    them. First, we need to build the household income database.
    Then we need to get in real time, and, as Mr. Diaz-Balart
    talked about, we need to do it in a way that is secure, that
    has the appropriate safeguards. We need to determine
    eligibility. We then are going to need to work to have monthly
    payments going to insurance companies, and so we need
    interfaces with all the different insurance companies in the
    country. Then we are going to have to work out protocols with
    the exchanges around change in circumstances: how we change
    that, how we verify that through our systems. And then that
    refundable credit is actually an advanced payment in--take
    2014--on your 2014 income. So you will, in 2013, figure out
    what health coverage you will have for the year based on 2012
    or 2013 income. This will happen throughout the year, and then
    there will be a reconciliation in our systems on the back end
    to figure out what you actually owe.
        That $200-plus million is to do the planning, do the
    interface work, start to build that system that is going to
    have all those different complex interchanges with insurance
    companies, with employers sending in some money, with the
    exchanges. So that is actually a technology infrastructure
    build. It is separate from this data analytics group that is
    doing pure compliance around refundable credits.
        [The Refundable Credit information follows:]

                         Refundable Credit Information

        The IRS budget has several figures related to credit compliance.
    The figures discussed include the 453 FTE and $213.5 million budgeted
    for ensuring compliance with the ACA credit. The bulk of this
    investment is to expand the IT infrastructure to properly administer
    the new premium credit to subsidize the cost of health insurance for
    Americans who do not have access to affordable care. This amount is a
    subset of the $473.4 million and 1269 FTE requested for implementing
    all the provisions of the Affordable Care Act (PL 111-148) for which
    the IRS is responsible.
        The FY 2012 budget request also requests 314 FTE and $30 million to
    establish a Refundable Credits Compliance Office. This office will
    develop a comprehensive and integrated compliance strategy for
    administering refundable credits and rapidly address refund schemes
    through pre- and post-refund enforcement. Establishing an office
    dedicated to refundable credit work allows the IRS to address non-
    compliance and fraud trends that emerge from existing and future
    refundable credits.
        The IRS also maintains an Electronic Tax Administration and
    Refundable Credits Office (ETARC). The current staff dedicated to
    Refundable Credits has a staff of 43 and provides oversight and
    strategic direction across twenty-two service-wide program areas across
    the IRS. These figures only represent dollars and FTE dedicated to
    refundable credit work. They do not capture the employees who may spend
    part of their time reviewing and auditing claims for credits,
    developing forms and instructions for claiming the credits, and
    programming the necessary systems to deliver the credits, which is a
    much larger figure. Since the credits are claimed at the time of
    filing, much of the work is part of the IRS's normal work stream, and
    not separately captured.

        Mrs. Emerson. So will all 453 full-time employees that you
    need to at least set up this whole new system--actually will
    you need all of those people throughout the entire 10 years as
    you just said?
        Mr. Shulman. Not necessarily. Our personnel needs will
    likely decrease as we ``stand up'', which is why we will use a
    lot of contractors in addition to IRS personnel, so we will
    contract some build. This will be program offices, project
    managers, coders, certain folks. The average number I use from
    my private sector experience is that the drop-down cost of
    technology is anywhere from 20 to 30 percent of development
    cost. So you have your development cost. Then you have got your
    operating costs and infrastructure.
        I don't know how much of this will be in production for the
    long term, but this set of people we need to do the ramp-up
    won't be the same set of people we need to run the operating
    environment long term.

                       AFFORDABLE CARE ACT RECONCILIATION

        Mrs. Emerson. I can't remember if the language was specific
    enough in the health care law, even though I actually read it a
    couple of times, with regard to the reconciliation at the end
    of the year. I mean, suddenly Joe is going to get a bill here,
    just hypothetically, for $453 that he is going to end up owing?
    Have you figured that part out yet? I am just curious.
        Mr. Shulman. I am very focused on this reconciliation
    because it is actually a new concept in the tax system, paying
    this back. And Congress has and is talking about certain caps
    on it, and those caps have been expanding. Bottom line is you
    are going to get money, and then you may owe a chunk back. And
    if you go over the cliff, the chunk could be relatively
    substantial. And so we are needing to set up systems around
    that.
        Mrs. Emerson. And it seems to me that the complexity only
    gets exacerbated by the fact that your income status could
    possibly change dramatically, either to the positive or the
    negative, depending. And then is the onus then on me, the
    individual, to let you all know that suddenly I got this
    gigantic bonus, and I have a huge raise, and suddenly I don't
    qualify for this? I mean, whose responsibility will it be to
    tell you? Or will it just come at the reconciliation at the end
    of the year?
        Mr. Shulman. As I understand, it is a two-step. And so I
    don't know all the plans because it is the exchange's
    responsibility to know shift of income, and we will have some
    interface with that. But I think the first step is when there
    is a change in income, alerting the exchange and adjusting. But
    regardless what happens there, it will be on your tax form what
    your final income is, what tax credits you got, and if there is
    a delta, there will be an assessment on that.
        Mrs. Emerson. It is going to prove quite interesting, to
    say the least.

                                 SIMPLE RETURNS

        I will shift gears. We have talked several times about the
    President's campaign pledge to have the IRS perform tax
    preparation or simple returns. As you know, there still is, and
    probably more so now, significant bipartisan opposition to this
    concept, at least in the House. I know we have talked often
    about it, and you have told me that there are no plans to move
    forward or spend taxpayer funds to create this program. But I
    keep hearing, every so often, that the IRS is going to do this.
    And it is not from conspiracy theorist e-mails. I just hear it
    around. I also know that this concept comes not from you, but
    rather from those who are perhaps above you in the chain of
    command.
        I just want to make sure, is it still your position that
    the IRS is not moving ahead on implementing simple returns?
        Mr. Shulman. Yes. I get to decide what the IRS does and
    doesn't do, and we are not working on simple returns. So I will
    tell you that.
        Mrs. Emerson. Not even as a pilot?
        Mr. Shulman. We don't have a pilot program. What I always
    say is, whether you like it or not--compared to places I came
    from before, which built stock exchanges and did complex
    surveillance--the money we spend in technology investment money
    is very small. And so even though for 2011 and 2012 we have
    asked for an increase, as a percentage of total budget those
    are still incredibly small, especially if you look at other big
    financial institutions who move the kind of money we move. We
    would have a long way to go, even if we wanted to do it, to get
    our core database done, get the technology done, get the
    security done, and put all these pieces together. And so it is
    not something that is in our planning pipeline.
        Mrs. Emerson. I appreciate it.
        Joe.
        Mr. Serrano. Thank you.
        So you think some people will stop now saying that he is
    going to do it? Besides, it is not an e-mail; it is on radio.
    Anyway, and I am going to get a bill at the end of the year,
    you said?
        Mrs. Emerson. Hypothetically, yes.
        Mr. Serrano. I hope not.
        Mrs. Emerson. Well, I guess you would have to be in the New
    York exchange, so you won't qualify for any refundable tax
    credits.
        Mr. Serrano. Okay.

            EFFECTS OF BUDGET CUTS AND RETIREMENTS ON THE WORKFORCE

        Commissioner, we know that there could be, unfortunately,
    some very serious cuts coming to every Federal agency,
    reduction in workforce. But we also know that, according to the
    Treasury IG for Tax Administration, that they predict that 30
    percent of all IRS managers and 47 percent of IRS executives
    are eligible to retire. So how does one play into the other?
    And what preparations are you making for the fact that you have
    this many people that are eligible for retirement? How do they
    play into each other, I meant do you absorb then some of those
    cuts through some of the people you hire, or do you cover those
    and start at the bottom where you would have entry-level people
    coming in through the system?
        Mr. Shulman. In general around this retirement issue and 30
    percent of people being eligible, I have been very focused on
    workplace issues. I believe, as a leader of a large
    institution, if you get people to show up every day engaged
    with the right skill sets, you promote and create career paths
    for your good performers and you weed out poor performers. If
    you take care of those sets of issues, you can execute
    strategy. If you don't take care of those sets of issues, you
    can have the best strategy in the world, and you will never
    execute it.
        So I created this Workforce of Tomorrow Task Force. We had
    a whole program around it. The Agency, over the last 2 years,
    was the most improved in the Best Places to Work in Government
    survey, which surveys all Federal agencies. It is something on
    which I and my senior leadership team spent a lot of time and
    are quite proud of.
        I think this retirement wave creates challenges and
    opportunities. I think the challenge is really good subject
    matter experts who know the tax system, who know their specific
    area, are going to leave. It also creates career opportunities
    for younger people, some fresh blood to come and keep
    innovating as an Agency.
        We have been working department by department to make sure
    there is good succession planning, that we challenged our more
    mature workforce to take it upon themselves to mentor the next
    generation. And so I view this as it is--a fact. We have got in
    front of it early, so it is not a crisis. It is one of these
    things--you deal with the facts on the table and you manage it.
    And I think we are pretty far in front of it.
        I think regarding cuts and layoffs, the first move would be
    to allow--we wouldn't replace attrition. I can talk about being
    in a 2010 CR, given that there was inflation increasing the
    cost of contractors, increasing the cost of real estate, et
    cetera, we are having to tighten our belt right now. So we have
    an exception-only attrition freeze, where people are coming to
    me or my deputies if they want to replace attrition right now.
    So attrition is your first move, and we will have some people
    retire. But if the cuts in magnitude we are talking about
    materialize, we would also need to do RIFs or furloughs. I
    mean, attrition would not take care of meeting those kinds of
    cuts.
        Mr. Serrano. So you can deal with it as it is now through
    attrition, but any more dramatic cuts then would create a
    problem; is what you are saying?
        Mr. Shulman. I mean, it is a sliding scale.
        Mr. Serrano. I don't want to get you in trouble.
        Mr. Shulman. No. What I was going to say is you said ``any
    more dramatic cuts.'' So cuts of the magnitude that the House
    is talking about, we would definitely have to do that. There is
    a scale.
        Mr. Serrano. We are going to get more dramatic cuts. It is
    no government; just the legislative body. And even that is in
    question.

                              INFORMATION SECURITY

        Let me ask you about the issue of identity and the security
    behind that. I know you spoke about the health care bill and
    the law and how that plays into it, so that you would have some
    information, but not all information. There is always an
    ongoing issue of how much the IRS knows about you and how much
    should it know. So what are we doing to deal with this fact and
    trying to make sure that the IRS is where it should be, an
    agency that has certain information, but not harmful
    information?
        Mr. Shulman. I guess the first thing I would say is the
    information that we have is the information that Congress
    prescribes in the laws it passes. So Congress tells us what the
    tax law is, and we collect the information as appropriate. So--
    --
        Mr. Serrano. You wouldn't be the first agency to have more
    information than Congress told them to get. I am old enough to
    go back to the 1960s on those issues.
        Mr. Shulman. And the second is, as I mentioned earlier, one
    of the fundamental tenets of tax administration is data
    privacy, taxpayer privacy. It drives some Members of Congress
    crazy, frankly. I get calls and letters asking for information
    on taxpayers and what we did with them. The law prohibits it.
    It is a felony to share that information. We, every year,
    educate our people on that. Every year we fire people who
    breach or look at information.
        Everyone in the agency knows that we take security of data
    and taxpayer data very, very, very seriously. And so we have
    awareness training. When I first got here, and every couple of
    years after that, we did what we called Code Red, where we
    stood everybody down for 2 hours to talk about what information
    do I have access to? What is in technology? What is on desks?
    What is on e-mail? What can we do to tighten it up? It starts
    with employee awareness. And we have robust technology and
    computer security, both on our perimeter, as well as
    internally, around who has access controls.
        I made a commitment, and have been working with our
    Inspector General to make sure we have detailed logs of
    technology, and on any new technology we put in the appropriate
    logs, so we can do oversight of who accesses what technology.
    It is a big, complicated task, and I would never tell you we
    are done. This is just going to be ongoing. And the advent of
    technology, the kind of information we have, I think it is a
    challenge for everyone. But there is a culture in the Agency
    that is very locked down and very serious about data security
    and about privacy.
        Mr. Serrano. Thank you.

                         EFFECTS OF GOVERNMENT SHUTDOWN

        One other question. We don't want to mention this word too
    much, but there is a possibility somewhere along the line of a
    government shutdown. And if it happens during a certain part of
    the season, and you have seasons more than anyone else, people
    worry, well, what does that mean? What does that mean for tax
    collection? What does it mean for tax refunds? And that is a
    huge issue, because we are not only talking with a shutdown
    about the fact that people won't be paid or people will not be
    working. Or I remember in the last shutdown, one of the bills
    that hadn't been passed was the Interior appropriations bill,
    and the last thing I expected was important to a lot of people
    were people coming to our office here in Washington and saying,
    how come the monuments are closed? Or, I can't go to this
    particular park. It may not sound important to a lot of folks
    in terms of the whole picture, but if you planned a trip to
    Washington and found the monuments not open, you want to know
    why. And they had no idea what is going on.
        But a tax refund is a very serious issue in addition to tax
    collection. Do you know at all how it would affect you?
        Mr. Shulman. Let me start where I think where you started,
    which is the President has been clear that he is optimistic
    that Members of both parties and both Chambers will avoid a
    shutdown, because that is not going to be good for anyone.
        Mr. Serrano. By the way, for the record, because I don't
    want anyone to think that we are being partisan here all the
    time, we are very little, Jo Ann and I, but I think that 95
    percent of Members of Congress of both parties know that this
    is a dangerous thing, and they don't want to go that way at
    all.
        Mr. Shulman. So I start by saying I think I am equally
    optimistic, and think people recognize a government shutdown is
    not in the interest of the American people.
        Second, the date matters to the tax system and to the
    definition of essential functions of government. And so we are
    still looking at this, we are still working with OMB. Our
    general guidance would be to follow the plan we have had in
    place since the 1980s. In 1995, we deposited money but didn't
    process refunds. I think that is what you could expect in
    something that was short term and close to now. But as we get
    closer and closer to April, I think this is dynamic, and we are
    still having discussions and still looking at the issue.
        Mr. Serrano. Thank you.
        Mrs. Emerson. Mr. Diaz-Balart.
        Mr. Diaz-Balart. Thank you, Madam Chair.

                            MULTILINGUAL INITIATIVES

        Actually, I have a basic question as a new one here. And I
    am almost reluctant, I should have asked you this when we met
    privately, particularly when we have one of the country's
    foremost leaders on Hispanic access and empowerment issues, and
    that is Mr. Serrano. I apologize to you, sir. This is a very
    basic question, and I could have asked you, or I could have
    asked you, but I might as well take that.
        In south Florida, the IRS has a job in making sure that you
    have people that speak different languages there. And, by the
    way, you have some wonderful people who are always accessible,
    and they will meet with anybody who has an issue, and they will
    do so in the language of the people who--you know, we have
    those large communities.
        My question really is in other parts of the country, and in
    particular parts that are--you know, when you look at the
    census now, the growth of the Hispanic community in places
    where, frankly, a lot of people didn't know they were there.
    But I guess you are ahead of the census because you deal with
    this every single year. What are your challenges in dealing
    with language minorities? Do you have an issue finding people?
    Again, I know that in south Florida you do a really good job
    there, but in other parts of the country, particularly those
    that are relatively new as far as either Hispanic or minority
    populations, how do you do there? How are you doing? What sort
    of programs do you pursue to do that?
        I ask that, and I know it is a relatively simple question
    particularly in front of--a lot of people think that Mr.
    Serrano and I have great differences, and we do. But there is
    no doubt that not only I, but everybody in the country
    recognizes him as one of the great leaders of the Hispanic
    community.
        Mr. Serrano. Thank you. And I really appreciate those
    words.
        South Carolina was my biggest surprise in Hispanic growth.
    What was yours?
        Mr. Diaz-Balart. Frankly, everywhere. I mean----
        Mr. Serrano. Now I know why.
        Mr. Diaz-Balart. There are some areas that, frankly, even
    though numberwise are not huge, but there are areas where you
    wouldn't expect it at all, and that is really where I was more
    impressed. And so the point the ranking member was making is
    the fact that those are the places where it has got to be more
    difficult because you don't have the synergy of those
    communities anyway. So with that, I kind of posed that
    question.
        Mr. Shulman. It is a great question. I start with the basic
    premise that we are the one government agency--and I remind our
    people of this all the time--that interacts with most adult
    Americans every year. And we really do have an obligation to
    meet people where they are coming from, right? And so we, I
    think--I can't compare it to others, but I have been told--have
    one of the best, if not the best, in government multilingual
    sets of facilities, programs, and outreach, everything from
    Spanish speakers to Vietnamese speakers to Chinese speakers,
    Creole. The list goes on.
        I think it would be fair to say that areas of the country--
    take Spanish speakers as an example. Areas of the country where
    there are large Spanish-speaking populations, where it is a
    large percent of the population, we probably, in our in-person
    sites, staff very well. I am sure there are areas of the
    country where we are not as well staffed if the numbers aren't
    as great, because we have to figure out the cost-benefit of
    this. But then we always have backups. And so we have a big
    phone operation that answers 35, 40, up to 50 million calls a
    year. So if somebody walks in, we make sure we have
    multilingual literature, all of our outreach materials. We have
    a Spanish Web site. And then we have the ability to connect
    somebody over the phone to work through their issue or to
    connect them to an office.
        And so we take it pretty seriously. And I would point out,
    this year you might have seen we have an iPhone app for
    ``Where's My Refund?'' for the younger generation. And so we
    really do think that as we evolve, we need to figure out how to
    deal with every taxpayer based on how they walk in or how they
    want to deal with us, and we are going to be focused on the
    whole service agenda of the IRS.
        Mr. Diaz-Balart. Thank you.
        Mr. Serrano. Can I comment on that a second? And I want to
    be careful about this. Mr. Diaz-Balart and I are strong
    supporters, as are all members of the Hispanic Caucus, of the
    use of the English language as our language in this country.
    But there is the fact that there are a lot of people who are
    older who may have deficiencies in the language. And so this is
    a service that is very important, and it is to our benefit. We
    are going to pick up the tax dollars in the long run.
        I say that because I know that part of what is happening in
    Congress now is that a lot--some Members are looking at Web
    sites that use a language other than English, and they have
    been targeted to be done away with, and I think that may be in
    the long run foolish.
        As far as the IRS goes, if I make an attempt at a joke,
    which sometimes I do very badly, it is tough enough dealing
    with the IRS in English. Try having it as a second language and
    dealing with the IRS. It can be difficult. So I encourage you
    and I congratulate you at the same time on this approach
    because I agree with Mr. Diaz-Balart; it has been a great
    service, you do it well, and you should continue to do it.
    Thank you.
        Mrs. Emerson. Mr. Womack.
        Mr. Womack. Thank you, Madam Chair.
        And I enjoyed the dialogue between my colleagues that have
    tremendous minority populations and deal with that. Let the
    record reflect, though, that the greater Third District of
    northwest Arkansas has indeed its own growing share of minority
    population. And particularly the issues that you espoused about
    the language barriers, we are experiencing those same things.
    So I am interested in the ongoing efforts of your agency and
    other Federal agencies in what we are doing to, shall we say,
    provide for some assimilation-related activity in that
    ethnicity.

                         SIMPLIFICATION OF THE TAX CODE

        A couple of very basic questions. Really, how would
    simplifying the Tax Code, making things a little easier for
    those of us--as was already mentioned, dealing with the IRS in
    plain English is somewhat difficult at times, but if we were
    able to simplify forms and close loopholes, what overall effect
    would that have on your need to squeeze more resources out of
    the taxpayers so that you can prosecute your duties, both on
    the enforcement and service?
        Mr. Shulman. We were talking a little bit earlier about
    simplification of the Code, and I shared with some of your
    colleagues one of my favorite statistics is that the Tax Code
    is four times as long as War and Peace. And so, clearly, the
    more complexity there is, the more confusion there is amongst
    taxpayers, the more we have to answer questions, the more we
    get into correspondence with people around honest mistakes that
    they make.
        I talked about international before. I would say where
    there is complexity, there is always more room for
    noncompliance and evasion. I came from the capital markets
    regulation before this job, and the international area is a
    great area where you start getting things complex. It is where
    people who want to push the envelope can push the envelope.
        So the simpler the Tax Code, the more people clearly
    understand it, the easier the interactions are with us, and the
    more compliance I think there generally would be.
        Mr. Womack. I understand before my arrival that the
    chairwoman and my colleague from Florida talked a little bit
    about enforcement staffing and spending. It has been argued,
    somewhat convincingly, that an increase in enforcement spending
    and staffing has little, if any, effect on enforcement
    revenues. The larger question is what is the correlation
    between enforcement spending and staffing and enforcement
    revenues?

             RELATIONSHIP BETWEEN STAFFING AND ENFORCEMENT REVENUE

        Mr. Shulman. You know, our job is to administer the tax
    laws, ensure compliance, which has a service element. And while
    the Congressional folks, the staff who scores things, doesn't
    put a score on service, I, in my mind, put a score on service.
    When you answer a phone call, answer a question, you get the
    proper amount of tax filing. When you get technology that
    allows you to electronically file, people send it in. There
    aren't transcription errors, and you don't have issues.
        So if you look at our overall budget, you can look at the
    numbers in a variety of ways. You can say that we affect
    indirectly all the money that comes in. For every dollar spent
    on the IRS, about $200 flows in to the Federal Government,
    which I think is a number that is worth thinking about.
        [The information follows:]

        [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        I think for direct enforcement, for every dollar spent
    broadly on IRS enforcement, last year we brought in $57 billion
    from direct actions: audit adjustments, collection actions,
    cases in court, et cetera. And then we broke it down by program
    very specifically, and I would be happy to get you those
    numbers. Some of our enforcement programs have a 3 to 1 return,
    and these are returns that GAO and OMB have agreed on. They
    have looked retroactively back 10 years, about activity and
    revenue that comes in around them. The 200 to 1 and whether or
    not answering a phone call brings in money, people will argue
    about that. Nobody argues about these direct revenue effects.
    On what we call our Automated Under Reporter, which is our W-2
    matching--where you didn't have the right amount of income
    reported, you file something, the W-2 gets sent out to you, it
    reports it to us--and that is about a 22 to 1 return.

                              DIMINISHING RETURNS

        Mr. Womack. Finally, along that same line, I know our
    entire Congress, both sides of the aisle, are honed in on the
    concept of diminishing returns. At some point in time, when
    does more money thrown at any issue cease to produce the
    desired results? And so I guess I would leave you with the
    challenge, and I am sure you do in your capacity, to ensure
    that we don't ever exceed that point of diminishing returns.
        Thank you very much for your testimony.

