    [Senate Hearing 112-301]
    [From the U.S. Government Publishing Office]

                                                            S. Hrg. 112-301

      FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR FISCAL
                                   YEAR 2012

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

                                    HEARINGS

                                    before a

                              SUBCOMMITTEE OF THE

                COMMITTEE ON APPROPRIATIONS UNITED STATES SENATE

                          ONE HUNDRED TWELFTH CONGRESS

                                 FIRST SESSION

                                       on

                               H.R. 2434/S. 1573

        AN ACT MAKING APPROPRIATIONS FOR FINANCIAL SERVICES AND GENERAL
    GOVERNMENT FOR THE FISCAL YEAR ENDING SEPTEMBER 30, 2012, AND FOR OTHER
                                    PURPOSES

                                   __________

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

                                   __________

             Printed for the use of the Committee on Appropriations

       Available via the World Wide Web: http://www.gpo.gov/fdsys/browse/
            committee.action?chamber=senate&committee=appropriations

                                   __________

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                          COMMITTEE ON APPROPRIATIONS

                       DANIEL K. INOUYE, Hawaii, Chairman
    PATRICK J. LEAHY, Vermont            THAD COCHRAN, Mississippi, Ranking
    TOM HARKIN, Iowa                     MITCH McCONNELL, Kentucky
    BARBARA A. MIKULSKI, Maryland        RICHARD C. SHELBY, Alabama
    HERB KOHL, Wisconsin                 KAY BAILEY HUTCHISON, Texas
    PATTY MURRAY, Washington             LAMAR ALEXANDER, Tennessee
    DIANNE FEINSTEIN, California         SUSAN COLLINS, Maine
    RICHARD J. DURBIN, Illinois          LISA MURKOWSKI, Alaska
    TIM JOHNSON, South Dakota            LINDSEY GRAHAM, South Carolina
    MARY L. LANDRIEU, Louisiana          MARK KIRK, Illinois
    JACK REED, Rhode Island              DANIEL COATS, Indiana
    FRANK R. LAUTENBERG, New Jersey      ROY BLUNT, Missouri
    BEN NELSON, Nebraska                 JERRY MORAN, Kansas
    MARK PRYOR, Arkansas                 JOHN HOEVEN, North Dakota
    JON TESTER, Montana                  RON JOHNSON, Wisconsin
    SHERROD BROWN, Ohio

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

           Subcommittee on Financial Services and General Government

                     RICHARD J. DURBIN, Illinois, Chairman
    FRANK R. LAUTENBERG, New Jersey      JERRY MORAN, Kansas
    BEN NELSON, Nebraska                 MARK KIRK, Illinois
    DANIEL K. INOUYE, Hawaii (ex         THAD COCHRAN, Mississippi (ex
        officio)                             officio)

                               Professional Staff

                                 Marianne Upton
                             Diana Gourlay Hamilton
                               Melissa Zimmerman
                            Dale Cabaniss (Minority)
                            Ellen Beares (Minority)

                             Administrative Support

                                  Nora Martin
                           LaShawnda Smith (Minority)

                                C O N T E N T S

                                  ----------

                             Tuesday, April 5, 2011

                                                                       Page

    Department of the Treasury: Office of the Secretary..............     1
    Material Submitted Subsequent to the Hearing.....................    41

                             Wednesday, May 4, 2011

    Commodity Futures Trading Commission.............................    45
    Securities and Exchange Commission...............................    61
    Material Submitted Subsequent to the Hearing.....................   121

                            Wednesday, May 25, 2011

    Small Business Administration....................................   125
    Department of the Treasury: Community Development Financial
      Institutions Fund..............................................   133
    Material Submitted Subsequent to the Hearing.....................   161

                            Wednesday, June 8, 2011

    Department of the Treasury: Internal Revenue Service.............   165

      FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR FISCAL
                                   YEAR 2012