                         BUSINESS SYSTEMS MODERNIZATION

        Mrs. Emerson. Let's talk a little bit about something that
    I know is near and dear to your heart, and that is the business
    system modernization. For our colleagues who are new to this
    subcommittee, and because of the critical importance of the
    whole BSM and the ability for you to venture IT modernization,
    the cornerstone of this is this CADE-2. I probably need to
    actually come down and see your operation firsthand, at least
    this piece. You are going to deploy the CADE-2 in less than a
    year probably, right? So describe to me how the current CADE is
    different from CADE-2, first of all.
        Mr. Shulman. Sure. First, we would love to have you come,
    as I told you privately, and would love to have any Member of
    the Committee come to meet the public servants at the IRS.
        So I think the best way to describe it is when I started
    this position 3 years ago, I came in and there was a plan to,
    year by year, add 5 to 10 million taxpayers into the core
    database, and at the same time update all of our different
    downstream systems. So, take the system that is pulled up
    before our phone operators, and plug that into the database
    incrementally; the system that feeds into our collection
    operation, and plug that into the database; our financial
    systems, and plug that into the database. So it was, the way I
    would describe it, incrementally getting to a big bang that did
    both the database and all the technology applications that
    people use. And the end--I kept saying, ``when is the end
    date'' and I got dates like 2020, 2021, 2022.
        I came from overseeing big technology. I put some stock
    exchanges on line and other things, and I had a couple of basic
    beliefs about technology. One is you need to have very clear
    value-added deliverables in a short enough time frame that you
    could have a team focused, rally around it, plan, work through
    problems, and deliver. And my time frame is 2 years, 3 years
    maximum, not 10 years, because there is always going to be
    turnover of leadership people, teams, et cetera.
        Second of all, my belief is that the leader of the
    organization, not the technology people--I love them, I call
    them geeks--but it is not the technology people who are going
    to be accountable at the end of the day to the U.S. Congress
    and the American people to have wise spending. It is the leader
    of the organization. So I basically said, I want a plan to
    deliver value in the time I am here that really gets our
    modernization over a hump.
        And so we went back to the plan because I said I am not
    going to go to Congress and talk about 2020. We came up with a
    plan that said the data is key. In this day and age, it is all
    about the data. So if we can have a core taxpayer database done
    by the 2012 filing season that has integrity and the
    information you need for your service, for your enforcement,
    you get off of what is called the ``batch cycle,'' which runs
    every week or 2 weeks, and have the data run real time. We
    could achieve everything that we started and said we wanted to
    achieve in 1988, when modernization, this concept of IRS
    modernization, began, which was faster refunds for everyone,
    integrity of the data in a way that knocked down material
    weaknesses. No 2-week lag in the data between our database and
    what a taxpayer actually sent in. Because it used to be you
    called and said, ``I sent you the check.'' And I said, ``well,
    the data doesn't show that.'' And then you would have these
    cycles of--our people called it the death spiral, where we are
    writing, they are writing back at the same time, and you can't
    catch up. And so this would achieve all of this.
        And so, in short, the thing that was called CADE, and we
    called this CADE-2, originally was incrementally adding to the
    database over time while building the systems in. We basically
    cut and said we will get the database done, and we will have
    our core service technology, which is our phone support, linked
    into the database when we go live. But we are not going to have
    this kind of field of dreams at the end of the day. We are
    going to have deliverables that get us over the goal lines that
    deliver real value.
        Mrs. Emerson. So by the time everything is put in place, at
    least for the foreseeable future, because technology then
    changes too quickly, but let's just say this is all done by
    2012, will that enable you all to have fewer people then within
    the organization? Does the completion of the business systems
    modernization mean more efficiency, fewer people? Or does it
    just mean more efficiency, the same number of people, that you
    can foresee?
        Mr. Shulman. So I alluded to my view that we are like the
    big financial operations. We have 140 million individual
    customers, tens of millions of businesses, every year another
    act, a very complex Code, $2.3 trillion running through it. And
    there is no other financial institution of that magnitude in
    the country with those exact characteristics and numbers. Big
    banks, big brokerage firms, all which I seem to be inside of,
    they have 10 to 20 percent capital investment a year in
    technology. We went up from 1\1/2\ percent. We are running at
    1\1/2\ percent because we are running under a 2010 CR, and 2012
    our request gets us up to 3 percent. So when I went and talked
    to some of my colleagues in the Administration, I said, I
    understand these are big numbers, but from where I come from,
    and objectively, we have been incredibly underfunded. And so
    this gets you to a place that is not even that respectable from
    a private-sector comparison.
        What I would say is we need to continue--and I have been
    very clear about this--being more about data analysis,
    information matching, and less about feet on the street as the
    tax system goes forward for the next 5, 10, 15 years. And this
    just starts to build the infrastructure.
        So I wouldn't tell you that once we get this thing done,
    that the IRS isn't going to have to significantly invest in
    technology.
        Mrs. Emerson. I appreciate that.
        Let me say I have got some questions that I would like to
    submit for the record.
        Mr. Serrano. I have some, too.
        Mrs. Emerson. And I am sure my other colleagues do, too.

                         HISTORIC PRESERVATION CREDITS

        Mrs. Emerson. And I just want to mention one thing before
    we finish up. My office has heard several complaints about the
    administration of the Federal Historic Tax Credit or the
    Preservation Tax Incentive program. And I just wondered if you
    all could look into that for me and get back sometime in the
    near future? I would really appreciate it.
        Mr. Shulman. Absolutely.
        [The historic easement information follows:]

                         Historic Preservation Easement

        You noted you have heard complaints about the administration of
    historic easement donations. The IRS recognizes that donations of
    conservation easements play an important role in preserving historic
    property. When taxpayers meet statutory requirements and the easement
    is properly valued, taxpayers can claim a deduction for the charitable
    contribution on their tax returns.
        A historic preservation easement, commonly referred to as a facade
    easement, is a contribution of a partial interest in real property. The
    deduction may be permitted if the contribution is: 1) of a qualified
    real property interest, 2) to a qualified organization, 3) exclusively
    for conservation purposes. The taxpayer must adequately substantiate
    the deduction with a qualified appraisal and other documents.

        Mrs. Emerson. With that, then, we will conclude. Thank you
    very much for coming, and we will look forward to getting the
    answers to our questions, hopefully within 2 weeks. Okay?
        Mr. Shulman. Thank you very much.
        [The information follows:]

        [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                                                Friday, April 15, 2011.

               TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION

                                    WITNESS

    HON. J. RUSSELL GEORGE, TREASURY INSPECTOR GENERAL FOR TAX
        ADMINISTRATION
        Mrs. Emerson. Thank you so much, Inspector General, for
    being with us today. We really are grateful to you. Hopefully,
    my colleagues will come in and out. We have got these votes
    going on, so once an hour, we will have to race downstairs to
    do a vote and then come right back up. Since we are here in the
    Capitol, we will try our best to keep the hearing going. I am
    hoping that my other colleagues will get here sooner rather
    than later.
        TIGTA was originally scheduled as our first hearing for the
    112th Congress back in February, but with all the continuing
    resolutions that we were working on, we have had to delay until
    today. So thanks for your forbearance, we are very, very
    grateful. It seems rather fitting that not only would we be
    celebrating Jackie Robinson, but we would also be delaying this
    hearing until April 15th, tax day. It is not many people's
    favorite time of the year. Certainly, not for those of us who
    have to pay taxes.
        Anyway, as we all know, we have a very difficult challenge
    in front of us with the debt at almost $14 trillion. It is
    really important that we build a foundation for living within
    our means. The Appropriations Committee, and certainly our
    subcommittee, has been tasked to make tough decisions ahead.
    And in so doing, I feel very strongly that you have to be very
    strategic in the reductions that you make. Therefore, we have
    to learn as much as we can about the agencies under
    jurisdiction in order to make these decisions.
        Inspector General George, you have a daunting task of
    overseeing the IRS, which is an enormous organization that
    touches the lives of most Americans and with 100,000 employees
    and a budget of more than $12 billion, you have your hands
    full. If this subcommittee is going to reduce spending for the
    fiscal year and try to get back to 2008 levels, we are going to
    have to identify some savings in the IRS budget.
        I want to do our best not to reduce service that the IRS
    provides taxpayers preparing their tax returns, nor do I want
    to jeopardize anything that would help us detect tax fraud so
    that we can get as much revenue in as possible. Hopefully, you
    will help us wade through some of these questions.
        I welcome you back, Inspector General George, and so
    appreciate your being here, and look forward to your testimony.
    And now to my friend, Mr. Serrano.
        Mr. Serrano. Thank you, Madam Chair.
        And I, too, join you in welcoming the Treasury Inspector
    General for Tax Administration on April 15th, which is a great
    day, J. Russell George, before the subcommittee today.
        Inspector General George, you have an important job in
    helping ensure that the IRS is running our Nation's tax system
    in an effective and efficient manner. I am interested in
    learning more about your views of the current challenges that
    the IRS faces in both the fair administration of our tax laws
    and in the management challenges that the IRS itself faces with
    an aging workforce.
        Additionally, I should have mentioned that we are in the
    process of finishing the fiscal year 2011 budget process. In
    fact, did the President sign it yet?
        Mrs. Emerson. I don't think so.
        Mr. Serrano. Soon.
        The final bill, as you know, flat funds the IRS at the
    fiscal year 2010 level. I am interested to hear your views on
    the impact this will have on IRS efforts to close the tax gap
    and whether there are areas of vulnerability as a result of the
    funding level. We look forward to your testimony. And I am
    sorry you are a Mets fan, but that's not the right thing to say
    to me.
        Mrs. Emerson. At least he is from New York, gosh.
        Mr. Serrano. There is a big difference.
        Mrs. Emerson. I bet the tickets for the----
        Mr. Serrano. I am only kidding.
        Mrs. Emerson. The Mets have a new stadium, a newish
    stadium. How much does it cost for Mets tickets?
        Mr. George. I have yet to visit it so I don't know the
    answer to that, Madam Chairwoman.
        Mr. Serrano. We cannot afford it, trust me.
        Mrs. Emerson. I know. Both my son and husband are West
    Point grads, and we went up to the West Point-Notre Dame
    football game at Yankee Stadium because it was kind of a fun
    thing to do, and those tickets were $175. I had actually gotten
    six because we were taking some friends, and I had no idea. I
    looked at the Visa charge, I mean, I figured they were probably
    $75, $80 which was still a lot for a football game, that we
    lost particularly. But nonetheless, Mr. Serrano tells me that
    the tickets are really about $475 for a decent seat.
        Mr. Serrano. $1,250 for a front row seat.
        Mrs. Emerson. Do they serve you food and drink or something
    for that $1,250?
        Mr. Serrano. They don't even guarantee you they are going
    to win. I don't know.
        Mrs. Emerson. We can have lots of fun at this hearing, but
    we really do need to try to get down to business and kind of
    going back to the whole issue of the country's debt. And I
    think all economists--I started getting carried away. We would
    like to hear from you.
        Mr. George. If you would like to, I mean it is very brief.
        Mrs. Emerson. Absolutely, please go ahead and do that.
        Mrs. Emerson. We start getting carried away, and then I
    forget so I apologize. I apologize.
        Mr. Serrano. Baseball gets in the way.
        Mr. George. Well, listen, hey, Tom Seaver.
        Mr. Serrano. The Franchise.
        Mr. George. There you go, 1969 Mets and all that.
        Chairwoman Emerson, Ranking Member Serrano, Members of the
    Subcommittee, thank you for the opportunity to appear today to
    testify on the issues confronting the Internal Revenue Service
    and helping hold it accountable as it administers the Nation's
    tax laws.
         I represent the office of Treasury Inspector General for
    Tax Administration, commonly referred to as TIGTA. An
    organization consisting of approximately 800 men and women
    spread across the country, all of whom are dedicated to the
    mission of protecting the integrity of our Nation's system of
    tax administration. We do this by conducting independent
    audits, investigations, and reviews of IRS programs and
    operations.
        We are a very unique Office of Inspector General in that
    our mission, which dates back over 50 years, includes the
    mandate to protect the Service from both external as well as
    internal threats to its personnel and operations. In the
    current threat environment in which the Nation finds itself,
    this responsibility takes on an even more important role.
        Now as I indicated earlier to you, Madam Chairwoman, I am
    not a stranger to the longstanding challenges confronting the
    IRS. I served as staff director to Mr. Steve Horn, Government
    Management Subcommittee and then under--again, Steve Horn, who
    had a particular interest in the performance problems
    confronting the Internal Revenue Service, and it is unfortunate
    to say that some 16 years later, some of the very same problems
    persist.
        As you indicated before, the IRS has a budget of over $12
    billion with 100,000 employees, and it is one of the largest
    and most important components of the Federal Government. Each
    year, it collects over $2 trillion, and returns to the
    taxpayers approximately $400 billion in refunds. It is
    responsible for administering a very complex and lengthy tax
    code, which contains many new and sometimes temporary
    provisions. For the most part, the IRS administers these
    provisions in an effective manner. However, as I will note in a
    moment, it falls short in its administration of other areas.
        Since 1999, my organization has identified cost savings and
    recommended efficiencies that, if adopted, would bring
    additional revenue into our Nation's treasury. As an aside, we
    estimate those savings and cost findings of additional revenue
    at over $223 billion.
        I am statutorily required to identify the most serious
    management and performance challenges confronting the Internal
    Revenue Service pursuant to the Reports Consolidation Act of
    2000. The issues identified in that report range from security
    of IRS employees and infrastructure, and the modernization of
    its information technology systems, to human capital, taxpayer
    rights, and erroneous and improper payments and credits. In the
    latter category, we released in February a report on the Earned
    Income Tax Credit. That report reveals, among a number of
    things, that the IRS failed to comply with the requirement that
    it provide quantifiable targets to reduce improper Earned
    Income Tax Credit payments. Out of a $50 billion appropriation
    for that program, the IRS itself estimates that 23 to 28
    percent of these credits, the EITC, are wrongfully paid each
    year totaling $11 billion to $13 billion. That amount equates
    to the entire operating budget of the IRS.
        Another example of a refundable credit that is not being
    implemented effectively is the Additional Child Tax Credit. In
    2009, we reported a significant increase in the Credit by
    filers who are unable to obtain Social Security numbers.
    However, they filed for the Credit and received it. For tax
    year 2000, these individuals received $62 million----
        Mrs. Emerson. Excuse me, will you just say that last
    sentence again?
        Mr. George. Certainly. In 2009, we reported a significant
    increase in the number of Additional Child Tax Credit filers
    who were unable to obtain Social Security numbers.
        Mrs. Emerson. So the credits--excuse me for interrupting
    you, but I want to pursue this very quick. So they filed for
    the child tax credit but provided no Social Security number,
    and they still got it?
        Mr. George. That is correct, this is correct.
        Mrs. Emerson. We will pursue that in a little bit. Thank
    you.
        Mr. George. Now, for tax year 2000, these individuals
    received $62 million. For tax year 2007, the amount of the
    applicants for this Credit that was received increased to an
    astounding $1.8 billion. This is something, notwithstanding the
    fact that my auditors identified this as a problem and a
    possible approach to contain it, the IRS has failed to act.
        Now as you both noted, and welcome Mr. Bonner, since today
    is traditionally the deadline to file taxes, and as you know,
    because of the holiday in the District of Columbia, it is
    extended until the 18th, I will close my oral comments with an
    assessment of the current filing season. We will be issuing our
    interim report on the filing season officially next week, but
    it will show that as of March 4th, the IRS received just over
    60 million returns. Of those, 53.9 or 89 percent were
    electronically filed, and nearly 6 million to 7 million or 11
    percent were filed on paper, a decrease of over 30 percent from
    this time last year. That is a good news story.
        Mrs. Emerson. A decrease in the paper?
        Mr. George. Correct, that is correct. As you well know,
    electronically filed costs the IRS much less to process than
    those which are filed by paper.
        In addition, nearly 52.6 million refunds totaling
    approximately $161 billion has been issued as of March 4th. Our
    report found that overall the IRS is doing a better job of
    intercepting and preventing fraud this year. I am sure you may
    want to delve into this later, we recently issued reports about
    prisoners receiving tax refunds they were not entitled amongst
    a host of other people. Since those reports were issued, the
    IRS has changed its procedures and is doing a much better job.
    We still have found that there are some improper credits still
    being paid, and they still have some issues as they relate to
    customer service that need to be addressed.
        And I just want to close in my opening statement by saying
    Members of the Subcommittee, our Nation, notwithstanding the
    items that we will discuss today, which are we are here to
    focus on the problems that need to be addressed, we nonetheless
    have the best system of tax administration in the world. And it
    is my challenge and my organization's challenge to help the IRS
    identify ways to ensure that that remains the case. We commit
    to do our level best to achieve that goal. That concludes my
    opening statement, Madam Chairwoman.
        [The information follows:]