                                  ----------

                             TUESDAY, APRIL 5, 2011

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

                           DEPARTMENT OF THE TREASURY

                            Office of the Secretary

    STATEMENT OF HON. TIMOTHY F. GEITHNER, SECRETARY

                 opening statement of senator richard j. durbin

        Senator Durbin. Good morning. I'm pleased to convene this
    hearing of the Appropriations Subcommittee on Financial
    Services and General Government, the first in a series of
    hearings we're going to have this spring as we embark on the
    2012 appropriations bills.
        I want to welcome my Ranking Member, Senator Jerry Moran of
    Kansas. Welcome in your new position here.
        Senator Moran. Thank you.
        Senator Durbin. I am looking forward to working with you.
        And, of course, my colleague from Illinois, Senator Mark
    Kirk--we've both worked together on many things.
        And let me start with an apology to the Secretary and to my
    colleagues, but it's all the President's fault. He decided, at
    the last minute, to call in the leaders, including Senator
    Reid, and I had the responsibility of opening the Senate. So, I
    apologize to all of those who are in attendance.
        Today, we're going to examine the fiscal year 2012 funding
    request for the Department of the Treasury. While the Treasury
    programs funded in our appropriations bill include the Internal
    Revenue Service (IRS) and the Community Development Financial
    Institutions Fund (CDFI), we're planning to look at those two
    agencies separately. We'll save questions on those for focused
    hearings.
        The Treasury programs we're going to talk about today are
    programs which deliver a generous return on investment to
    taxpayers. I'd like to illustrate a few examples.
        Before any coalition planes were in the sky over Libya, the
    Department of the Treasury's Office of Foreign Assets Control
    had frozen $32 billion in Libyan assets. That's $32 billion
    that Muammar Gaddafi can't use to pay mercenaries, gas up his
    tanks, or purchase weapons to kill his own people.
        The Treasury's Financial Crimes Enforcement Network
    (FinCEN), tracks the financial paper trail when a criminal
    tries to steal your identity, cash out the equity in your home,
    or skim your credit card. And again, when that criminal tries
    to wire your money abroad, blow your money on blackjack, or
    even flee the country with a pocketful of diamonds, it's the
    Treasury's FinCEN that follows the money to make sure crime
    doesn't pay for terrorists, financiers, organized crime,
    narcotics traffickers, Ponzi scheme operators, and loan
    modification scammers.
        The Treasury's Financial Management Service ensures that
    Social Security payments make their way to seniors, that
    benefit payments make their way to our disabled veterans, and,
    as many of you may be looking forward to, that tax refunds make
    their way to taxpayers.
        The Treasury employs a professional cadre of staff who
    forecast economic indicators and analyze market conditions in
    order to monitor risk building up in our financial system and
    promote not just an economic recovery, but sustainable economic
    growth.
        The Treasury's special inspector general (IG) for the
    Troubled Asset Relief Program (TARP) works diligently to root
    out fraud and abuse in that program and provide transparency.
    Last year alone, the IG saved $555 million in taxpayer dollars
    that would have otherwise been lost to fraud. The office
    continues to work, this year, on 153 criminal and civil
    investigations that they actively pursue.
        To continue all these activities in 2012, the Treasury
    requests spending authority of $1.39 billion. The request is
    actually a net decrease of $18 million, or 1\1/2\ percent,
    compared to both the fiscal year 2010 enacted level and the
    fiscal year 2011 continuing resolution level that we're
    currently operating under.
        I'm glad to see a restrained budget proposal, though I'm
    concerned about some of the proposed cuts. There are several
    that have come to my attention. The Treasury proposes to scale
    back local law enforcement access to data on suspicious
    financial transactions. There's also a proposal to discontinue
    funding for law enforcement pursuing criminal activity related
    to alcohol and tobacco. We'll discuss those today.
        In addition to these ongoing duties, the Treasury is
    shepherding the creation of the Bureau of Consumer Financial
    Protection (CFPB). For too long, consumers have struggled to
    navigate financial products fraught with hidden fees, bait and
    switch terms, and other complex features that even experts have
    difficulty understanding. The CFPB will operate with a simple
    mission: to empower consumers with the information they need to
    make financial decisions for themselves and their families.