        [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Mrs. Emerson. Thank you so much, Mr. George.
        And thanks for being here, Jo.
        I am going to go out of order now because I want to pursue
    this child tax credit and ask, how is it possible that you can
    file for a tax credit and not provide a Social Security number?
    I mean, I am just curious. It sounds like not having to have
    any income and getting $200,000 mortgage when you make $35,000
    a year. How is that possible?
        Mr. George. By a multitude of actions and/or inactions.
    One, Congress was silent on this issue. Unlike the EITC, when
    years ago we identified similar problems, Congress passed
    legislation that mandated that anyone who applied for EITC had
    to supply a Social Security number. Then the IRS's contention
    is that for the Additional Child Tax Credit, the law is silent
    on that issue and that it does not necessarily need to deny
    these credits.
        As you know, with a refundable credit, it is very difficult
    for the IRS to anticipate problems. In effect, they have to
    wait until people apply for it, receive the credit, the refund,
    and then in a very inefficient way, doing a cost-benefit
    analysis, go after money that has already gone out of the door.
        We recommended that the IRS receive what is known as math
    error authority, which would give them the ability when they
    identify problems before the money has gone out the door, that
    they can in effect change the taxpayer's tax form and prevent
    it from going outside, from being submitted. Because once it is
    submitted or returned to the taxpayer, it becomes, in their
    argument, cost prohibitive to go after it; it is cost-benefit
    analysis. Do you go after a $500 tax refund when it would cost
    $1,000 in manpower and what have you?
        Mrs. Emerson. So we would have to probably fix that
    legislatively?
        Mr. George. Yes, that would require legislative action. And
    we have made recommendations to that effect.
        Mrs. Emerson. When you submit the report to the
    commissioner, is the traditional process that the commissioner
    then gets together with you to discuss all of these items and
    ways to work on them, or how does the process work when you
    submit your findings?
        Mr. George. That is a great question. First of all, what we
    do is, in advance of any final report, we give the IRS an
    opportunity to comment on it, to make sure, in all candor, we
    are not misstating things and, if we have, to have a discussion
    with them regarding that. The Department--and this has been the
    case since I have been the Treasury Inspector General, and I
    served under three Secretaries now--the Secretaries have
    delegated substantive tax policies to the Office of the
    Assistant Secretary for Tax Policy. And so I am truly, both by
    the directive as well as by the Inspector General Act, I am
    prohibited from engaging in substantive tax policy. I can
    comment on it, but I really can't create it. That is for
    Congress and that is for the Administration.
        Mrs. Emerson. Right.
        Mr. George. So that Commissioner and my staff, we will
    discuss issues, findings, especially ones they disagree with,
    but we don't in advance decide this is the best way you should
    recommend to Congress or to the Administration, unless that is
    a formal part of the recommendation in the report.
        Mrs. Emerson. If some of the recommendations that you all
    made are not agreed to, then do you re-pursue those?
        Mr. George. Yes, that is a great question. The Department
    actually has a process in place where every recommendation that
    we make and every audit report is put into a data bank. And
    that data bank is something that is available to the department
    heads, to the Commissioner and to ourselves. And so,
    periodically, we issue over 120 audit reports a year, if not
    more, and hundreds of recommendations. So we have a certain
    process for doing so in terms of revisiting them. So we do
    revisit them, but we can't do it every month or every 6 months,
    just because of resources and other priorities.
        But the bottom line is something along the lines as
    important as this, we certainly would bring to the attention,
    and I have to both the Secretary and to the Deputy Secretary.
        Mrs. Emerson. Let me talk about the EITC, because I have
    many, many people in my congressional district who are
    fortunate enough to take advantage of this, and it is their
    safety net, if you will, in many cases.
        But can you go over just a little bit in further detail the
    issue of the erroneous payments and the fact that the IRS
    doesn't seem to have a quantifiable means by which to make
    corrections?
        Mr. George. Yes, if you have a very detailed response to
    that. Just speaking off the cuff, Madam Chairwoman, as you
    know, the Earned Income Tax Credit is a refundable Federal
    income credit for low- to moderate-income working families and
    individuals. To qualify, taxpayers must have earned income from
    employment, self employment or another source and meet certain
    rules. In addition, they must either meet the additional rules
    for workers without a qualifying child or have a child that
    meets all the qualifying child rules.
        The IRS reported 24 million taxpayers received $55 billion
    in Earned Income Tax Credits for tax year 2009. GAO has listed
    the EITC programs having the second highest dollar amount of
    improper payments of all Federal programs.
        Now there was an Executive order issued by President Obama
    in November 2009, which said reducing improper payments was
    supposed to increase the pressure on Federal agencies to hold
    departments more accountable for reducing improper payments.
    And as it relates to the IRS, the IRS is required to provide
    TIGTA with a report on four action items: the methodology for
    computing the error rate, and they have done that; the
    reduction target and plans for meeting improper payment
    reduction targets, and they have not done that; plans to ensure
    program access and participation by eligible beneficiaries, and
    they have not done that; and a quarterly reporting requirement.
    Now the problem as it relates to that, and this is something
    that is not within the jurisdiction of this committee, it is
    Title 26 Section 6103 of the Internal Revenue Code or the tax
    code prohibits the IRS, myself, the Secretary from revealing
    taxpayer information under penalty of both jail time as well as
    a fine. So there are just certain privacy restrictions on what
    type of information they can report. So that may be the reason
    why that quarterly report has not yet been submitted to us.
        We have observed that the IRS has made little progress in
    reducing EITC improper payments since being required to report
    these estimates to Congress. The IRS continues to report,
    again, the figure of 23 to 28 percent of improperly paid each
    year, and we believe that the IRS is not in all honesty
    responding to the President's Executive order in an effective
    manner.
        The IRS has contended, and rightfully so, that the some of
    the changes that they are initiating as it relates to paid
    preparers will be helpful in helping to reduce the number of
    erroneous EITC payments.
        Part of the problem, Madam Chairwoman, is the tax code, tax
    forms are difficult. I am an attorney, and there are times when
    I have to call an accountant and/or the IRS to figure out how
    do I respond to a particular question on the tax form, let
    alone somebody who has not yet had that type of training. So we
    agree to pay tax preparers, especially once the IRS initiates
    this program, to register them, to test them, and to ensure
    that they have the credibility and the training as the first
    line of defense in the IRS and our efforts to help administer
    an effective and fair tax system.
        Mrs. Emerson. But realistically, how many folks who are
    qualified for the EITC can afford a paid tax preparer?
        Mr. George. Great question, I don't know the direct answer
    to that. But I can tell you and I am sure you are aware of,
    there is the free file program. There are a number of new ways
    that the IRS and others have worked together to help people
    comply with their tax obligation.
        This is a point, and I am glad you opened up this area of
    discussion, I believe, Madam Chairwoman, that it is the
    obligation of the Internal Revenue Service to make it as simple
    as possible for people to comply with their tax obligations.
    And it is my contention, although I don't have any empirical
    evidence to follow it up, but it is my gut that says, you make
    it easy for people to comply, they will. Obviously, there are
    bad apples out there and people who just will do the wrong
    thing one way or the other. But if it is simple to comply,
    believe me--and I don't advocate this, because, one, it is a
    policy issue--but if the government, like some countries, were
    to--and actually some States--were to fill out the forms for
    you and in effect you just confirm their numbers and sign and
    send a check or just validate the refund, you would have a much
    higher compliance rate.
        Mrs. Emerson. I know that is somewhat controversial in some
    areas, but the Free File is a program that I embrace
    wholeheartedly, as a matter of fact I actually did a seminar,
    Webinar if you will, with some of my community organizations
    throughout my district so that they could get more people to
    use the Free File and/or help some of their customers and/or
    clients do that. I know that makes a big difference.
        About the online services, it is one thing to pay $29.95 or
    whatever it is these days, but to hire an accountant is, you
    know, rather expensive. But the Free File does work, and
    obviously for those folks within this income range, that is
    available. And those are all good programs. So I appreciate
    that. In the interest of time, so we all have an opportunity to
    ask questions, I am going to go to Mr. Serrano.
        I called on you to ask questions.
        Mr. Serrano. I was trying to figure something out here.
        Just to follow up on this issue of folks without Social
    Security numbers. Now my understanding is that you can have a
    business in this country and pay taxes without being here with
    proper documentation. I would suggest the IRS doesn't care who
    it gets money from is the bad joke. Now is that also related to
    the possibility of people applying for the tax credit without a
    Social Security number? Because as you know, the flip side of
    that is that America's worst kept secret is the number of
    undocumented, or some would call them illegals, who are working
    with shall we say an improper Social Security card, paying into
    Social Security, but will never ask for a penny from the fund
    because they can't come out in public to do that. And so in a
    very bizarre and strange way, they are paying for the rest of
    us in so many ways. So how can that be related?
        Mr. George. That is a very important point that you raise,
    sir.
        I would only quibble with the word improper number for
    organizations the way you pose it in your question. Because the
    Internal Revenue Service has established what they call an
    individual taxpayer identification number, which is not a
    Social Security number; it is a number literally made up by the
    IRS to give individuals in that particular--individuals and
    entities--it could also be an individual who has a tax
    obligation because they have business transactions in the
    United States and yet who don't qualify for a Social Security
    number and so nonetheless would like to comply and should
    comply with their tax obligation. But that number, the ITIN----
        Mr. Serrano. When I was referring to improper--and then
    there is another group that does have a Social Security card,
    but it has been said for years, I have no proof of this, that
    those cards were gotten improperly--initially.
        Mr. George. Well, if I may, because I think it is a
    slightly different issue, there are very limited number of
    circumstances in which a Social Security number can be issued
    for the purpose of paying taxes but not for the purpose--not to
    say, though, that you are a U.S. citizen and not to say that
    you are entitled to any benefits under Social Security. One of
    my colleagues here can really delve into that more deeply if
    necessary.
        You are exactly right, there are a number of undocumented
    aliens or I am not sure what term you prefer nowadays, but the
    bottom line is, who do believe if they comply with their tax
    obligation, it may in the long run help them if they decide to
    apply for legal status in the country.
        But the bottom line is the law, especially as it relates to
    the Additional Child Tax Credit, does not allow these people to
    benefit from that credit.
        Mr. Serrano. From the credit.
        Mr. George. But it is nonetheless accepting the ITIN in
    that way, and they shouldn't be doing so.
        Mr. Serrano. Okay. The other thing was, just again, it is
    another aside, that on the EITC, some years ago, we discovered
    that 17 percent of all tax filers claimed the EITC, but 37
    percent of audits were on this particular group at one point. I
    was making the point at that time that, okay, I understand that
    IRS has to audit who it has to audit, but auditing EITC at 37
    percent and not auditing some higher income folks at the same
    percentage may not be getting a good bang for the buck.
        Mr. George. Sir, again, that predated me. But you were
    right in terms of my understanding as to how it was done
    historically, but that has definitely changed under the current
    Commissioner Shulman and under Everson, I believe, it started,
    and that now the focus is more so on high-end earners. And in
    all honesty, to get the biggest bang for the buck is to go
    after those people who earn the most money. And they have
    changed processes, both of in terms of domestic taxpayers but
    even much more important, international, foreign tax--
    corporations and individuals, in terms of dollars that they are
    hiding or keeping overseas and not declaring on their U.S. tax
    forms.
        Mr. Serrano. Let me ask you a question about your budget.
    You have a unique perspective in your role as Inspector General
    For Tax Administration. In addition to receiving a fine
    education in New York City public schools, the Chancellor will
    love this, you served on the Committee on Government Reform and
    Oversight and on the Government Management, Information
    Technology Subcommittee. You have conducted exactly the type of
    hearing that we are holding this morning, including oversight
    of Inspector Generals across the government. In addition, you
    have been in your current position for almost 7 years.
        What can you tell us about the responsibilities of your
    office? You have a staff of roughly 827 FTEs and you make
    important decisions about how to deploy that staff to conduct
    oversight of the IRS. How do you make those decisions?
        Mr. George. A wonderful question. And thank you for the
    plug on the New York City public school system, because it gave
    me great opportunities. The bottom line is we have to be,
    unfortunately, a very reactive organization, Congressman. It
    depends on the day of the week. The largest component of TIGTA,
    and we are approximately the fourth largest Inspector General
    in the Federal Government, is again to protect the
    administration of our Nation's tax system. And this is, as I
    indicated in my opening statement, something of longstanding
    responsibility. We were initially called the Inspection Service
    set up over 50 years ago. We were the Internal Affairs Division
    of the Internal Revenue Service, and it was with the
    Restructuring and Reform Act of 1998 that we stood up
    officially as an Inspector General.
        The role of an Inspector General--to root out waste, fraud,
    and abuse--is very different than the role of the protector of
    the system of tax administration. So more than half of my staff
    literally consists of Special Agents spread all over the
    country, who when threats are made against the system of tax
    administration writ large, namely tax, IRS employees or other
    people who are engaged in the system of tax administration,
    they literally rush out to the scene in any part of the country
    and world and either effect arrests or conduct investigations.
        The irony is that we have the responsibility if a threat is
    made against a criminal investigation employee of the Internal
    Revenue Service, it is my agents who, at 2 o'clock in the
    morning, rush to the scene and provide whatever assistance is
    needed. Case in point, when that person flew an airplane into a
    building in Austin, Texas, and murdered Vernon Hunter, an
    innocent IRS employee who was just doing his job, and just by
    the grace of God, his plane hit a support beam as opposed to
    going just 3 feet lower and would have gone into the atrium,
    and there would have been massive casualties had that happened.
    So that is just one example of where my Special Agents go after
    that type of matter. I could go on and on, sir.
        But as it relates to audits, in every aspect of the system
    of tax administration, if someone makes an allegation that a
    tax employee of the IRS is soliciting a bribe, we will send out
    people and we will use whatever means necessary, legally of
    course, but to find, root out, identify that person, to prove
    or disprove the allegation and to then refer it to the
    appropriate prosecutorial entity. And vice versa, if a taxpayer
    solicits a bribe from an IRS employee, and believe me, that
    happens a lot, fortunately--and again, I can't say completely
    that every IRS employee will report that, but I am
    extraordinarily proud of the number of IRS employees who do
    come to us and say, this taxpayer offered me $10,000 to reduce
    their $100,000 tax obligation. And so we literally, whether it
    is using some of the investigative technologies that we have,
    hopefully investigate those and again pass them along to
    prosecutors.
        Mr. Serrano. Thank you.
        Madam Chair, I will stop here so our colleagues may ask
    questions.
        Mrs. Emerson. Thank you.
        Mr. Bonner.
        Mr. Bonner. Mr. George, welcome.
        Mr. George. Thank you, sir.
        Mr. Bonner. I was conflicted about whether I would be able
    to make this meeting until my wife told me last night how much
    more we owe in taxes. So I thought I would take advantage of
    this opportunity. I don't blame you.
        Mr. George. I don't set the rates.
        Mr. Bonner. I came with three questions, and I am going to
    try to get to them, but your response to the chair and to the
    ranking member has actually now raised a few additional
    questions.
        You said, I don't think you would get any disagreement from
    anyone here, certainly not from this member, that our tax forms
    are too difficult and that even with that great education from
    New York City public schools and Howard University and Harvard
    Law School, that you, too, have had to seek professional help
    to fill out your forms.
        Has the IRS ever done a survey of their employees--how many
    employees are there, 110,000?
        Mr. George. Roughly, roughly. Depends, during the filing
    season, it goes up slightly more than during nonfiling season.
        Mr. Bonner. Have they ever done a survey to find out how
    many of the employees of the Internal Revenue Service have to
    seek help either from a professional accountant, Turbo Tax, H&R
    Block, someone like that?
        Mr. George. Not to my knowledge.
        Mr. Bonner. That would be really interesting. I don't know
    if that would fall in your jurisdiction or if we need to bring
    that to the commissioner. But I think it would be fascinating
    to know.
        Mrs. Emerson. If you will yield for a minute, perhaps that
    would be something that we could just encourage in report
    language in our bill. It wouldn't cost any money because you
    can do it on e-mail with the fancy new computer system there
    that exists now.
        Mr. Bonner. Well, it is just a suggestion, and I would
    certainly welcome the chair's help in making that happen.
        The other comment you make, which I certainly agree with,
    is that it is your opinion that the IRS should have an
    obligation to make filing and paying your taxes as simple as
    possible. In your position, what grade would you give service
    in terms of doing just that?
        Mr. George. That is a very, very--and you put me on the
    spot because Mr. Steve Horn, as you may recall, used to issue
    report cards on the status of Federal agencies as it related to
    Y2K and financial management issues.
        Mr. Bonner. I will give you a chance to think about it
    because I didn't mean to put you on the spot, but I want to
    tell you why I ask that question. We all have the privilege of
    serving on this committee, and as such, we serve on different
    subcommittees. And earlier this week, we had an opportunity in
    the Defense Subcommittee to meet with Dr. Ashton Carter, who is
    the head of procurement for the Department of Defense, a very
    smart man like yourself, someone who could be doing so much
    more in the private sector, but you dedicated your life and
    certainly this chapter of your life to serving your country in
    this role. And so we thank you and we thank people like Dr.
    Carter as well.
        When asked by one of our colleagues how many people worked
    in procurement at the Department of Defense, he said
    approximately about 140,000. So actually more people work in
    that than work at the Internal Revenue Service. So one of our
    colleagues said, well--and the example was when we were talking
    about Defense is that sometimes it takes 7 or 10 or 12 years
    just to get what should be a pretty simple system underway and
    funded and then into service. How many of those 140,000 people
    are really good at what they do? And his answer was not enough.
        So I don't say this to put a black mark on any of the
    110,000-plus men and women who are dedicated and who are doing
    their work. But to your point that I agree with, it should be
    the obligation of the Service to make it as simple as possible
    to comply with the laws that this Congress passes and previous
    Congresses. I would just like to know if you would care to give
    a letter grade?
        Mr. George. I would, I would. And again, it is risky to do
    this, but in all fairness to the IRS, they get a B in terms of
    giving decent and accurate information to taxpayers. And that
    wasn't always the case. It really did take the hearings in the
    late 1990s to help bring some sanity in some areas. A lot of--I
    know many of my colleagues who were around back then--and Mrs.
    Emerson and Mr. Serrano, you may have been two of them--some of
    the claims made against the IRS were exaggerated, as proven
    later on. But nonetheless, certain changes were implemented,
    including the standing up of TIGTA, that have assisted the
    Commissioners of the IRS, the Secretaries of the Treasury and
    the American people have a more efficient and effective system
    of tax administration.
        Former Commissioner Mark Everson used to say that
    compliance equals enforcement plus customer service. And so
    there was that balance between making sure that people got
    telephone calls answered in a prompt fashion, who went to
    taxpayer assistance centers and got accurate information and
    then----
        Mr. Bonner. Accurate and consistent.
        Mr. George. And consistent, that is exactly right, because
    as you are suggesting, when we first started doing
    examinations, we found we would send people undercover to
    taxpayer assistance centers, and literally, the accuracy rate
    of the tax return was zero percent. Not a single tax return was
    correctly filled out by people who were IRS employees paid to
    do this. And our most recent examination, again, it was a very
    limited sample, a much smaller number, because there are
    hundreds of taxpayer assistance centers, the accuracy rate was
    100 percent.
        Mr. Bonner. That is great.
        Mr. George. They made very good progress in that regard. Is
    there perfection? No, you are right. They call one number one
    time and get a different answer than they may get the next
    time. That is still a possibility. Human nature; people make
    mistakes. But I would give them a B.
        Mr. Bonner. Well, I am going to submit two of the questions
    for the record. But I want to get the last question in that
    really is something that has been a pet peeve of mine for
    years. I was a staffer up here for 18 years. I have only been
    elected in the House for 9 years. I don't know that I will ever
    be a good Congressman; I was a great staffer, if I say so
    myself.
        Mr. Serrano. You are a great Congressman.
        Mr. Bonner. You are very nice. Thank you.
        Mrs. Emerson. Yes, you are.
        Mr. Serrano. Is it shrimp time----
        Mr. Bonner. Two, weeks, 2 weeks.
        Liberal groups, conservative groups, this crosses the
    spectrum: Senior citizens throughout our country get letters
    just like this, dear senior citizen, send us your money, so we
    can go to Washington and keep Congress from destroying Social
    Security, destroying Medicare, destroying whatever it is. And
    it struck a raw nerve for me when a 92-year-old lady in my
    district who is suffering from dementia and who actually has
    relatives in a colleague's district who notified me about this,
    that she drained every penny of her savings.
        And Mr. George, I don't know about Mr. Womack or Mr.
    Serrano or Mrs. Emerson, I have never seen any of these people
    in the 18 years I was on staff and the 9 years I have been in
    Congress who have actually come in to my office and say we are
    here to keep you from destroying Social Security or Medicare.
        Now I ask this because the Internal Revenue Service, as I
    understand it, has oversight responsibilities for these
    501(c)(4) groups. If that is true, how well is the Service
    performing in their oversight? I know we have the First
    Amendment. We celebrate the First Amendment. We are a better
    Nation because of the First Amendment.
        But it is just unconscionable to have companies, groups
    that are able to use the current deduction system to fund
    themselves to go out and become a plague on the senior citizens
    of our great country. And with that, I will yield to your
    answer and thank the chair for the opportunity to ask some
    questions.
        Mr. George. A very important question, Congressman.
    Initially, I thought where you were going with this are these
    tax schemes being perpetrated by many people from foreign lands
    and even people domestically, who say you have won a lottery,
    all you have do is pay the tax and we will send you a check for
    a million dollars, and you would be surprised how many people
    fall prey to that.
        Mr. Bonner. We have a number in our district as well. That
    was a different question.
        Mr. George. But as it relates to this, when you say
    oversight of 501(c)(4)s, we actually did conduct, at the
    request of Congress, two reviews, and because of privacy and
    tax restrictions, I can't say which groups we looked at, but
    they were prominent, and you can probably guess which ones they
    were. What we were only able to do, sir, is to look at the
    processes within the Internal Revenue Service for overseeing
    complaints against these types of people, groups, rather, and
    how the IRS handled those things. Because again, the 6103 would
    put me in jail if I were to reveal particular tax groups,
    individuals and/or organizations, and at this stage, I don't
    want to lose my job.
        But what I can do is, one, commit that we will share the
    report with the committee as well as with you in response. I
    don't know--it won't answer your question spot on, but it will
    give you a better sense of what the IRS has and has not done.
    Actually, they are getting two reports, and they are both
    issued within the last year, year and a half.
        Mr. Bonner. Thank you.
        Mrs. Emerson. Thank you. And I will tell you one of the
    things I do, because this just annoys me to death and scares me
    because I have so many seniors who do, in fact, do that, but
    every time that we do any kind of mailing, any time we answer
    any kind of letter, most every time, to seniors, I put a little
    thing in if somebody is asking you to pay $10 to help save your
    Medicare and Social Security, do not send, do not, throw it
    away and don't send any money in. In many cases, especially
    with high gas prices, that $10 can make it, give you enough gas
    to go back and forth at least to the grocery store.
        With that, Mr. Womack.
        Mr. Womack. Thank you, Madam Chairwoman and Mr. Inspector
    General. There is not an ad on television that upsets me any
    more than an ad that comes on and says, if you want to have
    some help in gaming this country by saving on your debt
    obligation to the United States of America, it is that ad. We
    have all seen them. I think you touched on this a little
    earlier. Help me out; how does that work?
        Mr. George. The IRS has a formal program which is entitled
    Offers and Compromise, which any citizen, with or without the
    help of a third party, has a right to go and petition the IRS
    for, in effect, an agreement if they are having problems paying
    their tax obligations.
        Congressman, you hit the nail on the head. Over 2 years
    ago, and one of my colleagues directly behind me will attest
    that I requested that we take a look at some of these things
    and find out, Tax Masters and Roni Deutch and all these others,
    when they were making these claims, we will reduce $50,000
    obligation to $5,000, were they telling the truth or not? And
    once again, we have a report, happy to share with you, I don't
    recall all the conclusions, but at the same time, I do know
    that under the State Attorney Brown, before becoming Governor
    of California, he filed suit against Roni Deutch making
    allegations of criminal wrongdoing and these types of
    solicitations. I believe it is ongoing, so I don't know what
    the final result is of that, but that is something that is
    still on our radar.
        In some instances, there have been proven allegations that
    people are getting ripped off, for lack of a better word, but
    that is something that I am also very concerned about. But
    again, the bottom line is the IRS does have a legitimate
    program which does, in effect, allow that. And I think, my
    understanding is and I may ask him to come up and address this,
    that in the limited cases that we looked at, the allegations
    that were actually made in the TV ad were accurate.
        Is that the case? So, yes. I was just told by staff that it
    was valid what this particular business was claiming in terms
    of how they handled a particular case. But that may be just one
    out of thousands as opposed to every single client receiving
    that type of benefit.
        Mr. Womack. I understand the need to have some negotiated
    process on potentially doubtful and uncollectible accounts. But
    depicted in these ads, and I know a lot of it is just style and
    verbiage, but depicted in these ads are people who obviously
    have lifestyle levels that are suggested to be through the ad
    greater than the average American. And there is no more of an
    outrage--and I think I speak on behalf of most Americans when I