                               prepared statement

        Since the day I introduced the first bill to create this
    bureau, Wall Street has fought it and tried to undermine it. In
    fact, with the help of some in the House, Wall Street is
    attempting to limit spending by this Bureau to barely half of
    what it needs to get started. It's not a surprise that Wall
    Street is balking at the CFPB starting up. Fully informed
    consumers will make markets more competitive, eliminating the
    ability of banks, lenders, and mortgage brokers to profit from
    sheer confusion. We're going to work to make sure this agency
    has what it needs to start working for consumers from the
    start.
        I look forward to discussing these and other issues with
    the Secretary.
        And I now turn to my ranking member, Senator Moran, for any
    opening remarks.
        [The statement follows:]
                Prepared Statement of Senator Richard J. Durbin
        Good morning. I am pleased to convene this hearing of the
    Appropriations Subcommittee on Financial Services and General
    Government, the first in a series of hearings I am planning this spring
    as we embark on developing our 2012 appropriations bill.
        I welcome my ranking member, Senator Jerry Moran, and other
    colleagues who have joined me on the dais today. I also welcome
    Treasury Secretary Timothy F. Geithner to the hearing.
        Today we will examine the fiscal year 2012 funding request for the
    Department of the Treasury. While the Treasury programs funded in our
    appropriations bill include the Internal Revenue Service (IRS) and the
    Community Development Financial Institutions (CDFI) Fund, we're
    planning to look at these two agencies in depth in separate hearings
    scheduled over the next several weeks. We'll save questions on the IRS
    and CDFI for those focused hearings.
        The Treasury programs we'll examine today deliver a generous return
    on investment to taxpayers. I would like to illustrate a few examples
    of how Treasury programs provide taxpayers with the best bang for their
    buck.
        Before any coalition planes were in the sky over Libya, Treasury's
    Office of Foreign Assets Control froze $32 billion in Libyan assets.
    That's $32 billion that Muammar Gaddafi can not use to pay mercenaries,
    gas up his tanks, or purchase weapons to fight his own people.
        Treasury's Financial Crimes Enforcement Network (FinCEN) tracks the
    financial paper trail when a criminal tries to steal your identity,
    cash out the equity in your home, or skim your credit card, and again
    when that criminal tries to wire your money abroad, blow your money on
    blackjack, or even flee the country with a pocket full of diamonds.
    It's Treasury's FinCEN that follows the money to make sure crime
    doesn't pay for terrorist financiers, organized crime, narcotics
    traffickers, Ponzi scheme operators, and loan modification scammers.
        Treasury's Financial Management Service ensures that Social
    Security payments make their way to our seniors, that benefit payments
    make their way to our disabled veterans, and--as many of you may be
    looking forward to--that tax refunds make their way to taxpayers.
        Treasury employs a professional cadre of staff who forecast
    economic indicators and analyze market conditions in order to monitor
    risks building up in our financial system and promote not just an
    economic recovery, but sustainable economic growth and global
    competitiveness.
        Treasury's Special Inspector General for Troubled Asset Relief
    Program (TARP) works diligently to root out fraud and abuse in the TARP
    program and provides transparency of a complicated program. Last year
    alone, the inspector General saved $555 million in taxpayer dollars
    that would have otherwise been lost to fraud. The office continues its
    work this year with 153 criminal and civil investigations it is
    actively pursuing.
        Treasury's Alcohol and Tobacco Tax and Trade Bureau collects more
    than $24 billion in taxes on alcohol and tobacco every year with a
    budget of just $103 million. The agency combats tax evasion, keeps
    illegal tobacco and alcohol products off the shelves, and ensures
    alcohol products are labeled properly and advertised appropriately.
    Every time you open a beer, a bottle of wine, or a bottle of spirits,
    you can trust the label because Treasury has ensured the safety of that
    product.
        To continue all of these activities in 2012, Treasury requests
    spending authority of $1.39 billion. The request is actually a net
    decrease of $18 million, or 1.5 percent, compared to both the fiscal
    year 2010 enacted level and the fiscal year 2011 continuing resolution
    level we are currently operating under.
        While I'm glad to see a restrained budget proposal, I have some
    concerns about a few of the proposed cuts. Let me talk about a couple
    of them. Treasury proposes to scale back local law enforcement access
    to data on suspicious financial transactions. Treasury also proposes to
    discontinue funding for law enforcement pursuing criminal activity
    related to alcohol and tobacco. I look forward to discussing those
    proposals in more detail today.
        In addition to these ongoing duties, Treasury is shepherding the
    creation of the Consumer Financial Protection Bureau (CFPB), known as
    the CFPB. For too long, consumers have struggled to navigate financial
    products fraught with hidden fees, bait-and-switch terms, and other
    complex features that even experts have difficulty understanding. The
    CFPB will operate with a simple mission--to empower consumers with the
    information they need to make financial decisions for themselves and
    their families.
        Since the day I introduced the first bill to create such a bureau,
    Wall Street has fought to defeat and undermine it. In fact, with the
    House Republicans' help, Wall Street is attempting to limit spending by
    that agency to just half of what it needs to get started. It's not a
    surprise Wall Street is balking at the CFPB starting up--fully informed
    consumers will make markets more competitive, eliminating the ability
    of banks, lenders, and mortgage brokers to profit from sheer confusion.
        We're going to work to make sure this agency has what it needs to
    start working for consumers right from the start.
        I look forward to discussing these and other issues with you. I now
    turn to my Ranking Member, Senator Moran, for any remarks that he would
    like to make.

                        STATEMENT OF SENATOR JERRY MORAN

        Senator Moran. Mr. Chairman, thank you very much.
        Secretary Geithner, welcome.
        Today marks my first opportunity to sit in this new role as
    Ranking Member of the Financial Services and General Government
    Subcommittee, and I appreciate the opportunity to serve on the
    Appropriations Committee, particularly given its very important
    role in providing oversight over all discretionary spending.
        I look forward to working with you, Mr. Chairman, as we
    review this budget, and others, and make certain that our
    agencies have the opportunity to explain their story and we
    reach the right agreement in regard to spending levels.
        Mr. Secretary, you have many, many challenges, and your
    responsibilities are great, and they include, in my view,
    reinvigorating bank lending to consumers and small businesses,
    stabilizing the housing market, and encouraging sustainable
    economic growth. Most importantly, you must promote this
    economic growth at a time in which the long-term financial
    security of the United States is one that is burdened by
    unprecedented debt.
        Our country faces enormous fiscal challenges which, left
    unchecked, will have a disastrous impact upon the future of our
    Nation. For too long, members of both political parties have
    ignored this growing fiscal crisis and allowed our country to
    live well beyond its means.
        Americans are looking for leadership in Washington to
    confront the problems we face today and not to push them on to
    future generations. Oftentimes, the debate about Government
    spending is seen as a philosophical, academic, another
    political discussion, a partisan issue; but, in my view, the
    truth is that out-of-control borrowing and spending has very
    real consequences upon the everyday lives of Americans. We are
    facing a turning point in our country's history and can no
    longer avoid these difficult decisions.
        Mr. Secretary, I know that you're fully aware of the crisis
    we are facing, and I hope that we can work together to right
    the ship. The Congress needs a partner in the administration if
    we are to enact any meaningful changes or reforms.
        In my remaining few moments, I want to address another
    problem hampering our economic recovery: the uncertainty coming
    out of Washington, DC. regarding bank regulations and bank
    regulators. You and I had a conversation about this at a joint
    hearing when I was a Member of the House. And unfortunately, I
    don't think things have changed. We have reached a sad point in
    America when small-town banks are unwilling or unable to lend
    to small-town businesses. This sort of relationship banking
    played no role in the fiscal crisis we just experienced, and I
    feel strongly that, once we correct this trend, we will see a
    recovery take hold.
        I hear, from many Kansas bankers, that the most serious
    reason for their inability to lend to creditworthy borrowers in
    the community--in their community--is the fear of bank
    examiners' unwarranted scrutiny and the increasing cost of
    unnecessary regulations. Time and time again, I hear from
    bankers, like I heard this morning, Ken Domer, of Spearville,
    Kansas, who, in his 30 years experience as a banker, has never
    experienced such an unprecedented examination process like what
    has been ongoing recently. I hope that you will work with me to
    find solutions to this circumstance.
        Finally, I am requesting your thoughts--Senator Durbin
    mentioned the CFPB--I intend to introduce legislation today
    that would reform the structure of the CFPB by subjecting it to
    an appropriations process and replacing the single-director
    structure with a five-person commission, similar to the
    Securities and Exchange Commission, Commodity Futures Trading
    Commission, and a host of other Federal agencies. While my
    concerns with Dodd-Frank extend beyond the structure of the
    CFPB, this legislation, I believe, is a good first step to
    making sure the Congress has the necessary oversight of such a
    powerful agency.
        Secretary Geithner, the Department of the Treasury plays an
    important role in managing the Federal Government's finances
    and attempting to reinvigorate our economy, and I stand ready
    to work with you to address the challenges, and look forward to
    working with you and Senator Durbin and my other colleagues on
    this subcommittee to find common-sense solutions to address our
    mounting fiscal crisis.
        Senator Moran. I thank the Chairman and welcome Secretary
    Geithner.
        Senator Durbin. Thank you, Senator Moran.
        Mr. Secretary, you have the floor.