    say for those who, like me, pay my taxes and probably could do
    a little better for ourselves if we looked here and there for
    better deductions and this sort of thing, it is just, to me,
    not really worth the effort all that much. But on behalf of
    taxpayers across America who pay their taxes and pay them on
    time, there is no more outrage that I feel, perhaps except for
    those who are willingly selling their homes because they are
    under water--or letting their houses go into foreclosure
    because they are under water, even though they never missed a
    payment and still could make those mortgage payments, but we
    will save that for another discussion.
        I want to go back to the EITC for just a moment, because I
    come from an area in northwest Arkansas that has been impacted
    by illegal immigration, and I would like to know if there are
    accurate numbers out there that have impacted our Federal
    Treasury of people who are not entitled to the EITC but
    nonetheless are collecting that credit.
        Mr. George. The short answer is, yes, there are. I am going
    to turn to my staff. Do we have numbers? Number of illegal
    aliens receiving the EITC?
        Mr. McKenney. Yes, our primary concern is the EITC--the
    EITC is about 2 million.
        Mr. Womack. Two million.
        Mrs. Emerson. Excuse me, can you just identify yourself
    please for the court reporter?
        Mr. McKenney. Michael McKenney, Assistant Inspector General
    for Audit.
        Mrs. Emerson. Thank you so much.
        Mr. Womack. We will submit for the record, I would like a
    little bit more detail on what we know and what we don't know,
    so that I can intelligently answer those questions with
    constituents of mine who pay attention to these sorts of
    things, and I think we all should pay attention.
        We have got people gaming the system across the spectrum of
    the Tax Code, but in particular with EITC, we have a lot of
    gamers out there?
        Mr. George. We do. Again, Mr. Womack, I don't know if you
    were here when I was introducing myself. I, too, served on the
    Hill as a staffer over 16 years ago. When we first looked at
    this issue, it was then estimated that the annual improper
    payment rate was in the $20 billion a year range. And so
    subsequently, through, again, oversight hearings that Congress
    held and later action by the administrations----
        Mr. Womack. That was about what year?
        Mr. George. That was 1995, 1996 timeframe. So it is now
    roughly $11 billion to $13 billion a year. Still an outrageous
    amount of money, but obviously, the trend seems to be in the
    right direction. Again, that is just EITC.
        As my colleague alluded to a moment ago, there is an
    additional tax credit on the Additional Child Tax Credit, which
    has similarly been very large numbers of improper payments and
    that literally the Congress, because of inaction of Treasury,
    IRS, state that they are not in a position to address it. That
    is something that could be fixed by Congress, and that is
    something we discuss in detail in my written testimony.
        Again, I have to again, sir, I don't think you were here, I
    have limitations on the substance of tax policy that I can
    advocate in my role as the Inspector General, and it is the
    Assistant Secretary for Tax Policy that the Secretary has
    delegated that responsibility to. But he, too, Michael Mundaca,
    is aware of that issue.
        Mr. Womack. Thank you. We would like to see some more
    detail on the reporting.
        Madam Chairwoman, our country is a great country with a
    terrific system in place, albeit with its flaws and its
    complicated tax codes, but there is, I will say again, no more
    outrage that I could have than to have people who game our
    system and take advantage of things to which they are not
    entitled that over time adds up to billions and billions and
    billions of dollars at a time when our country is faced with
    the financial distress that we face.
        With that, I yield back.
        Mrs. Emerson. Well, thanks.
        And I totally agree with you, particularly when we can
    actually touch and feel where this fraud is being perpetrated,
    and that is very, very frustrating. Because what it does is
    hurt the people who actually need to take advantage of these
    types of tax credits, where it helps them be able to put food
    on the table or even maybe even save a little bit for school
    supplies and stuff. It is very, very frustrating. There are
    some things that we might have the opportunity to do, and we
    will engage you on those.
        Mr. Serrano. I would like to comment on this because every
    so often, we are going to find issues where both sides,
    Democrats and Republicans, can agree on.
        There is another side to this that has to be looked at. In
    my district, in the Bronx for instance, around tax time, a lot
    of places we know by name open up storefront operations to do
    taxes. They have the whole issue of basically we think--can I
    prove it? I guess I am within the bar of the House, but we
    suspect in some cases, they are telling folks to fill out this
    and fill out this and go for this and you can get that. And the
    person is either a person with less education about these
    matters and goes along with it, or in some cases, it might be
    undocumented folks, who are afraid of their shadow, who want to
    pay taxes, because you are right, they know, one, it is the
    right thing to do; two, it could help years from now. Whenever
    we talk about any kind of immigration reform, the first thing
    we say is pay your taxes, learn English and so on. So a lot of
    that is going on.
        Then you have the other addition, which is these folks will
    advertise that on the day they fill out your form, they will
    give you a check--a loan, not a check, a loan for the return.
    These folks think they are getting a check from the IRS. They
    are not. They are getting a discounted amount because this
    person is making a loan. It may be one of the few issues you
    will find, actually many, but one of the glaring ones we will
    find where conservatives have a reason to be angry and liberals
    also have a reason to be angry, and we can work on it.
        Mrs. Emerson. We found some new opportunities to hopefully
    save money.
        Mr. George, did you have something you wanted to say while
    everybody else was making small talk?
        Mr. George. As it relates to Mr. Serrano's comment, it is,
    again, the commissioner's thinking that by registering and in
    some way validating these paid tax preparers, we may be able to
    root out the less scrupulous ones and to bring in people who
    will help avoid that situation.
        Mr. Serrano. I don't know if this happens in your district,
    but in my district, it is amazing, they dress up like mascots.
    They hire local folks who dress up in these outfits to stand
    and give out and say, down the block, we will get your taxes
    done.
        Mrs. Emerson. I live in a rural area. It is not done quite
    the same, but we do have----
        Mr. Serrano. They stand by the highway and wave?
        Mrs. Emerson. With the signs ``free taxes'' or ``discounted
    taxes.''
        One of the things that the IRS has helped us do that I find
    positive is that we have all these volunteers that go to our
    senior centers and nutrition centers to help seniors, free,
    fill out the forms. And they have got the computers there. That
    is a terrific system that has helped multiple numbers of
    people. However, then you get the ones who have no more
    business than I do in trying to fill out people's taxes.
        Mr. George. If I may, Madam Chairwoman, as I indicated, we
    went to these private organizations--the tax centers--and had
    100 percent accuracy rate. Some of the VITA programs, they have
    had some problems in terms of accuracy in terms of filling out
    taxpayer forms. That is something I would suggest this
    committee--as we are going to be a little more aggressive have
    on.
        Mrs. Emerson. Well, I appreciate that because I visited two
    of those centers in my district, and I guess--and I had IRS
    folks there with them. I am not sure how many hours of training
    each of these individuals has had to have.
        Mr. George. The groups are the ones that support that.
        Mrs. Emerson. Just keep our eye on this one, too, okay.
        Mr. George. Lastly, to Mr. Serrano's point, with the First-
    Time Home Buyer Credit, it was the same situation. You had
    people literally telling people hey, come into my office, pay
    me X amount of money, I will fill out the tax forms for you and
    help you with a refundable credit. Until our audits identified
    many of the problems associated with that, namely 4-year-old,
    people who hadn't actually purchased homes or people who had
    purchased homes prior to the implementation of the legislation,
    these unscrupulous tax preparers and taxpayers were getting
    away with it.
        Mrs. Emerson. This is a very good discussion. I think it is
    really helpful. I want to move to a different subject, if that
    would be all right, just because apparently we are going to
    have soon three votes, and if we could try to get finished with
    the real questions that we want to ask so you don't have to
    wait around. I hate to have you do that, Mr. George, because a
    10-minute sequence of votes ends up taking an hour because
    people chitchat and don't vote.
        On Monday, I was down at IRS headquarters with the
    Commissioner and his staff discussing the new IRS taxpayer
    account database. There is no doubt that this really has--there
    is an opportunity to immeasurably improve the IRS customer
    service and tax return processing. I know my children, who file
    their tax returns want those tax refunds back immediately. It
    is certainly much better since they do it electronically.
        But I want to know how much confidence you have in the IRS
    to meet its goal of launching the database by next January so
    it can support the 2012 filing season. And then, after 50 years
    of working with a database that gets updated on a weekly basis,
    IRS employees are going to have to use a database that is
    updated on a daily basis. Are employees prepared to have their
    schedules totally disrupted in order to maintain this huge
    investment that we all have made?
        Mr. George. The short answer is, I have been told by my
    staff who have actually conducted the audits on the ground that
    the IRS is making very good progress in anticipating the
    implementation of the customer account data engine version 2,
    CADE 2. CADE 1, as you know, is still a work in progress. But
    it is still the master file, what the IRS has been relying upon
    for over 50 years, that is what the IRS employees have to rely
    upon. I have to admit my view and my response is somewhat
    clouded, I think is the word, by their experience with the tax
    system modernization effort that you may recall started in the
    mid 1990s. They spent $2.5 billion on a system that was behind
    schedule, didn't produce what was promised, and ultimately just
    completely thrown away. And so $2.5 billion were wasted. As my
    former boss, Mr. Horn said back then to Commissioner Rosatti,
    after $100 million, couldn't you realize this wasn't working?
    Why do you have to wait until it gets--I am told it is actually
    closer to $3 billion that was completely wasted.
        So I am from the Show-me State on this one. So I really
    have to see it to believe it. But I have been told that they
    have learned from the past mistakes. And I am reasonably
    optimistic that they will be able to achieve a lot of what they
    promised. Now will it be done on time? I have no idea. I can't
    predict the future. But I do know that they have made changes
    that are somewhat disappointing because at one point their goal
    was to have a system similar to what you do when you encounter
    your credit card companies, you call in and you can just input
    your credit card number, or, in this case, your Social Security
    number or whatever it would be, and then how much money have I
    paid into the system, how much money do I owe, when do I owe
    it, so on and so forth.
        I think it was being called MyIRS. And it was supposed to
    be this really high tech or avant garde type of situation. And
    they have abandoned that. Not necessarily their fault. The
    resources that they received were cut back and so they have to
    make choices between what to provide and what not to provide,
    given the limited resources that they have. And then added
    obligations that I am sure you will talk about in a moment.
        Mrs. Emerson. I am certainly hopeful that it does work. One
    of the questions I asked them was: well, if you aren't here in
    2 years or 3 years when it is completed, how can you ensure
    that this gigantic investment we have made will actually be
    carried forward, to which, of course, nobody can answer that
    question because you can't see into the future. But this does
    worry me, given the fact that I think the entire government has
    done a horrible job across the board on IT modernization and we
    just haven't kept up. Unfortunately, it does require an
    investment. It needs to be done much quicker than--and we dole
    out moneys a little bit at a time. By the time you have
    finished it, it is already obsolete.
        Anyway, hopefully we can get it underway. So I guess the
    original estimate was that this whole modernization was going
    to take about 15 years and it was going to cost about $8
    billion. So we are in the 12th year and how much money have we
    spent on this altogether?
        Mr. George. They are below the budget. So $3.25 instead of
    $8.
        Mrs. Emerson. I know the Commissioner suggested that if we
    were able to give them about $111, $112 million over the next 2
    years, they thought that would do the trick to get it
    completed. Do you all have any sense of whether or not that is
    a real number? Am I putting you--will you identify yourself.
        Mr. Duncan. Alan Duncan, Assistant Inspector General for
    Security and Information Technology. We have been looking at
    this project for quite some time. Every year, we issue a
    business system modernization assessment. And in looking at
    that, CADE 2 is really in a three-phase installation plan. The
    first phase of CADE 2 will be implemented, as they have
    planned, in January of 2012. There are two additional phases
    for that project. So that may be the money that you are talking
    about to finish the existing database to get us an
    authoritative database that will have all individual taxpayers
    accounts.
        Mrs. Emerson. Rather than using the tapes that they
    currently use, like the old-fashioned way. Everything would be
    on one database.
        Mr. Duncan. That is correct. That is on schedule. We have
    been reviewing this very extensively. We have four audits
    currently in process, including your reference there to the
    daily processing, which is not just a technology issue, it is
    also an individual employee issue because they have to be ready
    to go from a very extensive process that they have to do before
    they know what your account looks like to every day it will
    updated, which is with what we should be expecting as a
    taxpayer. I think they are on track to do that and to have that
    first phase in place for the filing season next year.
        Mrs. Emerson. So, if, in fact, you have phase 1 completed--
    and I didn't really go into all of the details about phases 2
    and 3, only hoping they could get phase 1 finished on time.
        Mr. George. Yes.
        Mrs. Emerson. And somewhat close to budget. How long are
    the additional phases to take?
        Mr. Duncan. We are looking at 2014 for the full
    implementation and the elimination of the redundant systems
    that are currently processing. This would then give us the
    opportunity--and the 2012 is important because it sets the
    baseline upon which then we will be able to go forward. They
    must meet that.
        Mrs. Emerson. So it is much easier to do once you get phase
    1.
        Mr. Duncan. If they can get 2012, I believe they will have
    a very good opportunity to then complete the other two phases
    in the budget that they have set forward.
        Mrs. Emerson. As an IT expert, which I assume you are since
    you are in charge of this, do you--well, we all know that some
    people get promoted into positions because somebody at the
    lower doesn't want them. Been there, done that in the private
    sector.
        Is this a good system?
        Mr. Duncan. We believe the change that they made 2 years
    ago to redesign for the Commissioner to endorse this particular
    approach, which is a major change in the way they have been
    doing business system modernization, is a correct approach. And
    I did do a lot of work on the commercial sector before coming
    here. This type of an approach is the type of approach, as we
    move into the Web environment and the portal environment, which
    will allow all of our taxpayers to really be able to get the
    type of information, the processing that they require. We
    believe that they are on the right track at the moment. They
    need to follow through. And you already touched on it--the
    executives to stay in place. We have had a serious concern. If
    you continue to change executives at the top level and they
    bring in their own ideas and their own approach, then we may
    have a problem as we go forward.
        Mrs. Emerson. Would you design a system like this yourself?
        Mr. Duncan. Yes, I would. This would be the approach that I
    would take.
        Mrs. Emerson. I know that you--and then I am going to turn
    it over to Mr. Serrano. Mr. Alexander just came in--you and GAO
    both have found a little bit of security weaknesses.
        Mr. Duncan. Yes, ma'am.
        Mrs. Emerson. Have those been addressed?
        Mr. Duncan. They have a material weakness that has been
    reported in the security arena. We believe, again, that this
    project that they are called CADE 2 will help to address--not
    saying it will resolve it--but help to address some of the
    major issues that have been reported in the past on security.
        Mrs. Emerson. I think perhaps we will have that discussion
    in a private session.
        Mr. Serrano.
        Mr. George. Madam Chairwoman, as you indicated at the
    outset of this questioning, with the rapid transition in
    technology, again, something that looks good now, 2 years ago
    may be antiquated. I just want to make sure I made that point.
        Mrs. Emerson. I know. It scares me to death.
        Mr. George. I just wanted to make sure I made that point.
        Mr. Serrano. Yesterday, we voted on the budget that keeps
    the IRS at fiscal year 2010 levels. Given the cuts in the IRS
    budget, where do you feel the budget is most vulnerable? What
    accounts worry you the most as far as these cuts go?
        Mr. George. Great question. It hasn't come up yet, but of
    course with the Affordable Care Act having passed, and is law,
    and the key role that the Internal Revenue Service is going to
    play in this implementation, unless additional resources are
    provided to the IRS, they are going to have to take away from
    either the enforcement side of the house or the customer
    service side of the house in order to meet some of the
    obligations they have under the ACA.
        It is almost a zero sum game, Congressman, because, again,
    unless the IRS gets much more resources, they have such a
    massive responsibility, that is namely the tax revenue entity
    of the most powerful Nation in the world, they are just going
    to have to make some tough choices, and most likely the
    sacrifices will be on the customer side of the house.
        Mr. Serrano. So you may be on your way to answering the
    second question, which is how does the IRS even begin to close
    a tax gap with fewer resources than it has currently? I am just
    saying that they have to make a decision since health reform is
    the law.
        Mr. George. It is not only health reform, it is really any
    new requirement change to the Tax Code, which, unfortunately,
    many times comes so late in the year, too, that it requires the
    IRS--it is almost like the Army. They will get it done. It may
    not be pretty, but they can get the job done. And that is the
    case--that is been the case for the AMT and a few of the other
    tax provisions.
        I carry around a card with me everywhere I go. And this is
    very telling. And it is just a few seconds. Let me read this,
    if I may. Third party reporting. And this is really IRS
    information-based information. There is such a high correlation
    between tax compliance and third-party information reporting
    and withholding. The IRS estimates individuals whose wages are
    subject to withholding report 99 percent of their wages for tax
    purposes. Self-employed individuals who operate nonfarm
    businesses are estimated to report only 68 percent of their
    income for tax purposes. But the most telling figure, self-
    employed individuals operating businesses on a cash-only basis
    are estimated to report only 19 percent of their income.
        And what I am suggesting is I know Congress recently took
    action as it related to the 1099 and the $650 business
    transaction figure. But these numbers are telling. When you
    have someone else reporting how much money you earn, you are
    most likely going to be honest with the IRS as relates to money
    you earn. Obviously, the reverse being the case.
        A way to address that tax gap is more third-party
    information reporting. That is a way. And so how to make it as
    least burdensome on taxpayers, that is the challenge that
    Members of Congress have before them.
        Mr. Serrano. It is interesting you say what you just said
    because part of what we hear a lot these days, and I say this
    with all due respect, is we have got to reduce the size of
    government, we have got to have less government, and let
    American small business take care of the economy. I guess what
    you are saying is yes, and then make sure they pay taxes. That
    would help the economy.
        Ms. Emerson. And I will just give you a perfect example. My
    husband is an attorney. He is a partner in a small law firm in
    Missouri. He is very good about paying his quarterly taxes, but
    they don't have withholding. For the clerical help, yes. But
    for the partners, they just get a big old check and it is up to
    you to go ahead and be responsible and pay your taxes. But I
    can see how easily it would be for some people who chose not to
    pay their fair share, even in spite of the fact that those
    schedule K-1's that the businesses have to file anyway as a
    business tax return basically indicates how much the firm has
    made. But you would have to have somebody rat on you, almost,
    to necessarily put that at the top of your list for
    investigations.
        Mr. George. Again, it makes common sense why people will
    say, If you pay me cash, I will give you a lower figure for the
    item that you are buying.
        Mrs. Emerson. Although, when you go to the hospital and you
    work a deal with them that you don't pay it through the
    insurance company, they will, in fact, give you a big discount.
        Mr. Serrano. Am I supposed to be hearing all this?
        Mrs. Emerson. No, no, no. Any hospital administrator will
    tell that of.
        Mr. Serrano. I am looking at Mr. Womack. And I have got
    great respect for him and his background both as a mayor and a
    colonel. A mayor and a colonel. Not a major. How do we treat
    our men and women in uniform? I remember when I was in the Army
    1,000 years ago for a very underwhelming small career, I used
    to get these letters from New York State when I was stationed
    somewhere, saying, ``You didn't pay.'' I said, ``No one told
    me.'' It was ahead of time and so on. And no one seemed to know
    where men and women in uniform were supposed to be paying taxes
    or not. No one told us.
        What happens with that now?
        Mr. George. When I first became the Inspector General, we
    had a review of that very situation where the servicemen and
    women were not being informed of their right not to have to
    submit tax returns on a particular date. And I don't recall the
    exact, because the laws have changed and that was literally 7
    years ago, 6 years ago. But we issued a report and the IRS did
    take action in that regard.
        Mr. McKenney. They are better on following up on that. They
    have an indicator on servicemembers' accounts so that they know
    that they are military. They have obviously their combat zone
    pay is exempt and they have extensions of time to file. So we
    think they are doing better at putting the indicator and making
    sure their----
        Mr. Serrano. The worst thing in the world--and now I am
    going to sound not like a liberal--liberals don't get credit
    for saying anything nice about the military. The worst thing in
    the world is to be serving your country and then to have a tax
    issue because somebody didn't tell you what you are supposed to
    do or not to do.
        If you are in a combat zone, that pay is exempt.
        Mr. George. Correct.
        Mr. Serrano. Is it up to every State to determine whether
    they will----
        Mr. McKenney. I couldn't tell you. I assume most States
    follow the Federal. But I am not certain of that.
        Mr. Serrano. Do you know, Mr. Womack?
        Mr. Womack. Not specific to that question, although I
    think--correct me if I am wrong; these guys will know more than
    I do--I think the amount of pay is exempt up to and including
    the pay equal to a Sergeant Major in the Army. I think there is
    a difference for higher-ranking personnel. It has been a while
    since I have looked at the income levels of the various
    servicemembers, but I think somewhere at the senior captain
    level, captain level, and above, not all of that pay----
        Mrs. Emerson. I would agree, with a son who is a captain in
    the Army, that when he was in Iraq--he made captain in Iraq, so
    he started--it started costing him a little bit more.
        Mr. Serrano. I don't think anyone who is in a battle zone
    should pay a penny of tax. How is that? That is my statement
    for the day.
        One last question, given these cuts, how will your office
    respond? Are there vulnerable areas of IRS that will receive
    more attention from your investigators?
        Mr. George. As I indicated in response to an earlier
    question, Mr. Serrano, it really will depend on circumstances.
    If there are threats that are issued because of anti-tax
    protestors that would require us to have people in, whether it
    is New Hampshire or----
        Mr. Serrano. Anti-tax protestors?
        Mr. George. Believe it or not. But there is no question
    that some hot-button issues as is relates to business systems
    modernization as it relates to a lot of the refundable tax
    credits, and then, again, the American--the Health Care Act,
    those are things that we would want to bring--highlight our
    focus on to make sure that they are implemented effectively.
        We have found, again, that it is much more beneficial for
    the IRS and for the American taxpayer for us to identify
    problems before they really manifest themselves or before the
    money goes out the door, because it then becomes so much more
    difficult and costly for the IRS to try to recover that, and in
    many instances, they just give up.
        Mr. Serrano. Well, I thank you.
        Madam Chair, I have a few questions I will submit for the
    record. I thank you for your service. I think that we all,
    whether inspector generals or direct IRS employees, should make
    it easier for the taxpayer to file and pay their taxes. It
    should not be something where people feel threatened or
    intimidated. And so anything we can do in that direction helps.
        Lastly, I don't think even a major tax break will help the
    Mets this year. I don't think there is anything you can do for
    them.
        Mr. George. Thank you for your service. I will leave it at
    that.
        Mrs. Emerson. Mr. Alexander from Louisiana would like to
    ask a question.
        Mr. Alexander. Not ask a question, but would you read the
    little card to us again?
        Mr. George. Yes. And I will just skip right to the relevant
    questions. IRS estimates individuals whose wages are subject to
    withholding report 99 percent of their wages for tax purposes.
    Self-employed individuals who operate nonfarm businesses are
    estimated to report only 68 percent of their tax for tax
    purposes. And self-employed individuals operating businesses on
    a cash-only basis are estimated to report just 19 percent of
    their income.
        This is IRS information.
        Mr. Alexander. Do we have a guesstimate at what those
    numbers would be, the number of self-employed out there and
    what the magnitude of that lack of income to the government
    would be?
        Mr. George. Well, again, the official numbers that the
    Internal Revenue Service issues, and these are as of 2001, are
    $345 billion each year not paid to IRS on time and in full. We
    believe that is a lowball estimate. It does not--we believe it
    does not include in its totality the number of international
    entities that--money to the U.S. Treasury. Our guesstimate is
    it is closer to $500 billion a year that should be paid that is
    not paid. But there are even some that think the figure is much
    higher than that.
        The IRS is doing--it is called the National Research
    Project--and the IRS is currently in the process of updating
    that, looking at subchapter S corporations and whether or not--
    what the compliance rate is with those. As you know, many
    businesses, small businesses especially, and some large ones,
    incorporate under subchapter S, which affects how much money
    they can claim that the owner and/or the business has actually
    earned.
        Mr. Alexander. I am just interested in why would you say
    self-employed non-farmers? Would the farmers be subjected to
    something different from other self-employed?
        Mr. George. I will defer to my colleagues on that one.
        That is just the way the IRS has captured the information.
        Mr. Alexander. Okay. Thank you.
        Mrs. Emerson. Thank you so much, Mr. Alexander.
        I have some questions I would like to submit for the
    record, one including--I heard some complaints about how the
    IRS administers the Federal Historic Preservation Tax Incentive
    program. Hopefully, you can get back to us on that. If any of
    my other colleagues--we will submit all the questions for the
    record.
        Thank you so much for being here. It is really a privilege
    to have you. Your experience on both sides, I think, makes you
    an exceptional person for this position. You have insights that
    others do not. I am grateful for your service and that of all
    of your staff. Thank you all for the work that you do.
        Mr. George. Madam Chairman, it is really the work of the
    people all over the country who work with me. It has been an
    honor. They are talented.
        Mrs. Emerson. Well, we would be nothing without our staff,
    too. We don't give them enough credit. Quite frankly, we may
    get the glory, but they are really the people who do the work.
    Some of us actually really work, too. But our staff----
        Mr. Serrano. Be careful how you say that.
        Mrs. Emerson. We couldn't do it without our staff. We are
    all a team and it is very important.
        I just appreciate you all looking out for taxpayer money
    and for doing that tough job. Thanks so much.
        [The information follows:]

        [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                                             Wednesday, March 16, 2011.

                           DEPARTMENT OF THE TREASURY

                                    WITNESS

    HON. TIMOTHY GEITHNER, SECRETARY OF THE TREASURY
        Mrs. Emerson. The hearing will come to order.
        Thanks to all of the subcommittee members for being here.
    And, Secretary Geithner, thank you so very, very much. As we
    speak, numeral doctoral theses about your tenure at the New
    York Federal Reserve Bank and the Department of the Treasury
    are being written. Both TARP and Dodd-Frank have made an
    indelible mark on financial markets, government policy, and
    U.S. history.
        In January, the Special Inspector General for TARP
    concluded that while TARP prevented the failure of one of the
    world's largest banks, it also insulated risk takers from the
    consequences of failure, and thereby encouraged future high
    risk taking behavior. Whether Dodd-Frank can successfully
    address the moral hazard introduced by TARP remains to be seen.
        For fiscal year 2012, the Treasury Department requests $14
    billion of which $13.3 billion is for the Internal Revenue
    Service. The remaining $754 million is for, among other things,
    the offices of three inspectors general, the Community
    Development Financial Institutions Fund (CDFI), the routine
    cash and debt operations of the Federal Government, and various
    policy offices that oversee counterterrorism, anti money
    laundering, financial regulatory reform, housing finance
    reform, and small business initiatives.
        The decisions made by these policy offices have an effect
    on American lives and businesses disproportionate to the level
    of appropriated funds that they receive. As such, the committee
    will review their funding levels and activities with great care
    and in great deal.
        The Federal government's gross debt currently exceeds $14
    trillion, and the administration's budget will lead to debt in
    excess of $26 trillion or 107 percent of GDP in 2021. In light
    of these estimates, the administration's lack of leadership to
    steer us towards a sustainable spending trajectory is
    disappointing. Inaction is unacceptable; and as such, this
    committee is going to do what it can within its jurisdiction to
    significantly reduce spending.
        Once again, many, many thanks for being here, Secretary
    Geithner, and I look forward to your testimony. Now I recognize
    my colleague in arms, Mr. Serrano, for any opening statements
    he would like to make.
        Mr. Serrano. Thank you, Madam Chair.
        I would also like to welcome the Secretary of the Treasury,
    Timothy Geithner, to this hearing of the Financial Services and
    General Government Subcommittee.
        For 2012, the Treasury Department is requesting authority
    to spend a little over $14 billion, an increase of $562 million
    or 4.2 percent above 2010. As you know, I have been a long time
    supporter of strong funding for the Community Development
    Financial Institutions Fund. The CDFI fund has played an
    important role in increasing economic opportunity and community
    development in our most disadvantaged communities. I am also
    pleased that in your budget request, you are trying to find
    innovative ways to help our small businesses and to increase
    their ability to access credit.
        Small businesses play a crucial part in job creation; and,
    thus, our continued economic recovery. With the passage of the
    Dodd-Frank Act, you were given many new responsibilities
    designed to help stabilize our financial system and prevent a
    repeat of the economic crisis. I am interested to learn more
    about how you are moving forward in carrying out these new
    mandates. I also want to make sure that you have included
    sufficient resources in your proposed budget to allow you to
    successfully implement these new requirements.
        The Treasury Department also has an important role to play
    in stabilizing our housing market. We need to make sure that
    affordable housing options continue to remain available, and
    that our consumers are better protected from risky financing
    packages. I know that you are very involved in trying to find
    solutions to improve the health of our Nation's housing
    financial system, and I am hoping to discuss these important
    efforts with you today.
        I would also note that you are seeking to fund the IRS in
    fiscal year 2012 in a very strong way. Taxpayer services and
    enforcements are a vital part of our effort to reduce the tax
    gap and stop those who seek to cheat the United States
    Government. Unfortunately, H.R. 1, the Republican continuing
    resolution, would cut more than $600 million for IRS
    operations.
        IRS Commissioner Shulman was here just a couple of weeks
    ago and told us that this cut would mean that the United States
    would lose more than $4 billion in revenue from delinquent
    taxpayers. Cutting IRS funding in this manner makes little
    sense to me since the IRS provides the very funding that the
    rest of our government uses to operate. The Treasury Department
    has an important role to play in helping to address the
    concerns of everyday Americans in the areas of tax assistance,
    small business credit, mortgage relief, and the creation of
    economic opportunity.
        I look forward, Mr. Secretary, to discussing your important
    work in all of these areas. I thank you before we begin for
    your service to our country.
        Thank you.
        Mrs. Emerson. Thank you, Mr. Serrano.
        I would now like to recognize Secretary Geithner. If you
    can keep your statement to 5 minutes, that will give us more
    time for questions.
        Secretary Geithner. Thank you, Chairwoman Emerson, Ranking
    Member Serrano, and members of the committee. Thank you for
    coming here today. I just want to say at the beginning that I
    very much respect the process of oversight you are engaged in.
    I think it is a great thing for our country that you subject
    all of the actions of the executive branch to rigorous
    oversight and review. That is what you should be doing, and it
    is my privilege to participate in that process. I think this is
    my 51st testimony today during the time as Secretary. I know it
    is a necessary part of what we are doing, particularly at a
    time when we are involved in so many difficult, complicated
    problems.
        Our core priority in the Treasury budget is to help
    strengthen the recovery and help put more Americans back to
    work. We are undertaking a variety of initiatives to support
    those objectives. Let me just list a few.
        We are providing help for small businesses through tax
    incentives, through the small business lending fund, the
    States' small business credit initiatives through the new
    market tax credit and the CDFI program. All of these share one
    feature in common as a strategy. They are designed to provide
    substantial leverage for any dollar of taxpayers' money we put
    at risk to leverage private resources alongside the taxpayers'
    money. So we are working with the market to help catalyze
    private investment.
        Second, we are continuing our efforts to help repair and
    reform the financial system, not just the housing markets,
    housing finance market, but the broader financial system. And
    we are working to shape and design a broad reform of the
    corporate tax system that would lower the rate, broaden the
    base of revenue neutral tax reform, that would help improve
    incentives for business investments in the United States.
        Of course, alongside these efforts, we play a critical role
    in helping advance U.S. security interests, and our national
    security interests abroad. Our budget request includes funding
    for implementing our targeted economic and financial sanctions
    programs against foreign threats to the United States, and I
    know these are very important to many of you on this committee.
        In this year's request, as in the past, the overwhelming
    bulk of the resources we are asking Congress to appropriate are
    designed to support or directed to support the talented public
    servants who are charged with Treasury's important economic and
    financial responsibilities. Salaries and operating costs make
    up 96 percent of our budget. We are a little unusual in that
    context relative to other agencies. The rest of the budget is
    mostly for investments in technology that those public servants
    need to do their jobs.
        Now in our request, we have asked for just above $14
    billion for the Treasury; $13.3 billion, the overwhelming
    majority is for the Internal Revenue Service. Now, I just want
    to emphasize that we are very committed and very successful in
    finding ways to save resources and improve efficiency in the
    basic Treasury programs. In the last three budget requests, we
    identified more than a billion dollars in savings and offsets.
        In this budget, we have identified another $1 billion in
    savings, of which there is about $336 million in direct cost
    savings and efficiencies. The balance of that, the roughly $630
    million in offsets, is through assets seized as a result of
    violations of U.S. sanctions.
        These savings help us finance what we think are targeted,
    valuable, investments that have a very high return. Let me
    mention a few. Investments in customer service and enforcement
    programs at the Internal Revenue Service generate revenue at
    many times the cost to the taxpayer. Every dollar invested in
    the IRS yields roughly $5, and that is a pretty conservative
    estimate, in additional revenue from non-compliant taxpayers.
        Our judgment is that the modest targeted investments in
    this budget that we are proposing for the IRS are expected to
    produce more than $1.3 billion in additional revenue once fully
    implemented in 2014.
        We are also working to improve efficiency by moving to a
    more paperless transaction system, from automated debt
    financing to greater electronic filing of taxes. Overall, these
    paperless transaction initiatives with the public are expected
    to produce more than $500 million in cost savings and
    efficiencies over the next 5 years.
        So we have designed our request to save as much as we can
    while preserving critical functions and programs. In our
    judgment, any substantial cuts to the IRS budget would hurt
    both our ability to collect enough revenue to meet our
    obligations and hurt our ability to serve taxpayers more
    quickly and efficiently. Cuts to our remaining programs would
    weaken our ability to support reforms that are very important
    to the economic recovery and the ongoing challenge of repairing
    our financial system.
        Finally, cuts to the CDFI Fund would substantially damage
    our ability to attract private investment to communities hurt
    most deeply by the crisis, which are still suffering because of
    the broader damage caused by the crisis.
        Now, I want to end by noting, as Madam Chair you did, that
    it is important to recognize the strategy that we embrace to
    address the financial crisis has been much more successful and
    at a much lower cost than we initially anticipated. Let me just
    give you a few facts on that.
        On relatively conservative estimates about the future of
    the economy, over the next 10 years, we think the total costs
    of the taxpayer support to Fannie and Freddie will fall by
    about $61 billion, or 45 percent from the initial estimates.
    Since the August 2009 midsession review, the projected cost of
    TARP has declined by $293 billion, or 86 percent. Today I can
    say that based on the expected additional repayments we expect
    from several financial institutions, taxpayers will have
    recovered more than 99 percent of the funds disbursed for the
    TARP's bank programs.
        In fact, outside of housing, the programs designed to help
    give Americans the chance to stay in their home, outside those
    programs, the TARP programs in banks, automobile companies,
    even in AIG on balance will show a significant positive return
    for the American taxpayer.
        Now these savings, these hundreds of billion dollars in
    lower expected cost of TARP means we are returning hundreds of
    billions of budget authority unused and that creates greater
    room for us to meet our future challenges and reduce our
    deficits.
        You are right, Madam Chair, to point out that when
    governments act to put out a financial fire, by definition,
    they create the risk of adding to moral hazard in the future.
    And the big test we face is the broader reforms in Dodd-Frank
    will be effective in helping limit that risk. I can tell you
    that I am very confident that those reforms will, if we are
    able to put them in place, allow us to substantially reduce the
    risk of future crises, and substantially reduce the risk of
    moral hazard that exists in any financial system.
        One final word in closing. I have the privilege of working
    with a remarkably talented team of career professional service
    individuals at the Treasury, working very hard in the face of,
    I think, some of the most challenging economic and financial
    problems we have seen in generations. They have played a vital
    role in helping bring this economy back to growth, help restore
    financial stability, and I think we owe them a debt of
    gratitude and some recognition for their hard work and their
    commitment to public service. I want to say again how much it
    has been a privilege to me. Once a career civil servant in the
    Treasury, to have a chance to work with them again.
        Thank you. I am happy to answer your questions.
        [The information follows:]

        [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Mrs. Emerson. Thank you, Mr. Secretary. We, too, would like
    to thank all those who work with you. They make lots of
    sacrifices.
        I am going to try to keep my questions to 5 minutes just so
    we have an opportunity to have as many questions as possible.
        Shortly after the passage of Dodd-Frank, Mr. Secretary, you
    said that the Act would ensure that the risks undertaken by
    banks would not ``threaten the health of the economy as a
    whole.'' But you also told Special Inspector General for TARP
    that it wasn't possible to create effective and objective
    criteria for evaluating systemic risk, but rather ``you just
    don't know what is systemic risk and what is not until you know
    the nature of the shock.''
        In the absence of objective criteria for evaluating
    systemic risk, is systemic risk something you just know it when
    you see it? If so, how can the government and private
    businesses identify and remedy Too Big to Fail?
        Secretary Geithner. An excellent question, and very
    important question. Let me try to give you my own personal view
    on how to think about this.
        The most effective things you can do to reduce moral hazard
    risk in the system are really these two: One is to make sure
    that you have the authority to force financial institutions to
    hold more capital against the risks they run in their
    businesses. That is essential to reduce the risk of failure by
    large institutions. In general, our view has been we want to
    make sure that the largest institutions, the one whose mistakes
    can cause the most collateral damage, are held to a high
    standard in terms of risk management and higher capital. But
    that is not enough.
        Even if you do that, to effectively reduce moral hazard
    risk, you have to have a system which allows you to allow
    institutions to fail. In fact, what this law does is prevent
    the executive branch or the Federal Reserve from coming in and
    intervening to help an insolvent institution survive, to live
    for another day.
        What the law does is force us to, in effect, to unwind an
    institution whose failure has brought it to the edge of
    collapse, but unwind it in a way that we reduce the risk of
    loss to the taxpayer and reduce the risk of collateral damage.
    Those are the two most important things to do about moral
    hazard, and the law gives us the authority to do that. We did
    not have that authority before.
        Now, you began with a very important question which is how
    do you judge what is systemic, what type of institutions might
    pose systemic risk to the system as a whole. I just want to
    make it clear that you cannot make that judgment with
    confidence without knowledge of the circumstances you are in at
    the time.
        I will just give you an example. Bear Stearns, the first
    significant institution to really fail in this crisis, come to
    the edge of failure in this crisis, was not a very large
    institution. Why was it so consequential? Why was its failure
    so threatening to the system? It was, in part, because of the
    nature of institution, its business and how connected it was to
    other institutions. And it was, in part, because we were at
    that stage where the U.S. economy was heading into a very
    damaging recession. In an environment where there is much more
    risk of recession, much more risk of broader financial
    collapse, and even institutions that themselves don't look
    particularly large in that context, could cause a lot of
    collateral damage and could accelerate a run. That is why I
    made the observation you quoted at the beginning in that you
    cannot know in advance of a crisis what particular types of
    risks might threaten a collapse of the system as a whole.
        Mrs. Emerson. A quick follow-up to that, if you knew that
    the nature of a shock was a scare from a municipal bond
    default, for example, how would Dodd-Frank protect the
    financial system or the economy in that situation?
        Secretary Geithner. Again, the most important thing to do,
    to reduce the risk of future crises, is to make sure that the
    institutions at the center of the payment system, the ones that
    are central to the capacity of businesses to borrow and fund
    themselves, central to the housing finance system, to make sure
    those institutions hold much more capital against risk than
    they were required to hold before the crisis.
        You need to make sure that you can impose those types of
    requirements on leverage, on capital, on institutions that look
    like banks and are performing banking functions even if they
    aren't in a legal sense banks. So, for example, in our crisis
    before Dodd-Frank, in our system we had regulations for capital
    over banks, but there was an entire parallel financial system
    composed of investment banks, finance companies, you could say
    GE, Fannie and Freddie, that were larger in the aggregate than
    the banking system as a whole, but no effective capital
    regulation to limit leverage. So what Dodd-Frank allows us to
    do for the first time is not just have more conservative,
    better designed capital standards for what we call banks
    traditionally, but make sure that we could extend those to
    institutions that are effectively doing the same thing and play
    that critical role in the payment system, in the financial
    system that causes the risk of broader collateral damage if
    they make mistakes.
        Mrs. Emerson. Of course, then you could say those
    municipalities don't often have to when you are doing bonds
    actually put their assets out on the table. And with the crises
    that we see happening in so many States with pension funds and
    the like, there is here another risk that I think needs to be
    taken into consideration.
        Secretary Geithner. I think you are right to point out that
    ultimately the overall risk to an economy, to the financial
    system as a whole depends a lot on things like whether the
    fiscal foundation of the government, State and Federal level,
    is on a sustainable path. Absolutely. That affects the overall
    environment.
        But I just want to emphasize one point again that no one
    will know with confidence in advance of a crisis what
    particular type of shock, mistake, source of risk, could cause
    a lot of damage. And since you can't know and fully anticipate
    that, we need to make sure that the system just runs with
    thicker cushions, thicker shock absorbers in terms of capital,
    again because you can't predict with confidence where they are
    going to come from.
        Mrs. Emerson. Mr. Serrano? Okay, I will go to Mr. Rogers,
    our big chairman.
        Mr. Serrano. I would rather you go, Mr. Chairman. I am not
    trying to be nice to you for any other reason than friendship
    because we don't have earmarks anymore.
        Mr. Rogers. Thank you.
        Mrs. Emerson. Please, Mr. Chairman, if you would like to
    make some opening remarks, please do.
        Mr. Rogers. Thank you, Madam Chair, for the courtesy, and
    my dear friend from the Bronx.
        Welcome, Mr. Secretary. It is good to see you again.
        Including stimulus funding, we have increased spending by
    84 percent in the last 2 years. The deficit this year is $1.65
    trillion or so. That over $14 trillion. We are in a deep hole.
    You agree with that. And we are borrowing 42 cents on the
    dollar we spend which troubles all of us. I was a little bit
    surprised the other day to see a Chinese government official
    quoted to the effect that they would have to reexamine their
    willingness to loan money--any more money to a country that
    might not be able to repay it. Did you happen to see that
    remark?
        Secretary Geithner. I don't think I saw that particular
    remark. I wouldn't be particularly concerned about any remark
    that I hear from any foreign official about the United States
    because no one is going to care more about the basic challenge
    of restoring fiscal sustainability than the people in this room
    and the people who hold my job. We care about our fiscal
    position and how we dig out this deep hole because of how
    important it is to Americans, to sustain confidence of American
    investors, not just foreign investors, and in our capacity as a
    country to go back to living within our means.
        Mr. Rogers. Given the amount of money that we borrow from
    China, those remarks troubled me not only because of the fiscal
    question involved, but really the sovereignty of the country. I
    mean, if we get into some spat with China, for example, over
    Taiwan or whatever, I am worried that they would be able to use
    the leverage that they have because of the mortgage that we
    have given them, to affect our policy. The public is on to
    this. I think they said last November cut spending, discipline
    your spending.
        The Chairman of the Joint Chiefs has told us of the
    importance of this to the Nation's security. The Chairman of
    the Federal Reserve says it is terribly important; and you,
    yourself, of course, have said so.
        And yet we get the President's 2012 budget and it is long
    on rhetoric but it is lean on spending cuts. We are dealing
    only with 14, 15 percent of the budget which is discretionary
    appropriated spending, half of which is military or DOD. If we
    zeroed out all appropriations for the whole year, as we did
    last year, because we didn't pass a single bill, if we zeroed
    out all of the appropriations bills, we would still be deeply
    in the red.
        Now there is talk about tackling the entitlements where 65
    percent or so of the money is. What do you think?
        Secretary Geithner. Let me just say that it is absolutely
    imperative that we find a bipartisan solution that will lock in
    the types of changes in policies that will bring down our long-
    term deficits dramatically over the next several years. It is
    critically important we do that. If we don't do that, then we
    will face the risk of broader erosion of confidence in ways
    that might hurt the sustainability of this expansion. So I
    welcome very much the importance you've brought to that issue,
    and I think you are right to highlight it today.
        Now, that will require not just demonstrating that we are
    able to find a way to reduce spending in the discretionary part
    of the budget, that is necessary but not sufficient. Alongside
    those changes, and we are hopeful we can come to a bipartisan
    solution on how to make sure we demonstrate the necessary
    restraints in spending, we will have to go beyond that if we
    are going to bring down the long-term deficits.
        In the budget you referred to, we proposed a detailed set
    of policies, revenues, entitlements, and discretionary spending
    that would reduce our deficit from 10 percent of GDP to roughly
    3 percent of GDP over the next 5 years. 3 percent of GDP is the
    point at which you achieve primary balance, meaning revenues
    equal expenditures minus interest. And that is an important
    threshold because when you achieve that, then you stop the debt
    from growing as a share of the economy. If we are able to work
    together to develop constraints on Congress to live within that
    deficit reduction target, then our overall debt burden would
    stabilize as a share of the economy in roughly the range of 70
    percent of GDP. Between 70 and 80 percent of GDP. Now that is
    high, higher than we would be comfortable with, but it is an
    acceptable range. Now, even if we achieve that, that is not
    sufficient because even if we stop there, because of the rate
    of growth in health care costs, even with the Affordable Care
    Act, our long-term deficits will start to grow again over the
    succeeding decades, so that has to be viewed as just a down
    payment.
        But again, I would not underestimate the value to broader
    investor confidence and to confidence of the American people
    and the capacity of this town to work in putting in place
    multiyear constraints which would achieve that level of deficit
    reduction over time. You are very right, Mr. Chairman, to
    highlight the fact that you can't do that by focusing only on
    the discretionary part of the budget, certainly not on the
    nondefense discretionary part of the budget.
        Mr. Rogers. You know both, the White House and Members of
    the majority party in the House now, both groups have said
    almost the same thing, that we have to tackle the entitlements.
    It is as if, though, each is waiting on the other to take the
    first step and perhaps engender an attack. How can we get over
    that?
        Secretary Geithner. Well, I think you are right to point
    that out. But I just would observe in the Affordable Care Act,
    in the judgment of the Congressional Budget Office, which is
    the nonpartisan, neutral scorekeeper we all rely on, they show
    unreasonably conservative assumptions that the Affordable Care
    Act, if left in place, reduces the deficit by $140 billion
    roughly over the next 10 years and another trillion over the
    next decade beyond that.
        So in our judgment, we have already put in place the
    largest reform that affects the rate of growth of health care
    costs, the biggest part of our long-term deficits than we have
    done in generations. Of course, we recognize that is not
    enough. But we feel that is a pretty good foundation on which
    to build. Now I agree with you, and I know the President does,
    to do this, to do a broader, comprehensive multiyear deficit
    reduction program, we have to do it together. We can't
    legislate this just with Democrats or Republicans. We have to
    do it together, and it is going to require us to come together.
        We laid out a proposal. I know there are some on your side
    who want to go deeper in deficit reduction even in the near
    term, and I know that Chairman Ryan will have a chance in the
    next couple of weeks or so to lay out a 10-year budget
    resolution, in some sense giving the view of the House
    leadership, what an alternative strategy is to the one we laid
    out.
        Our view is we have a moment, and I will take the
    optimistic side of this, there is a lot of support now on both
    sides of the aisle, both houses of Congress, to try to find
    something on a bipartisan basis that will make a very
    substantial contribution to reducing the deficit. We would like
    to find a way to do that on common ground. Of course, it is
    going to be important to us, as I assume it will be to you, to
    make sure that we do that in a way that doesn't hurt the
    economy.
        One of the reasons why you have to do this on a multi-year
    basis is because if you pull it all forward, then you will do a
    lot of damage to the recovery. You can't do it by making that
    gradual path, something we try to do in 1 or 2 years. It has to
    be gradually phased in over time. Otherwise, you hurt growth,
    hurt revenues, and future deficits rise, even apart from the
    effect that we have on things that we believe are important to
    our capacity to grow in the future, like education or
    incentives for innovation and incentives for investment and
    things like that.
        Mr. Rogers. Well, as you say, we have both heard
    Republicans and Democrats say virtually the same thing, that we
    have to do this. And we are all worried about who gets blamed
    for taking the first step.
        Secretary Geithner. I think it is fair to say that we are
    all going to be blamed.
        Mr. Rogers. Let me suggest, why don't we meet at the top of
    the Empire State Building on June 3 at 12:03 and see who jumps
    off.
        Secretary Geithner. I agree with you, there is no way to
    solve this problem which is not going to leave everybody
    somewhat unhappy, and everybody unhappy with us. But that is
    our obligation in some sense. That is what governing is about.
    And if we don't act, if we don't do something together, we will
    face the risk that we will see a broader erosion of confidence
    that could really hurt.
        Mr. Rogers. Is the Erskine Bowles-Simpson Commission
    suggestions a starting point or an ending point?
        Secretary Geithner. I think what they did was a remarkably
    important accomplishment. They put a lot of good ideas on the
    table, and a lot of innovative ways to solve some problems that
    we have had a hard time thinking about in the past. So I think
    that that report, combined with--there is another report by
    what we call the Rivlin-Domenici Commission that has a lot of
    ideas that I think any group would want to draw from to find
    something that we can get the votes for.
        That is our challenge. Our challenge is to find something
    that we can get the votes for. I hope we can take advantage of
    this moment where there is so much commitment on both sides to
    try to do something; and again, not just to reduce spending on
    that 12 percent of the budget, but reduce deficits, lock in
    deficits long term as well.
        Mr. Rogers. Mr. Serrano, can you see the Bronx from the
    Empire State Building?
        Mr. Serrano. I was going to comment that if June 3 is a
    Sunday, I can't join you in the jump. That is the Puerto Rican
    Day parade. I won't be able to join you for the jump.
        Mrs. Emerson. Mr. Serrano, go ahead.
        Secretary Geithner. Usually we use the boat analogy. If we
    are going to step into the boat, we have to step in all
    together.
        Mr. Serrano. That is for the Interior Committee.
        Mr. Secretary and Madam Chair, a lot of people would be
    disappointed if I didn't ask this question first, knowing me.
    And out of respect for my friend, Mr. Diaz-Balart, I will ask
    this question first.
        Mr. Secretary, I was pleased to hear the President announce
    a policy change concerning the Cuban embargo. A policy change
    in the final rule from OFAC indicated a commitment to allowing
    much freer travel and trade between the United States and Cuba.
    It has now been 2 months since the initial announcement, and we
    have not seen the final guidelines setting out how people will
    apply to travel.
        Two quick questions: When can we expect to see these final
    guidelines? Are there particular problems hindering the release
    of these guidelines? Do you expect that the final guidelines
    will reflect the openness indicated in the President's original
    announcement and allow regular hassle-free travel for those
    authorized to do so?
        Secretary Geithner. Yes, we will meet the policy objectives
    set out in the President's announcement. In terms of timing, I
    will only say ``soon.'' There is no date in soon, but my
    expectation is relatively soon. I have not yet heard of any
    particular problem that we face in finalizing the guidelines. I
    will consult with my colleagues and see how things are going.
        Mr. Serrano. I would appreciate finding out what the
    problem is other than 10,000 phone calls coming in perhaps
    telling you not to do it once the President decided to do it.
        Secretary Geithner. As you know, we take the obligation to
    make sure that we not just meet the test of the policy, but the
    constraints of the law very carefully. We are very careful in
    refining these things. Again, my expectation is we will move
    forward reasonably quickly.
        Mr. Serrano. Mr. Secretary, you have proposed two
    initiatives from the CDFI fund that were proposed last year but
    not acted upon: $50 million for the Bank on U.S.A. initiative
    to promote affordable financial services and credit to those
    without bank accounts; and $25 million to increase availability
    of healthy, affordable foods in underserved urban and rural
    communities. Can you give us details on how these programs will
    be run and how they differ from existing programs at Treasury
    and other agencies?
        Secretary Geithner. I will be happy to do that in writing
    in more detail. But let me respond briefly now. The Bank on
    U.S.A. initiative that you referred to is very important. I
    think anybody who looks at what happened in the United States
    over the last 10 years to the financial system, you can see why
    this is so important.
        One reason why so many Americans were vulnerable to
    predation, abuse, and fraud by financial institutions was
    because they operated outside the banking system without even
    the protections which existed with respect to people who had
    relationships with banks. I think it makes a lot of sense not
    just encouraging more responsible saving behavior, more
    responsible use of credit, it is more efficient, often less
    expensive to deal with banks, but we are better able to make
    sure that those individuals enjoy the protections that come
    with consumer protection in that area.
        So that is a very important and the kind of initiative that
    has a very high return in terms of reducing future costs.
        Now, in terms of the healthy foods initiative, this is a
    program that uses the combined instruments of new market tax
    credit and CDFI fund proposals to try to make sure that in
    parts of the country where there are no supermarkets, no access
    to affordable, reasonably nutritious healthy food options, that
    we are making sure that some of those resources go to help
    catalyze private investment in those communities.
        Again, for those of you new to these programs, these are
    programs that at their core rely on the strategy of trying to
    leverage private capital to catalyze and attract private
    investment to communities where investors are often reluctant
    to go without that additional support.
        Mr. Serrano. Briefly, Madam Chair, on the Healthy Food
    Financing Initiative, I think it is important to note that more
    than 23.5 million people, including 6.5 million children, live
    in low income metro areas that are more than a mile from a
    supermarket, and 2.3 million people in low income rural
    communities live more than 10 miles from a grocery store. We
    are not just talking about access to healthy food, but we are
    also talking about access to food, period. As I understand it,
    entities like farmers' markets and bodegas will be considered
    partners in bringing food to underserved communities, as
    appropriate. Can you comment on the proposed implementation of
    this initiative? How are you working with other agencies to
    accomplish the Healthy Food Financing Initiative?
        Secretary Geithner. This is something that we are doing in
    close cooperation with USDA, and others, and I will be happy to
    give your staff a more detailed report on how things are going.
    Again, and you said it very well, the basic idea is in
    communities where investors have been reluctant to come and
    establish what most Americans would view as like a normal part
    of a neighborhood, to try to make sure that those investments
    come on terms that have a very good record. These programs have
    a very good record for the taxpayer. We think that they justify
    your support.
        Mr. Serrano. Madam Chair, in closing, let me just say that
    I never cease to be amazed at the fact at these hearings we
    learn so much about each other. Chairman Rogers and I always
    comment on the fact that we represent two of the poorest
    districts in the Nation, and they are totally different from
    each other. I thought our situation in the Bronx and other
    urban areas was tough. I had no idea that some folks don't have
    a grocery store anywhere near 10 miles from where they live.
    These are issues that this great Nation should address, and
    address now once and forever.
        Mrs. Emerson. You need to come down to rural Missouri where
    I live where people live 50 miles, in many cases, from a
    grocery store.
        With that, I will take it to Mr. Womack from Arkansas.
        Mr. Womack. Thank you, Madam Chairwoman. Thank you, Mr.
    Secretary, for your appearance here today. I look forward to
    your visit to the great State of Arkansas in a little over a
    week. We will roll out the red carpet for you and make you feel
    welcome and show you the great things we are doing in that
    region of our country.
        Secretary Geithner. No red carpets.
        Mr. Womack. No red carpets, okay. We will save on that.
        It didn't take long for Madam Chairwoman in her opening to
    talk about TARP. That is the subject of my first question. It
    is a controversial topic, and I am not here to judge
    necessarily. History will judge that program. But you have
    articulated that it has presented about a 99 percent payback I
    suppose, and if you take the housing out of it, it operates in
    the black. We understand the numbers that you have articulated
    here today.
        What is left for TARP to do? There are still a number of
    people involved in TARP. We spoke with someone earlier this
    week, and it came to our attention there are new contracts and
    extensions of already existing contracts. Why are there still a
    significant number of people working TARP?
        Secretary Geithner. That is a very good question. I am glad
    you raised it. We still have a very substantial investment
    outstanding in--most of these are now common equity, but not
    just common equity in, for example, GM, Chrysler, AIG. We want
    to make sure that we get the highest return for the taxpayer in
    those investments. These are very complicated transactions to
    deal with. So part of the resources still remaining are
    designed to make sure that we can manage our remaining
    investments down carefully at the highest possible return to
    the taxpayer. There are a bunch of programs which have a
    slightly longer fuse in terms of the investment profile, and we
    want to maximize return. We are still trying to make sure that
    we can reach as many homeowners as we can through the housing
    programs.
        As long as we have a dollar of taxpayer money outstanding
    and at risk, we want to make sure that we keep in place a core
    group of people who can manage that risk carefully. So even
    though on the overall numbers we are way ahead of any
    reasonable expectation in terms of getting the money back for
    the American taxpayer and getting ourselves out of those
    companies, we still have enough of a residual investment left
    to justify the need for a staff of people over time.
        Now the numbers we have at Treasury today I am quite
    confident will be the peak in terms of staffing. In fact, we
    have been discussing a little bit what is a reasonable pace in
    which to start to wind that down. I can give you more details
    on that if you would like. Of course, we want to make sure that
    we are keeping talented people there as long as we need them.
    So we have to manage those things carefully. But those
    resources are coming down, and they are very modest.
        Mr. Womack. We all understand the concept of diminishing
    returns. As I drill down on this subject, I want us to be
    careful of, while there may be funds outstanding, there are
    staff allocations dedicated to getting as you say the best rate
    of return. But at what point in time do we achieve a state
    where we are in diminishing returns?
        Secretary Geithner. Again, an excellent question. That is
    something we take very seriously. Let me explain a little bit
    again why with the overall amounts coming down dramatically,
    the complexity of the challenge still does not diminish quite
    as much as that. Again, we are a very large country, very large
    financial system. Even though we have gotten most of the money
    back, we still have resources outstanding in a lot of programs
    and in a lot of individual institutions.
        We want to be very careful to make sure that we are doing
    as good a job as we can for the taxpayer. But the people
    managing this program have done a remarkably effective job; a
    clean audit on a complicated program, and we want to make sure
    that we hold to the highest possible standards.
        But we are not going to be in these institutions a day
    longer than we need to be. Again, I believe we will be able to
    start to gradually wind down the resources we have in these
    programs as quickly as we can.
        Now, I should point out that this is not really the best
    measure of the complexity of the challenge, but if you look at
    what the oversight bodies have asked for in terms of resources,
    if you look at SIGTARP's proposed budget, for example, you can
    see from the people doing oversight, in their budget requests,
    they still see a very substantial oversight need, and that is
    another measure of the complexity of the challenge.
        Mr. Womack. Fannie and Freddie. What is the government's
    role in the mortgage industry?
        Secretary Geithner. Today, because the crisis caused this
    huge, the private market to recede completely from writing new
    mortgages, Fannie and Freddie, the FHA, USDA and VA are about
    90 percent of the market for new mortgages today, and that is
    untenable for the long term, of course.
        Our basic strategy is to gradually wind down the
    government's role, wind down Fannie and Freddie completely, and
    gradually have the government recede and have private capital
    come in and replace the government's role. And we will do that
    through a carefully designed program of lowering conforming
    limits, raising guarantee fees, and toughening underwriting
    standards so that the private market can come back in again.
    For that to be possible, we need to make sure that these
    financial reforms, for example, capital requirements,
    underwriting standards, servicing standards, risk retention,
    disclosure requirements and securities markets, those all are
    laid out and put in place so that the investors have clarity
    about what the rules of the game are in the future. Those are
    sort of two conditions you need to meet to get private capital
    to come back in again.
        Mr. Womack. What is the overall impact of doing away with
    GSEs?
        Secretary Geithner. If you tried to turn off the lights
    tomorrow, you would have catastrophic damage. Taxpayers would
    lose billions and millions of dollars, more than we expect to
    have to absorb, and you would have a huge increase in the cost
    of borrowing for homeowners; the risk of substantial further
    reduction in house prices, and that would be dramatically
    damaging. I don't think there is any credible argument that
    would be a responsible path for us to take.
        We do think, though, that over a gradual period of time,
    perhaps 5 to 7 years, we can have the private sector come back
    in and take over that market and return to a market in which
    they are a dominant provider of mortgage finance.
        Mr. Womack. My last question is on corporate tax reform;
    where are we going?
        Secretary Geithner. It depends a little bit on what we find
    up here in terms of receptivity. But I have been consulting
    very broadly with your colleagues on the tax writing committees
    in this body and in the Senate, and with the business
    community, of course, and we think that we have a reasonable
    chance of getting people to come together on a comprehensive
    reform that would lower the corporate tax rate quite
    substantially.
        Mr. Womack. Do you have a number?
        Secretary Geithner. Not yet. It would broaden the base, do
    so in a revenue-neutral way, and leave us in a position where
    we have a more competitive tax structure, better able to help
    support investment, and incent investment in the United States.
        I think we have a chance to do this. Some people say you
    can't do this unless you do individual. I don't agree with
    that. I think there is a chance you can do it without doing
    individual. And some people think it is something we should
    wait on. I think it is worth taking a run at. Again, we are not
    going to be able to solve all of the problems facing the
    country. We are going to disagree on a lot of things. The
    country is still very divided on some basic things governments
    do. It is good for us to find some things we can try to do
    together to help the economy. I think corporate tax reform is
    one of those.
        Mr. Womack. Thank you, Mr. Secretary. I yield back.
        Mrs. Emerson. Ms. Lee.
        Ms. Lee. Good afternoon, Mr. Secretary. It is no secret
    that I want to talk to you also, like other officials about
    earmarks, from the administration. I know that is not a popular
    word around Washington, D.C.; but back in my district and in
    some of our communities throughout the country,
    congressionally-directed funding, earmarks, provide jobs and
    services where these gross disparities exist. The reality is
    that communities who are in most need of help, whether they
    face high rates of poverty or lack of economic opportunity, are
    also the least well equipped to apply and compete for Federal
    grant opportunities. We also know that earmarks are 3 percent
    or less than 3 percent of our budget. So in terms of deficit
    reduction, which we all want to see take place and know has to
    happen, this is a drop in the bucket.
        Now, it is not because these programs don't do great
    things, but it is because the knowledge and expertise required
    to navigate the grant-making process is expensive to hire or to
    develop, and most of these programs spend every dollar they
    have in helping others creating jobs and providing services.
    Also, they leverage millions of dollars. One earmark of
    $250,000 to a nonprofit to create jobs and to provide services
    where these gaps exist can and do leverage millions of dollars
    in private sector funding and in foundation funding. I know
    that these are programs in communities that the President
    supports and wants to reach out in helping. These are
    communities that I know the President and your administration
    and you want to provide a pathway out of poverty into
    prosperity. So let me ask you, in terms of this decision to
    support a total or to lead a total ban on earmarks, did anyone
    at Treasury do an analysis of the economic impact of
    eliminating earmarks and what it is going to do in terms of the
    loss of jobs and the loss of services in many of our districts
    around the country?
        Secretary Geithner. We at Treasury have not done such an
    analysis. But we do have a substantial number of programs in
    the President's budget that he has proposed, and many of those
    are the ones which we have referred to that are before you
    today, which go directly at the type of problem you are trying
    to solve. The programs that we are responsible for, at the
    Treasury, including not just our housing programs, but the CDFI
    fund, new markets tax credit, and a range of small business
    credit programs, those programs are designed to do exactly what
    you are concerned about, which is to make sure in communities
    that are hardest hit by the recession, that are at greater risk
    of taking a much longer time to come out of this, get private
    investment in there more quickly to help mitigate those
    problems. We very much share that objective. And I think we
    have a comprehensive set of programs in the President's budget
    that would help advance those objectives.
        Ms. Lee. Mr. Secretary, you have targeted CDFI for some
    cuts, as well as some of these other programs.
        Secretary Geithner. We absolutely are in a period where we
    have limited resources. We have to recognize that. So we are
    proposing savings in a variety of areas. But the request we
    have for CDFI is a very strong funding request. It would leave
    us somewhere between, if I am not mistaken, two and three times
    the funding level at the end of 2008. H.R. 1 would cut it to
    half the level. We are proposing in the 2012 budget what I
    would regard as a very strong funding level for CDFI. Maybe not
    as much as you would like.
        Ms. Lee. But given the lack of earmarks and the ban on
    earmarks and cutting CDFI, as well as some other cuts, I think
    that is going to make matters worse.
        Secretary Geithner. It may. It is a good question. Again,
    my impression is if you look at, and let's take these types of
    programs that are designed to target low income communities
    with tax incentives, guarantees, credit programs, things like
    that. My sense is, if you look at the combined size of the
    programs, as proposed in the President's budget, we have, even
    after the Recovery Act expires, very, very substantial funding
    levels relative to certainly where we were in 2008, which is
    appropriate because I think the returns are very high in those
    programs.
        Ms. Lee. Mr. Secretary, with regard to the programs, and I
    know again that you and your President, this administration
    gets it and understands that these communities need jobs and
    the support. What is happening and will continue to happen is
    that the organizations and the nonprofits that congressionally-
    directed earmarks are addressed toward, they are going out of
    business. They can't compete. They don't have lobbyists, Mr.
    Secretary, and they can't do these grant applications. They
    can't do these competitive packages. I mean, this is hard stuff
    to do. They do the work with seed money or a little bit of
    funds from the Federal Government as a foundation.
        They are able to maximize the Federal tax dollars that go
    into these areas. I don't know how you are going to backfill
    this and make sure that jobs aren't lost and services aren't
    cut.
        Secretary Geithner. I understand that concern, and I think
    it is definitely a reasonable concern. But let me try it from
    another perspective. And you know the President's view on this.
    But think about it this way. We are living in a period where we
    have unsustainably high deficits, limited resources. It is
    going to be very hard for us to get these deficits down to a
    sustainable level over time. It is going to require cutting
    things that many people believe in and have a huge record of
    success over time.
        In some ways our ability to convince the American people
    that investments in these programs are necessary and important,
    does depend in part on our willingness, our ability to
    demonstrate that by doing earmark reform, we can demonstrate
    more confidence to the American people that the decisions we
    are making about where these resources should be spent meet the
    highest test first.
        Ms. Lee. Mr. Secretary, this is less than 3 percent of,
    first of all, of the budget. Secondly, if you look at a
    400,000, 300,000 earmark, you are talking about $3 million,
    perhaps.
        Secretary Geithner. I completely agree with you about that.
    And I think even Chairman Rogers says this. You are not going
    to balance our budget on the backs of discretionary spending.
    It is just not going to happen. But I was making a slightly
    different point which is that if we are going to be able to
    demonstrate to the American people at a time of 10 percent of
    GDP deficits, these programs we think are so important to
    justify their support, then we have to be able to demonstrate
    we are willing to reform how we make these decisions over time,
    because they will be more confident that these are decisions
    that we made on the basis of what is in the interest of the
    country as a whole. That is one of the rationales for earmark
    reform.
        But you are right to point out that in many of these, we
    are talking about very small pieces of the budget, very good
    records of return, very strong cases for doing it. We are not
    going to have reasonable recovery in the United States across
    the country as a whole, until we get the unemployment rate
    down. Even though unemployment is at roughly 9 percent
    nationally, that dramatically understates the level of
    employment in many, many parts of the country.
        Part of our success in restoring confidence in this country
    is to demonstrate that across the country in communities most
    affected with high poverty and high unemployment, that we are
    going to make as much progress there as we are across the
    Nation as a whole.
        Ms. Lee. Thank you, Madam Chair. Thank you, Mr. Secretary.
        Mrs. Emerson. Mr. Alexander.
        Mr. Alexander. Thank you.
        Mr. Secretary, many of my community banks have expressed a
    concern over the recent proposed Fed regulation for the
    interchange fees that would cut into their profits and into
    their capital. Should there be a concern over the effect this
    might have on the credit available to small businesses?
        Secretary Geithner. Congressman, that is a very important
    question. I have heard that concern from lots of different
    people.
        This was a requirement of law that was imposed on the Fed.
    The Fed tried to design a rule that complies with the law. They
    have had a lot of feedback advice on how best to reduce the
    risk you have referred to. And I don't have a sense yet about
    whether they feel that they have the scope within the law to
    help mitigate that risk.
        Mr. Alexander. So you don't know if there was ever a study
    made by anyone, then, to gauge the potential effect of this
    law?
        Secretary Geithner. I know there were a lot of
    congressional hearings around this whole issue before this
    amendment passed. But the law establishes an obligation on the
    Fed, and the Fed is trying to figure out how to comply with
    that obligation and how to do so in a way that minimizes the
    impacts to which you referred. I don't know how much
    flexibility they have.
        Mr. Alexander. I appreciate your honesty there. There is a
    lot of talk about a potential vote in the future for raising
    the debt ceiling. What happens if that doesn't pass?
        Secretary Geithner. Congress has to do it. There is no
    alternative. It would be catastrophic for the United States for
    us to default on our obligations as a country. It would be
    catastrophic in terms of the effect on growth and borrowing
    costs for all businesses and families. I laid this all out in a
    lot of detail in a letter early in the year in response to a
    request from the Congress. I would be happy to walk through
    that again. But there is no alternative.
        I very much welcome the statements made by leadership on
    both sides of the aisle, both Houses, recognizing that we are
    the United States of America. We meet our obligations, and it
    would be unthinkable for this country not to make sure that we
    have the continued capacity to meet our obligations.
        Mr. Alexander. Do you think the financial crisis now taking
    place in Japan will have an effect on that? Will that mean that
    we----
        Secretary Geithner. On our recovery here?
        Mr. Alexander. Yes.
        Secretary Geithner. Oh, I think that is a hard judgment to
    make a decision. I think our focus now is, as it should be, on
    trying to do as much as we can to help them mitigate the
    humanitarian cost of the catastrophe. Of course, we will offer
    them every assistance we can and help make sure, again, that
    they can--that the restructuring effort itself is handled as
    carefully as possible.
        Mr. Alexander. I have got one other question. The Treasury
    Department has--one of the duties under the law is to certify
    and oversee payments from the Judgment Fund, a law passed in
    1956 by Congress to make payments for judgments rendered
    against the Federal Government. The Judgment Fund is one of the
    main sources of funds to use to pay litigation costs of
    settlements against the government. Can you provide us with a
    record of an explanation of the Judgment Fund and how it is
    funded and maintained at some point?
        Secretary Geithner. I would be happy to do that.
        [Clerk's note.--The Department of Treasury is either
    incapable or unwilling to answer this inquiry and provided no
    response.]
        Mr. Alexander. And it seemed to me like if you look at
    Article I, Section 9 of the Constitution, it provides that a
    regular statement and an account of receipts of all public
    money shall be published from time to time. It is what seems
    like the Constitution prohibits the current management of this
    Judgment Fund since we don't know for sure what goes on in that
    Judgment Fund, it is not transparent.
        Secretary Geithner. Well, again, I would be happy to make
    sure I understand your concern in more detail and be as
    responsive as we can.
        Mr. Alexander. Thank you.
        Mrs. Emerson. Thank you, Mr. Alexander.
        Mr. Diaz-Balart.
        Mr. Diaz-Balart. Thank you very much, Madam Chairwoman.
        Mr. Secretary, it is good to see you again. You said that I
    think you have been through 51 of these hearings.
        Secretary Geithner. This is my 51st, I think.
        Mr. Diaz-Balart. I have been with you on a couple of them,
    and rest assured, you are getting better and better at it.
        Secretary Geithner. I think only in a small fraction of
    them actually.
        Mr. Diaz-Balart. That is exactly right, that is exactly
    right.
        A couple issues, and first I wasn't going to talk about it,
    but since it was brought up by Mr. Serrano, there is no secret
    that he and I have serious differences on the issues of Cuba.
    By the way, those disagreements are always respectful and
    debated with the great respect, as should happen in a
    democracy. But what is clear, and what is more important than
    whether he and I may have differences, is what Congress has
    stated than what the law is. And you said it, and the President
    has stated it, that obviously tourism is not permissible, it is
    unlawful.
        You were very kind and when you stated in a previous
    subcommittee hearing, a different subcommittee of
    appropriations, that if I-- I am paraphrasing it, but we talked
    about if I saw a violation, a possible violation, of law, to
    bring it to your attention, and that you would obviously
    enforce the law. And so I obviously don't have to hold you to
    your word because I know that you are a man that will hold
    yourself to your word, and I just want to thank you for that
    courtesy.
        I have some serious concerns regarding some proposed
    regulations against the IRS, which I guess somebody talked to
    you about it, that would require U.S. bank deposit interest
    paid to any non-U.S. resident to be reported annually to the
    IRS. Now, according to the IRS, the IRS says that it is solely
    for the benefit of the foreign governments where those people
    come from.
        Now, you know, I represent south Florida. Obviously there
    are a lot of reasons why I think we could be concerned about
    that, about capital risk, the potential of what that would do
    to our banks. But more specifically and more directly let me
    use the case, for example--and we could use others, Venezuela.
    We all know the issues going on in Venezuela where, you know,
    the Chavez government has nationalized a number of companies;
    they have closed down the press; they have closed down
    television stations, Globalvision; they have arrested judges
    for being judges, and then they have mock juries and mock
    trials for those judges that they don't like. So I don't have
    to tell you about the issues in Venezuela.
        So my concern is imagine if now and in south Florida where
    we have thousands of others, but also Venezuela, nationals who
    are business people, jurists, journalists, whatever, who have
    homes and bank accounts, if that information goes back to Mr.
    Chavez, what nefarious purposes could that be used for to hold
    against them, to blackmail them, to confiscate. So that is
    obviously a concern that not only I have, but I think all the
    banks in the region have that concern. If you have any comments
    or suggestions on that, obviously those rules are now being
    promulgated.
        Secretary Geithner. As you said, this is about preventing
    tax evasion and preventing money laundering. We believe we have
    a very strong set of protections to protect the confidentiality
    of any such information. I would be happy to ask my staff to
    review those with your colleagues so that you can judge those
    for yourself. We think we found a reasonable balance. What we
    are trying to do is to make sure that we--and this is our
    obligation under the law, too--that we are taking every step we
    can to reduce the risk of broader tax evasion or money
    laundering for reasons that I know you respect. We would be
    happy to explain why we think those protections are adequate
    and listen to any concerns you have with them.
        Mr. Diaz-Balart. And again, Mr. Secretary, I appreciate
    that, because obviously you do understand the concern of those
    banks and, frankly, more so the individuals who are highly
    concerned, and these could be issues, I hate to put it in these
    terms of life or death, for some of these individuals if we
    don't get it right. And so we just need to make sure we get it
    right.
        Very briefly you mentioned that in many instances the
    President said as well that we are on an unsustainable path.
    And I am a simple-minded guy, I just want to make sure. You
    have gotten so good at these hearings, I want to make sure I
    understand what you are saying.
        Is it possible to solve our problem without reforming
    entitlements?
        Secretary Geithner. No. We have two types of fiscal
    problems. We have a big problem, a deep big hole to dig out of,
    over the next 5 to 10 years. And beyond that we have a very
    different, much more severe long-term fiscal problem. We have
    to solve both those problems.
        The long-term problem is driven by the rate of growth in
    health care costs and, to a much smaller extent, by a very
    modest gap in Social Security. The 5- to 10-year problem is a
    huge problem, and it is not driven by entitlement costs; it is
    driven by just too large a gap between commitments and
    resources and the rest of our budget. That is why in the
    proposed budget to the President we lay out a path to bring
    those deficits down very dramatically over the next 3 to 5
    years, down to level where we stop the debt growing as a share
    of the economy. That is the minimum necessary thing to try to
    do. And you will find, of course, that that is a very hard
    thing to do. That is necessary, but not sufficient.
        Mr. Diaz-Balart. It is not sufficient because, as you just
    stated then, again it starts shooting right back up.
        Secretary Geithner. It starts shooting right back up.
        Mr. Diaz-Balart. So we can either, to use the President's
    analogy, kick the can down the road, or we can look at, you
    know, where we have to go. And again, I think you have
    answered, but I just want to make sure I understand. You can't
    do that without looking at it and----
        Secretary Geithner. You have to do both those things. And
    again, it is very important to--it is better to do it sooner
    rather than later, because you need to give people time to
    adjust, businesses and individuals, to adjust the big changes
    in policies over time. You need to be able to phase them in
    gradually over time, like we did, for example, with the
    commission on Social Security that President Reagan initiated
    some time ago.
        So there is a lot of value in trying to reach consensus on
    these kind of things ahead of the point where they start to
    escalate dramatically.
        Mr. Diaz-Balart. Thank you, sir.
        Thank you, Madam Chairman.
        Mrs. Emerson. It would be nice to be able to get bipartisan
    agreement on this so that one side doesn't beat up the other,
    wouldn't it?
        Secretary Geithner. Well, we can't do it without bipartisan
    agreement. And as I said before, we can be confident that
    whatever we agree on is going to be unpopular with people on
    both sides of the aisle.
        Mrs. Emerson. Indeed.
        Mr. Bonner.
        Mr. Bonner. Thank you, Madam Chair, Mr. Secretary.
        I would like to go back to the big chairman first, with a
    statement he made, because I want to make sure I understand
    that.
        Could you repeat, Mr. Chairman, the amount of money, the
    increase in spending that we have seen over the last 2 years?
        Mr. Rogers. The last 2 years spending has increased by 84
    percent.
        Mr. Bonner. Mr. Secretary, do you disagree with that
    number?
        Secretary Geithner. Oh, I mean, there is--no, it is black
    and white. There is no doubt we have, as the chairman said, a
    deep hole, completely unsustainable fiscal position. Our
    deficits are roughly 10 percent of GDP, the highest level in
    generations. The deficit is, of course, the product of lots of
    things. They are the product of the choices made the last
    decade on taxes and spending, including entitlements. They are
    the choices made in terms of how we dealt with two wars. They
    are the product of the recession, and they are the product of
    the short-term emergency cost of fixing the crisis. And they
    are the products of some other things that are in the budget,
    too. But those are the most important drivers of the near-term
    deficits.
        Mr. Rogers. Would the gentleman yield?
        Mr. Bonner. I would be happy to.
        Mr. Rogers. The 84 percent is an increase in discretionary
    spending. It doesn't take into account the increases in the
    entitlement spending programs. But just in the 33 percent of
    the budget that is discretionary spending, we have increased it
    by 84 percent in 2 years.
        Mr. Bonner. Well, I know there are a lot of things in the
    past that have contributed to it. Certainly you can't increase
    spending 84 percent just over 2 years and that contribute to
    all of the problems that we are facing. But I guess the logical
    question that our constituents in Alabama, Kentucky, New York,
    wherever, might have is can we spend ourselves out of this
    hole?
        Secretary Geithner. Absolutely not. But in some ways the
    harder question is how we reduce spending and reduce deficits
    without killing the economy.
        Mr. Bonner. Well, and that raises a good point. Senator
    Kyl--and House Members are not prone to quote Senators unless
    we are running for the Senate, and I am not--Senator Kyl this
    weekend brought an analogy. You know, Washington, I think--
    maybe you disagree--I think this city is so disconnected from
    real America because we talk about billions and trillions. Most
    of us don't even know millionaires in our communities; we
    certainly don't know many billionaires. And so Senator Kyl put
    it in perspective that a family that is dealing with a budget,
    $10,000, 40 percent of that borrowed money, and yet the amount
    of money that we are trying to cut through H.R. 1, that we have
    gotten very little support from our Senate colleagues on the
    other side, although the Republican plan got more votes than
    the Democrat plan did, but if you cut--to give the analogy that
    most people can relate to, that would be a $28 cut out of a
    $10,000 budget. That is something most people in Camden,
    Alabama, where I grew up, can appreciate better than the fact
    that last month we recorded a $223 billion deficit for 1 month.
        So you agree, you can't spend yourself out of this, and yet
    I believe as just one Member that the President and the
    administration has been very timid to embrace even the
    President's own--he was the one who appointed the commission,
    and yet we have seen very little vocal support for the tough
    choices that are going to have to be made. Chairman Rogers
    mentioned that in his questioning. I am just curious from your
    perspective because you have a very important seat at the table
    as the Secretary of the Treasury.
        Secretary Geithner. Well, the President believes, and I
    believe, and we both believe this very strongly, that we need
    to take advantage of this opportunity to find a bipartisan
    consensus on ways to lock in changes in policies that would
    bring our deficits down over time. As you said, and the
    chairman said, you can't do that by focusing only on what we
    call nondefense discretionary. And you don't want to do that,
    because if you only allow nondefense 2 percent of the budget to
    carry all of the burden for deficit reduction, then you will
    end up, as some people say, eating our future.
        You know, a family living within its means is not going to
    cut tuition payments for its kids before it cuts spending on
    things that are really a luxury.
        So we have to make those choices together, but I think you
    are right to emphasize that you have to--for us to do this
    sensibly over term, it has to be a multiyear plan, it has got
    to be broader, it has got to involve policies beyond that very
    small slice of budget. I completely agree with that.
        Mr. Bonner. Just one last question. I want to go to follow
    up. Mr. Womack started this in terms of Fannie and Freddie and
    the GSEs. In the report that the Treasury Department issued on
    February 11th, as I understand it, you lay out three options
    for reforming the GSEs. But with respect to the second option,
    how is the backstop different from the implicit guarantee
    exploited by Wall Street in this recent crisis? And is this
    middle option, which the report appears to position as the most
    acceptable mandate response between the two extremes, how is it
    different from the status quo?
        Secretary Geithner. Well, it is not positioned as the more
    attractive option. I wouldn't actually view it that way. Each
    of those three options we try to frame neutrally, and they each
    have merits and disadvantages. I will try to explain what the
    difference is both from the status quo and from the other
    options.
        In the current system, private shareholders in these two
    public companies were able to benefit from an implicit
    guarantee. The government did not charge for that guarantee. It
    was not compensated for that guarantee. Taxpayers who end up
    holding the bag for what I said was ultimately tens and tens of
    billions of dollars for losses, that is a completely
    unacceptable way to run a financial system, and none of it
    should be--will not be supported in the future.
        Now, what we proposed among the options we considered was
    an option where alongside what the Federal Housing
    Administration would do in providing support for affordability
    to low- and moderate-income Americans, which I think there is
    broad support for, as a complement to that--and that is a
    guarantee, but the government charges for that guarantee, and
    there is a bunch of tough conditions on that guarantee. But you
    would complement that by something you would deploy only in an
    emergency to make sure that housing finance didn't dry up
    completely in a crisis. And that is a very important thing to
    do, because if you don't do that, then the risk is that even a
    modest recession would turn into deep recession because people
    would not be able to borrow to finance a house, house prices
    would decline, costs of borrowing would go up, and you would
    have a lot more damage as a whole.
        So in that type of model, which is just a backstop in
    emergencies, the government would charge for the guarantee. It
    would only be available to ensure there would be financing and
    financing wouldn't dry up completely. So it is a very different
    system than the system we have with the GSEs.
        Even that, though, would be challenging to design. All
    these options are very complicated to design in part because of
    the risk that we allow political factors to color the judgment
    about how to price the guarantee, how to set the eligibility
    criteria. And so you need to take the politics out of it to
    have any chance of getting it right.
        Mr. Bonner. Madam Chair, I said that was my last question.
    The only thing I would ask the Secretary in closing, do you
    think that the economy has recovered to the point where--I
    mean, new housing starts were down last month, what, 30
    percent? Something like that. It flashed up on the TV today as
    I was meeting with Alabama Home Builders. Do you think that
    people in rural America can go out and borrow money to buy a
    house or start home construction?
        Secretary Geithner. Well, two slightly different issues,
    and you are right to say housing is still weak, and
    construction is very weak. Housing starts are very weak in part
    because there are too many houses out there relative to demand.
    It is going to take several more years to heal the damage
    caused by this crisis.
        If you look at the cost, the ability to borrow to finance a
    house now, under the limits set by Fannie and Freddie and FHA,
    mortgage finance is very attractive now; in fact, much lower
    than it was, has been, over the last several years. That is a
    good thing.
        It is a little different for a builder, and in commercial
    real estate it is still very hard and very tough financing out
    there still. Just all again, just the echos and the aftershocks
    of the initial crisis, and that is going to take some time to
    heal. That is one reason why you want to make sure we move very
    carefully in reforming the housing finance market, because if
    we are going to get the market, the private market, to come in
    and replace the government's role, we need to move cautiously.
        Mr. Bonner. Thank you, Madam Chair.
        Mrs. Emerson. Thank you.
        Mr. Yoder.
        Mr. Yoder. Thank you, Madam Chair.
        Mr. Secretary, thanks for the opportunity to be here today.
    I know you have done a lot of these, it sounds like, so I will
    try to ask you a few questions here that maybe haven't been
    fully been vetted.
        I want to follow up where the previous speaker, the
    previous Congressman, the gentleman was asking. I want to ask
    you a more philosophical question. I am one of the new Members
    in Congress from Kansas, and what I have noticed in this city
    and across the country is that there is really a great divide
    in philosophy on what we should be doing right now in terms of
    spending, regulations, taxation, debt. And I kind of want to
    get a feel for where you are philosophically on these issues so
    I can understand sort of how you approach issues within the
    Treasury, and how your comments are related to questions before
    the panel.
        On one side I think you have the argument that what the
    economy needed was greater regulation; that there was too
    unregulated, that we needed new consumer finance protection
    bureaus, we needed greater regulation in markets, we needed
    greater government involvement in free commerce in this
    country, and that that was one of the things that was causing
    economic stagnation.
        You also have on that argument the idea that greater
    spending in Washington creates jobs, that cutting spending in
    Washington is a job killer, that borrowing more money and
    raising taxes can be a creation of jobs in Washington. And then
    clearly on the other side, you have the belief that government
    borrowing and spending is a net loser, that free enterprise and
    free markets are what built this country, and that we need to
    do everything we can to restore those principles and push
    rather for greater regulations, push for greater free trade,
    greater opportunities for folks to contract with one another.
        I will tell you back in the district what I hear from
    almost every small business and bank in the community is that
    they feel government breathing down their necks at every turn,
    whether it is the health care bill, whether it is it Dodd-
    Frank, or whether it is new EPA regulations, whether it is a
    whole host of things that are so destabilizing and so
    unpredictable for the bottom line for these businesses that
    they are telling me, we have capital, we are not going to
    create jobs, because we are waiting to figure out what the
    government is doing to us. I hear that from my community
    bankers, I hear that from small businesses, I hear that from
    entrepreneurs.
        And so I guess I would like to get an idea of do you agree
    with the sentiments of those entrepreneurs, small business
    owners, community bankers; do you think it is a fair assessment
    on their part? Do you think that the course of action in this
    city of greater regulation, spending and taxation is the proper
    way? And I know you made a statement before that the cuts that
    this Congress has looked at in H.R. 1 would be a job killer. Do
    you still believe that cutting government spending and putting
    more cash back in the hands of individuals and small business
    owners is a job killer?
        Secretary Geithner. Okay, a thoughtful question, but let me
    just try to give you a sense of what I feel about these basic
    fundamental questions about strategy.
        The most important thing we can do for the economy is to
    create better incentives for businesses to invest and to hire,
    and as we do that--and that is a complicated thing to do. It
    requires, again, making sure that tax policy creates better
    incentives for investment. It requires that businesses can hire
    people with the skills they need to be able to be competitive
    in this world. That is why education is so important. It
    requires investments by the government in basic things like
    research and development and science. Those things are
    fundamental to the capacity of any community to grow, any
    business to function and thrive in this competitive world.
    Infrastructure is hugely important to the basic competitiveness
    of the American economy. Those are core government functions
    that we have not been as good at as a country. We need to get
    better at that.
        Part of it requires expanding opportunities for trade and
    exports, and that is why you are going to see before you an
    agreement not just with Korea, but if we get the change that we
    need with some other important trade agreements, we think those
    things would be very productive and very consequential.
        Now, you referred to a couple of other things which I think
    I should respond to. In terms of the financial sector, you
    know, this is a crisis fundamentally caused in part by basic
    failures in financial oversight. And we all had an obligation
    to fix those problems.
        Now, community banks were not the source of that problem,
    and community banks are largely insulated from the broader
    forms of Dodd-Frank. Those are targeted except for interchange,
    which your chairman referred to. Community banks were left
    largely outside of the scope of those changes and regulations.
    Those were directed, as they should have been, to the large
    institutions and the major markets at the center of the crisis,
    and all businesses were victimized by those failures. It wasn't
    just individuals and communities where predation and fraud were
    rife, but businesses were the victim of the basic failures in
    the financing. It is why businesses stopped hiring, why
    financial markets seized up, why the economy was shrinking at
    the annual rate of 6 percent of GDP a year at the end of 2008.
        So getting the financial system better, more stable, and
    more efficient, better to be able to provide capital is a
    central function of government. And it is absolutely the case
    that parts of our financial system had too much regulation, but
    parts had too little. And fixing that is really important to
    the broader task of trying to make sure that businesses were
    able to grow again, expand again in that context.
        Now, of course, that to wait for this all to work, you have
    to bring the deficits down over time, and they have to kind of
    come down dramatically. If we don't do that, then you will risk
    higher interest rates, and you will make it harder for
    businesses to grow and expand. It is so important for all of us
    to recognize we have to do that. And you can't do it simply by
    doing the necessary reductions in spending and discretionary.
    We believe there are savings there we can do in support, but
    you are not going to be able to bring the deficits down over
    time without taking a broader multiyear approach, and that is
    going to be very important to confidence.
        So to summarize, I don't know you, you don't know me. I
    doubt we disagree quite as much as your question suggested. And
    you can measure our intention and our values on these things by
    looking at the things we proposed. Again, if you look at our
    proposals in education, in tax incentives for business
    investment, in innovation in basic research and development,
    and infrastructure and trade, we think we have good ideas, but
    if we have broad support across the political spectrum in the
    past, it would make a big difference in terms of strength and
    recovery.
        Mr. Yoder. To follow up on the last question I had as part
    of the philosophical section here, do you believe that cutting
    government spending in any manner, such as the manner in which
    we have cut discretionary spending, and returning that money
    back to small business owners and individuals is a net job
    killer?
        Secretary Geithner. Are you asking me about H.R. 1
    specifically? I think if you cut that deeply in the way you are
    cutting in H.R. 1, it would be very damaging to the economy,
    near term and long term. Again, you need to look broadly, as I
    am sure you will, at what the government is doing. And you want
    to look at where those savings are used. And so you want to
    look at not just where you can cut, but where you need to
    protect investments and where you use those savings to make
    sure that we are like educating children with better skill
    sets.
        Mr. Yoder. Let me be a little more specific on the question
    here. I guess my question goes to the issue of jobs. This is a
    philosophical question, depends which you go here, but we hear
    folks in this town say that when you are cutting spending in
    Washington, you are killing jobs.
        Secretary Geithner. No, I don't think that is necessarily
    the case. It depends on what you are cutting. There are
    absolutely things you have to cut, should cut. We can't afford
    a lot of----
        Mr. Yoder. I am not talking about the deficit.
        Secretary Geithner. No, no, no the spending.
        Mr. Yoder. When we reduce spending and reduce the amount of
    Federal employees that we have in this city, the argument is,
    well, then we have eliminated jobs, and we have hurt the
    economy. I guess I question you as to whether reducing those
    Federal jobs in a way in which we are reducing Federal
    expenditures and returning more money to small business owners
    and entrepreneurs, individuals isn't a net job benefit.
        Secretary Geithner. Well, again, I think it depends on what
    you cut. You are absolutely right that there are some programs
    that you cut would not be--hurt the economy, even if they
    temporarily reduce jobs. But again, it depends, what are you
    going to use the savings for? If the savings go to finance tax
    cuts for the richest Americans, you are not helping job
    creation. If you achieve those savings, but we are still living
    with very large deficits, then you are not helping the economy
    as a whole. You could be hurting the economy. It depends what
    you are doing to the overall path of----
        Mr. Yoder. Let us get into taxes, if we could, Mr.
    Secretary. You discussed in your statement that the budget that
    has been proposed by the administration would reduce the
    deficit from 10 percent of GDP to 3 percent of GDP over 5
    years.
        Secretary Geithner. Yeah. I can't remember if we do it in
    the 4th year or the 5th year, but over roughly that period of
    time.
        Mr. Yoder. What percentage of that reduction is related to
    tax increases?
        Secretary Geithner. A pretty modest proportion is related
    to taxes. But you are right, we do in the deficit--in the
    budget propose to allow the tax cuts that apply to the top 2
    percent of Americans to expire on schedule a year and a half
    from now, 2 years from now, and we also propose to limit in a
    very modest way tax expenditures for those richest same 2
    percent of Americans. So, for example, we propose to limit the
    tax deductibility, the deductions, for those top 2 percent of
    Americans. Those are the principal tax reforms recommended, and
    we think they are sensible. We don't think we can afford those
    taxes. And if we don't allow those reforms to go into place,
    then you will be left with higher deficits. That is why, again,
    I know there are people on your side who think we didn't go
    deep enough in the budget.
        I will make an observation. I don't think you will be able
    to find a way to get the deficit lower as a share of GDP in
    that time frame without doing anything in terms of tax reform.
    I think it is infeasible to do it without killing the economy.
        Mr. Yoder. I think you will find broad-based support for
    tax reform certainly as strong or stronger on the other side of
    the aisle. I guess I would ask, then, if you believe that we
    should increase taxes on the upper 2 percent. What do you feel
    the proper tax rate is for this country, specifically related
    to the upper 2 percent? It assumes your philosophy being that
    when we can take money to the richest 2 percent, and we can
    send it to the Federal Government and create programs, that is
    a benefit for society.
        Secretary Geithner. No, I wouldn't say it that way. I would
    say that we can't afford them. We don't say this with any
    enthusiasm; it is just more in sorrow and in reality. You
    should not ask me to go out there and borrow a bunch more
    money, a trillion dollars over 10 years, to make those tax
    cuts--leave those taxes in place. That would be irresponsible
    for the country, can't afford it. What we are proposing to do
    is to allow those taxes changes to take effect and use those to
    reduce the deficit.
        Mr. Yoder. Why is that the magic number, though? Why not
    increase taxes beyond that? It is seems sort of political, I
    guess. I know you look at these things from a very serious
    economic analysis here, and I want to, I guess, understand why
    this is just letting the 2 percent increase--what has the
    economic theory behind just that specific provision? Why is it
    not higher than that? Why does it not expand another 2 percent?
        Secretary Geithner. Here is the philosophy of how we do it.
    We want to have the lowest taxes possible consistent with our
    obligation to run a sustainable fiscal position and fund core
    critical functions of government.
        You say why those rates? The Bush taxes were designed to be
    temporary, to expire, and we think that the economy can
    withstand them reverting to the level they prevailed in the
    late 1990s, where we had, frankly, the best record of economic
    performance in terms of private investment, job growth, income
    growth, productivity improvement that we have seen in a long
    period of time. So looking back over history we think that this
    economy thrived at a time when the tax rates for the top 2
    percent were at that level.
        Mr. Yoder. That was for all rates. You want to go----
        Secretary Geithner. No, we are proposing only to go back to
    the----
        Mr. Yoder. I understand, sir, but you were talking about
    the 1990s in which all rates were at a higher rate.
        Secretary Geithner. They were a higher rate.
        Mr. Yoder. And this gets back to a philosophical question.
    There are some in this town who believe that these higher tax
    rates and greater spending in Washington ultimately is better
    for jobs and better for the economy, and there are others who
    believe that the tax reductions in the early 2000s led to
    economic gain. And it is just this question of whether we think
    ultimately higher taxes create greater economic gain, or we
    think lower taxes create----
        Secretary Geithner. I guess I would say if you describe
    both sides that way, they are both wrong, both substantially
    wrong. Of course, you want to make sure the commitments we make
    as a country are ones we can finance and afford, but you can't
    have everything, and you cannot sustain those tax rates with
    deficits this large. And you cannot achieve a reasonably
    responsible fiscal position without those types of tax reforms.
    Maybe you can, but I think it would be hard to do that.
        Mr. Yoder. Thank you, Madam Chair. You have been generous
    with the time. I yield back.
        Mrs. Emerson. Mr. Secretary, we have one vote, and I don't
    believe there will be more shenanigans. We hope not. But if you
    would be so kind as to allow us to recess for 10 minutes, and
    we will run over and vote, and we will be right back. Thanks.
        [Recess.]
        Mrs. Emerson. Okay. We will go ahead and resume our
    questioning.
        Mr. Serrano.
        Mr. Serrano. I will be ready in 5 seconds.
        Mr. Secretary, you are familiar with H.R. 1, and I don't
    mean Mickey Mantle's first home run or 900th.
        Mrs. Emerson. Yes, okay. As long as you make it straight
    that----
        Mr. Serrano. Mickey Mantle is your favorite?
        Mr. Womack. The gentleman knows that I am a Cardinal fan.
        Mrs. Emerson. Yes, it is 2 to 1. And we have an Oakland
    fan, so 2 to 1 to 1.
        Mr. Womack. My treat sometime, Mr. Serrano.
        Mr. Serrano. We have already heard from Commissioner
    Shulman of the IRS this hearing season, but I think a couple of
    points bear repeating. As I am sure you know, H.R. 1, the
    proposal to complete the 2011 appropriations process, contains
    severe cuts to the IRS. But I know Chairman Emerson and her
    staff did their best to avoid layoffs and furloughs. The IRS
    took the bulk of the cuts.
        I think a cut to the IRS budget is completely contradictory
    to everything that we are doing. How do we begin to solve a
    budget crunch by reducing resources to the agency that collects
    our tax revenue? What are the long-term ramifications, from
    your perspective, of reducing the ability of the IRS to
    accurately and efficiently collect tax revenue?
        Secretary Geithner. Well, I think they are very stark and
    compelling. If you reduce resources for enforcement and
    customer service, then two things happen. We collect less
    revenue. It means our future deficits are higher. It means to
    reduce deficits, you have to either raise more taxes on other
    people or cut other spending to make up for that. But the other
    effect you have is equally damaging. You reduce the capacity of
    the IRS to make sure that people who have the privilege of
    being Americans pay their fair share of taxes. So in some ways,
    if you reduce resources for enforcement and customer service,
    you make Americans less confident that the system is fair to
    them, too. So both of those effects are very damaging.
        Mr. Serrano. Now, Commissioner Shulman told us at the March
    1st hearing that--he stated a $603 million cut to the IRS
    proposed in H.R. 1 would mean $4 billion less in revenue for
    the United States Treasury. The lost revenue is seven times
    larger than the supposed savings. Do you agree with that
    assessment?
        Secretary Geithner. I do. I trust his judgment on that. He
    got a very good record of trying to make sure that we are
    satisfying the obligations Congress gives us with the lowest
    costs in terms of enforcement and customer services resources.
    But again, a dollar of enforcement resources raises roughly $5
    in revenue, it more than pays for itself. And if you don't do
    that, you are going to have higher deficits.
        Mr. Serrano. Yeah. I am going to bring up the word nobody
    wants to mention around here: shutdown. No one wants to see a
    shutdown of the Federal government. However, we must accept
    that this is a possibility and plan accordingly. What has your
    agency done to prepare for a potential shutdown?
        Secretary Geithner. Well, across the executive branch, at
    the President's direction, agencies have been looking carefully
    at what the law requires, what the law permits, how to make
    sure that we plan for that eventuality. But, Congressman, we
    are all working to avoid that. I think we should be able to
    avoid that. It would not be good for the economy now to put us
    through that kind of reduction in critical government services.
        Mr. Serrano. But across the government you say plans are
    being put in place. And I don't know if we are late into the
    season, but there was talk about refunds, tax refunds, being in
    jeopardy. Is that a possibility?
        Secretary Geithner. Again, I don't think I should at this
    point, Congressman, walk through the precise implications of a
    shutdown. It depends a lot on the legal judgment about what is
    possible and what is not possible in that context. But I think
    it is very important that we all try to work to avoid that,
    because, it is not good for us to put an economy still emerging
    from crisis through the trauma that would come from loss of
    critical government services.
        That would be one example that could be implicated. But I
    don't want to go into those details now. And again, we are
    doing what you expect us to do which is to work to avoid it.
    But, of course, we all always look at these kind of
    contingencies.
        Mr. Serrano. Madam Chair, I know that the time is running
    short, and I know we have other Members, so I will stop here
    for now.
        Mrs. Emerson. Thank you so much, Mr. Serrano.
        Let me ask you a really quick question, Mr. Secretary.
    Could other factors such as business cycles affect receipts
    more than the size of the IRS's budget, for example?
        Secretary Geithner. No. I think in this context anybody--
    well, not anybody. I believe it is fair to say that Republicans
    and Democrats who have looked at this question over time would
    say that enforcement and customer service resources have a
    substantial effect on revenue. Of course, lots of things affect
    overall revenue, how strong the economy is, but you know one
    thing for sure. If you cut it, your deficits will be higher,
    other things being equal. You don't make----
        Mrs. Emerson. The other things being equal key, because----
        Secretary Geithner. No, but you won't make the economy
    stronger by cutting enforcement resources. That will have no
    effect on that. Now, of course, the economy will be stronger
    long term if you get our fiscal position resources and--but you
    are not going to do that by cutting enforcement resourcesfrom
    the IRS.
        Mrs. Emerson. Well, I mean, this is why I think business
    cycles might impact, because when we--at two different times,
    in 2008 and 2009 and then, I believe, 2001-ish, receipts were
    down in spite of the fact that the IRS budget was up.
        Secretary Geithner. Yes. But I think it is fair to say the
    right way to think about this is that for a given economy and a
    given tax policy, Congress sets the tax rates for the country.
    You will collect more revenue in a more fair way if you have
    adequate enforcement resources with the IRS. If you cut those,
    you will have less revenue, and it will be less fair. And that
    is why it is worth doing.
        I know you have been very supportive of this in the past.
    Of course, we all have to make tough choices in this context,
    and we are trying to, as I said in my testimony--trying to find
    areas where we can save, so where we are making investments, we
    think of higher return, we are funding those investments to the
    extent we can with savings efficiencies.
        Mrs. Emerson. Appreciate that.
        Mr. Womack.
        Excuse me, let us keep to 5 minutes, okay, on this round of
    questions if you all don't mind. Thanks.
        Mr. Womack. I should be able to yield back time, because I
    only have a couple of follow-up questions.
        One, when you look at the glide path of our debt, the size
    of our debt, and the glide path of what that debt means in the
    outyears, I am concerned about the numbers that our side
    crunches and, I am sure, your side crunches, and the relative
    interest rates that figure into the projections. And my
    understanding is those are factored in, I don't know, 4 to 5
    percent levels, somewhere in that neighborhood.
        What happens in a period of high inflation? Suppose for a
    moment we went into that, and interest rates spiked to more
    astronomical levels? And you can pick a number. What does that
    do to the mandatory piece of our spending pie as obviously it
    gets elevated exponentially?
        Secretary Geithner. Well, you are right to say that lots of
    things affect that overall burden, interest burden, over time,
    how fast we grow, what happens to interest rates. But the
    biggest factor really is just the rate of growth in health care
    spending. With an economy aging and people able to live longer,
    that is the biggest overwhelming factor.
        Now, we have an independent Federal Reserve, and their job
    is to keep inflation low and stable over time, and they have
    got a very good record of doing that in the last three decades,
    and I am very confident they can do that. But even if they do,
    that is not going to save the Congress and the executive branch
    from the obligation of trying to put in place reforms that will
    reduce those long-term deficits.
        Mr. Womack. And then related to the debt ceiling, it has
    already been talked about in the previous line of questioning,
    you have indicated that the path that you hope to have us on is
    down to about 3 percent, a 3 percent factor of GDP.
        Secretary Geithner. At least.
        Mr. Womack. At least 3 percent. And you call that relative
    balance.
        Secretary Geithner. Primary balance.
        Mr. Womack. I understand the concept there. And through
    normal growth we can begin to trim our debt. I fully get that.
        I don't want to put words in your mouth, but because we
    have to continue to go back statutorily and raise this level of
    debt every time that we start bumping up against it, is that a
    call for a more indexed debt ceiling?
        Secretary Geithner. Well, that is really a question for you
    and your colleagues. We are the only country in the world that
    I am aware of, or any serious country, that requires its
    elected representatives to periodically go back and raise the
    limit.
        Remember the limit, we are only allowed to borrow to
    finance things Congress has obligated us to finance. Congress
    sets the obligations for the country; we just raise the money
    to finance it. And we are the only place in the world I know
    that has a separate obligation on Members of Congress to come
    back periodically and raise it.
        I don't know why you want to live with that. It is tough
    enough making some of the other choices you have to live with.
    As you know, it is not proven to be of any value in forcing
    choices Congress hasn't been able to force on itself through
    other means, because fundamentally we will never default on our
    obligations. No Congress will ever let us default. It provides
    no leverage in that context, and it has had no value in
    bringing discipline to fiscal choices of the contribution of
    the past.
        So my own sense is that it is not a particularly useful
    tool relative to political costs it imposes on each of you.
    That is why many of your colleagues in the past have tried to
    find ways to reform that obligation.
        The important thing is for Congress to agree on multiyear
    commitments that lock in improvements in the deficit over time
    in ways that don't kill the economy, and that is the important
    thing to do.
        Mr. Womack. My colleague here in his line of questioning
    talked a little bit about the Dodd-Frank Act and the community
    bank side of the house. We all agree that community banks are
    very important to local communities, in particular rural
    Arkansas, rural Missouri and other areas. Is it possible we
    threw the baby out with the bathwater in Dodd-Frank with regard
    to community banks?
        Secretary Geithner. No, no risk of that. In fact, again, we
    were very, very careful, completely committed to make sure that
    the reforms in this bill were targeted on the parts of the
    system that were broken. We were very successful in doing that.
        Now, there are things like interchange with people worried
    about that in that context, but if you look at all the basic
    dimensions of the bill in terms of what changed, we
    appropriately followed a simple principle, which is let us
    focus on the things that were broken and on the institution
    that caused the problem, not on the ones that were mostly
    caught up.
        Now, of course, community banks were not innocent
    completely. A lot of them got way too exposed to commercial
    real estate. They are trying to dig their way out of that. They
    have to reduce lending to their business customers because of
    that. And we can help them get through that a little bit. But I
    think Dodd-Frank has a pretty good balance; not perfect, but
    pretty good.
        Mrs. Emerson. Thank you.
        Mr. Womack. I am going to stop there. I just want to say
    one thing, Madam Chairwoman. I was digging through my unlimited
    funds here, and I found this $1 bill, it is all I have, with
    the Secretary's name on it. But I know because his name is on
    it that he cares deeply about what is happening in America and
    our fiscal health. And I appreciate his testimony here today,
    and I have enjoyed the conversation that we have had today.
        Mrs. Emerson. I am sure the Secretary would be happy to
    sign that for you.
        Mr. Womack. I don't know if that is a violation of Federal
    law or not. I certainly----
        Mr. Serrano. I think it is against the law.
        Mrs. Emerson. Actually I will say that I found at a
    colleague's home this past week that Secretary Snow had
    actually signed a dollar bill for he and his wife so--in honor
    of their marriage.
        Ms. Lee.
        Ms. Lee. Thank you very much.
        Okay. Going back to the point you were making about
    earmarks in terms of making the point that the public wants us
    to reduce spending and reduce deficits. I agree. But I also
    believe that the public understands that while everyone must
    share in the pain, not--it is given, all things being equal;
    given all people, given all districts, given entire countries
    in terms of middle-income individuals having the kind of
    wherewithal to sustain some of these cuts. So I don't believe
    all things are equal.
        And given that, the 3 percent in terms of the earmark, the
    3 percent reduction to me doesn't seem fair. It doesn't seem
    fair because once again it is hitting the most vulnerable
    communities the hardest, communities that need jobs and need
    services, which unfortunately our government nor State
    governments provide. And so while the public wants us to do
    this, reduce the deficit, reduce spending, I am sure the public
    does not want us to wreak havoc, mind you, and I don't think
    the President wants that to happen on these communities that
    need this type of support.
        Secondly, I believe that, and I think that many concur,
    that the deficit is caused by three factors, the Bush tax cuts
    for the wealthy, two wars that did not need to be fought, and
    the recession was, of course, caused in large part by Wall
    Street.
        Secretary Geithner. Part D and Medicaid contributed.
        Ms. Lee. Yes. Part D and Medicaid. The prescription drug
    deal.
        So given that, that seems to be where we should go to find
    revenue. That seems how you begin to dig us out of this hole
    and reduce the deficit. When we talk about going back to 2008
    domestic discretionary spending, cutting back, some agree, some
    disagree, but if we do that we should go to defense. Why not?
    Again, $700-some billion. And I think most experts who study
    this, most economists and most military experts, will identify
    100-, 150 billion in defense that could be cut without
    jeopardizing our national security.
        And so what I can't quite figure out is why would we talk
    about reducing or develop economic policy and strategies to
    reduce the deficit on the backs of those who can least afford
    these kinds of hits?
        Secretary Geithner. I don't think we should do that. And
    that is why the President proposed in his budget a very
    substantial, very ambitious deficit-reduction program with a
    balanced approach that preserves critical investments in things
    that matter, not just the most needy Americans, but also to
    things that are very important to our capacity to grow in the
    future.
        You know, the hard thing to do is not to figure out a way
    to cut spending or reduce deficits. The hard thing is to find a
    way to do it in a way that does not hurt the capacity of the
    country to grow, to expand opportunity, and it is done so in a
    way that is just as fair, fair across the country. That is the
    challenge, that is the political challenge in this context.
    That is why, again, in the President's budget we proposed a
    balanced approach, multiyear package of phased-in reductions in
    spending in areas where we can afford to cut spending, but
    while preserving in some cases increasing investments in things
    that this government has not done well enough and has to do
    better in the future if we are going to grow and prosper in the
    future.
        Ms. Lee. What are the numbers in terms of health care
    reform how that would hit our Treasury? If, in fact, we
    repealed health care reform, of course, we are going to create
    a larger hole. What are those numbers? Do you have that?
        Secretary Geithner. Apart from what it does to coverage and
    incentives to use health care more wisely, reduce cost growth,
    what it does is it reduces the 10-year deficit by $143 billion,
    the Affordable Care Act reforms, and it reduces the deficit
    over the next decade by a trillion dollars. And most health
    care estimates look at those estimates and feel that CBO is
    reasonably conservative in giving us credit, giving the
    government credit, for the savings that are ahead.
        Now, of course, for those savings to be realized, Congress
    we have to hold to them, not walk them back over time, leave
    them in place and let them work. So if you repeal, your
    deficits will be higher by 150-, a quarter billion dollars the
    next 10 years, then higher by a trillion in the next decade.
        Ms. Lee. Thank you very much, Madam Chairman.
        Mrs. Emerson. Thank you so much, Ms. Lee.
        Mr. Yoder. No more questions?
        All right. Mr. Serrano.
        Mr. Serrano. Thank you.
        In my final round, I think, I just want to help us set the
    record straight. It seems to me, Mr. Secretary, that there is
    some confusion about TARP with new Members and some returning
    Members of Congress. So let us set the record straight, and you
    tell me if I am wrong.
        As recently as yesterday on the floor of the House, my
    friends on the other side were accusing the Democrats of
    dreaming up TARP. Let us be clear. TARP came about under the
    Bush administration, and it was the Bush administration that
    told us that the entire American economy would collapse if we
    didn't vote for it. TARP is a program that you inherited, not
    one that this administration created. Am I correct?
        Secretary Geithner. That is absolutely correct.
        Mr. Serrano. Now that we have that clear, let us talk about
    the real cost of TARP. Beyond anyone's wildest expectations,
    the cost of TARP, as analyzed by the nonpartisan Congressional
    Budget Office, keeps declining. We are finding that the
    investment that we made in certain industries actually paid
    off. Can you tell us what the original estimate was for the
    cost of TARP and what we expect the program to actually cost
    now?
        Secretary Geithner. At its peak it was $350 billion. That
    was without the risk that we might have to come back to
    Congress and ask for more authority. And relative to that
    initial estimate, as I said, outside of housing we are going to
    earn money for the taxpayer. I think CBO's latest estimate is
    total costs are--I can't remember what the exact number is,
    something closer to $20 billion, but I think that is probably a
    little high.
        Mr. Serrano. Not every program within the TARP has been
    successful, though. The HAMP program, your signature program
    for foreclose mitigation, has produced far fewer mortgage
    modifications than anticipated or hoped. In fact, the House
    voted to defund the program just last week, claiming that it is
    better to give up on solving the foreclosure crisis than to try
    to fix the program.
        What are your plans for reforming the HAMP program? How can
    you make it more useful for homeowners who are struggling?
        Secretary Geithner. Very good question. And let me just say
    that we are all disappointed and frustrated by the speed at
    which we reach people through this basic program, but--and
    again, I would say that the servicers and banks are not doing
    nearly enough to make sure they can determine whether people
    are eligible for these programs and make sure they get the
    benefits of these programs as quickly as they need to, and they
    need to do a much better job of that.
        Appalling performance by servicers generally still not
    nearly good enough. But this program has reached 600,000
    Americans with permanent modifications and lowered their
    monthly payments by an average of $500 a month. That is a very
    substantial amount of money, and the reforms put in place have
    helped set an industry standard that led to more than 2 million
    additional modifications outside this program. Again, a very
    substantial improvement in reducing the rate of avoidable
    foreclosures.
        And we have a number of programs in place that are designed
    to help make sure we reach more people as quickly as we can.
    But by law, by the constraints of law, this is a voluntary
    program, and we do not have the capacity to compel banks, to
    force banks to deliver these reductions. We can push them to do
    what we are doing, encourage them to do it with incentives.
    And, you know, we publish detailed metrics every month to show
    how banks are doing on meeting the basic customer service
    obligations in this program. They are getting better, but not
    nearly good enough yet.
        Mr. Serrano. Go ahead, one more, or are we short?
        Mrs. Emerson. Two minutes left.
        Mr. Serrano. I did have a quick question about the Bank
    Secrecy Act.
        Mrs. Emerson. Go ahead.
        Mr. Serrano. In the 2012 budget issue, February 18th, the
    Treasury Department proposes to eliminate all State and local
    direct access to the Bank Secrecy Act, BSA, portal maintained
    by the Financial Crimes Enforcement Network. You are familiar
    with that issue. So the question is, is the degradation of the
    capacity of States and cities to combat terror, fraud,
    corruption and crime justified by a proposed savings of a
    little over $1 million? Did the Treasury Department conduct any
    study of the secondary cost of this proposal in terms of
    increased inefficiencies, loss of revenue, or the cost of the
    likely increase of uncaptured fraud that will result from this
    proposal? If so, what were the results of this study; if not,
    why not?
        Secretary Geithner. Excellent question. Of course we looked
    at this very carefully before proposing it. And again, we are
    trying to find savings everywhere we can justify them. But I
    did not believe this proposed reform would have any material
    effect in the capacity of State and local authorities to carry
    out those basic obligations. But we would be happy to give your
    staff a little more information on what went into that
    judgment.
        Again, this is just another example of how we can't do
    everything. We have to make some hard choices. We have to
    reduce some things that have a--where we think we can better
    use the money. But in this case we think the reforms are
    justified, and we don't think they affect the capacity of State
    and local governments to carry out that responsibility.
        And I want emphasize something your colleague said, which
    is, again, we want to be very careful that where we are saving
    resources, we are not hurting the most vulnerable or taking
    away from programs that have, again, a demonstrated very good
    record over time in using taxpayers' money, supporting private
    investment.
        Mr. Serrano. Well, in closing let me just say you should
    take a look at that, Mr. Secretary, because I can tell you one
    city where they feel they will be hampered in their ability to
    do what they need to do. Thank you.
        Mrs. Emerson. Thanks, Mr. Serrano.
        Bless you.
        In response to the question that Mr. Serrano asked you
    about HAMP, and it reminded me of this e-mail that I just got
    from a friend of mine who is a banker, a community banker in
    one of my counties. And I am actually going to read you what he
    said, because this is somewhat problematic. But basically, just
    to pick and choose, in theory the program, HAMP, seemed like a
    viable option to help borrowers stay in their homes in times of
    financial difficulties, but the cumbersome process of getting a
    borrower qualified for the program made it almost impossible to
    help those who are in most need in general. The servicers are
    required to solicit those borrowers and provide them with
    information regarding the HAMP options available. The borrower
    then must complete and return the forms required in order for
    the servicers to proceed. The borrower's information is then
    input into the HAMP Web site and transmitted electronically to
    Fannie Mae, who handles the applications for Treasury
    Department.
        Navigating the loan input Website was nearly impossible,
    the users guide alone being 64 pages. Issues with calls to the
    support line when assistance was needed included long wait
    times and conflicting answers from the staff members once the
    call was answered. The incentive offered to participate did not
    seem to interest any of our borrowers--blah, blah, blah. So I
    tell you this primarily because it needs to be streamlined and
    made more efficient.
        Secretary Geithner. I am really glad you raised this, but
    let me explain to you why we are in this position. Any time we
    put taxpayer resources on the table--in this case it is to
    encourage banks to put some of their own money on the table to
    modify a loan for a homeowner who is better off staying in
    their house--we have to be very careful that those resources go
    to people who are eligible for the program, and that requires
    making sure we can defend to you and your colleagues up here
    that we have good protections against fraud and people can
    prove income in this context.
        And as you know we have a crisis where part of the crisis
    was the country was filled with examples people were given
    loans without having to prove income, without having to
    document assets, capacity to pay. And part of our challenge in
    designing this program in applying was to make sure that again
    where we are qualifying people for a program and putting
    taxpayers money on the table that we could demonstrate to you
    and your colleagues up here that we are being exceedingly
    careful.
        Now, that does slow down the pace of conformance, and banks
    do complain about it, but look how well the banks are doing at
    qualifying and even loan programs. Ask people how they feel
    about the basic quality of service of banks for loan programs,
    and you will find people with still terrible examples of lost
    documentation, long waits, inability to find a live person to
    help them navigate that complicated process. But I agree with
    you it is still hard and complicated, but where it is hard and
    complicated is because we are trying to be careful custodians
    of the taxpayers' resources.
        Mrs. Emerson. I do understand that, but 64 pages of user
    guide seems a little excessive, and it begs the question then,
    if we are going to talk about banks just for a moment, and it
    frustrates probably all of us across the board that the Office
    of the Comptroller of the currency doesn't come under the
    Appropriations Committee, in spite of the fact they are
    authorized to charge whatever they want in order to run their
    own operation, and yet we have the FTC, the FCC, SEC, and I
    could go on and on and on, who are funded through fees and we
    actually do have some jurisdictions.
        But given the importance of the OCC and its performance
    over the past several years, do you think there is any
    justification at all for allowing bank regulators to be outside
    of the congressional oversight?
        Secretary Geithner. That is a dangerous question for me to
    answer in a subcommittee of the Appropriations Committee.
        Mrs. Emerson. This is not just we want our hands on it. It
    is a serious question because the regulators did not do their
    jobs in many cases, obviously. We all know that.
        Secretary Geithner. We had a system to which a really
    appalling extent we allowed institutions to choose who their
    regulator was. They could choose who their regulator was based
    on how soft or permissive the regulation was, and in some ways
    what was more expensive in terms of fees and that kind of
    thing. That is a crazy way to run a country's financial system.
        What happened was people just flipped their charters to
    take advantage of lower costs and lower standards, and that was
    disastrous for us. And it is just an untenable way to run a
    country in this context.
        Now, part of that is how we fund our supervisors, and it is
    very important for the country that we have a funding mechanism
    that allows them to attract and retain quality people and to
    maintain an adequate supervisor resource base. And so my own
    view in this case, and I know it is a little bit controversial
    in a body like this, is I would try to retain as much
    independence as possible so you can make sure that they can
    attract and retain qualified people. And I would eliminate as
    much as I can the capacity for arbitrage across different
    regulators. To some extent, we have done that in Dodd-Frank.
    But funding is part of that.
        Mrs. Emerson. I have ethical issues with fee-based
    regulators anyway because generally speaking, the people who
    end up being the top regulator come from the industry which
    they are entrusted to regulate.
        Secretary Geithner. I am against that, too. I think in
    general, particularly for a regulator, they have unimpeachable
    credentials not just for toughness, but for independence, and
    it is a very important thing that we instill in the system.
        Mrs. Emerson. Indeed. I have numerous questions to submit
    for the record that we would like to ask you to respond to
    within 10 days, if possible.
        Let me ask one quick question, and then we will close it
    down because I know you have to leave. This is about the
    Consumer Financial Protection Bureau (CFPB).
        What happens to the CFPB if there is no director confirmed
    by the Senate by that time in which it is supposed to be stood
    up?
        Secretary Geithner. At a date we call a transfer date, a
    date I set but the statute defines that authority, a bunch of
    authority from existing bank regulators transfers to the CFPB,
    but not all of the authority under the law. Some of the
    authority does not happen until there is a confirmed director
    in place.
        So the short answer to your questions is that the CFPB
    would not be able to operate with the full authority
    established in the law, part of it, but not all of it. The
    consequence of that would be that you leave the financial
    system left with a huge amount of uncertainty about who is in
    charge, and a lot of duplicative, overlapping function in this
    area. And you leave the system, I think, to some extent, to a
    significant degree, without the ability to make sure, for
    example, that small community banks don't face a lot of
    competition from people that are not required to adhere to the
    basic standards for consumer protection we try to apply to
    banks as a whole.
        So it would be--of course, it would substantially impair
    the capacity of this bureau to do what the law requires, which
    is establish and enforce sensible standards for consumer
    protection across the system. Again, in this crisis, what
    happened was you had banks subject to consumer protection, not
    always perfect, a lot of mistakes in that, too. But the more
    appalling failure was you allowed a bunch of institutions to
    compete with banks that were not subject to consumer
    protection.
        So you don't want to put community banks or any banks in a
    situation where they see their business just move to people who
    are not subject to that fair regulation. So that level playing
    field obligation is a critical objective, critical rationale
    for the establishment of this bureau, and you lose that
    objective, lose that advantage the longer you leave this entity
    in limbo.
        Mrs. Emerson. I appreciate that, and I don't believe there
    is anyone who believes that non-bank banks shouldn't be treated
    the same as banks when they are doing more or less the same
    thing.
        Thank you very much for being here. Thank you for staying
    over time. We appreciate it. This hearing is adjourned.
        [The information follows:]

        [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]