                 SUMMARY STATEMENT OF HON. TIMOTHY F. GEITHNER

        Secretary Geithner. Thank you, Chairman Durbin, Senator
    Moran, and members of the subcommittee. Thank you for letting
    me come up here today and talk to you. And I appreciate both
    your opening statements.
        We're here to talk about the Treasury budget, which, at
    first glance, may not seem central to the broad questions we're
    debating about how to strengthen the economy and restore fiscal
    sustainability. But, I want to spend a few minutes at the
    beginning just highlighting what's at stake.
        As you know, the Treasury plays a key role in a range of
    important programs to help strengthen economic growth. We play
    a central role in designing and administering a powerful set of
    tax incentives to encourage business investment and capital
    spending, investment in small, high-growth, start-up companies,
    make it easier for families to afford college. We play a
    central role in the evolving debate about how to design a
    better means for financing infrastructure across the country,
    in setting up a series of very important programs to help
    facilitate small business lending and credit growth, the new
    market tax credit, the CDFI program. We play a very important
    role helping expand United States exports, not just through our
    work with China, to encourage them to appreciate their currency
    more rapidly, but broader efforts to help us to establish a
    more level playing field for American companies. Obviously,
    we're playing a central role in helping repair the damage
    caused by the crisis to the housing market. And we're working
    to design a better corporate tax system that can help
    strengthen incentives for investment in the United States.
        Second, beyond these broad questions about economic growth,
    of course, we're playing a critical role in helping reform our
    national financial system. We chair the council established by
    the Congress for financial stability. We're helping work to
    wind down the government-sponsored enterprises' fixed housing
    finance system established by the CFPB, bring oversight to
    derivatives markets, all as part of a broad strategy working
    with countries around the world to make sure that U.S. firms
    face a level playing field as we strengthen these basic
    constraints on risk taking and leverage.
        The Treasury plays a key role, as the Chairman said, in
    help protecting our national security through administering our
    terrorist financing sanctions programs, not just with Iran and
    North Korea, but, as the Chairman said, most notably and
    recently, Libya.
        The Treasury, as you know, is responsible for raising the
    resources required to fund the obligations the Congress has
    established for the Government and for helping Americans meet
    their obligations as citizens. Every $1 we spend at the IRS
    helps generate nearly $5 in tax revenue. Every $1 we cut in
    enforcement through the IRS will increase our future budget
    deficits, add to our debt, and increase the risk that Americans
    who pay their taxes, pay more than their fair share of the
    burden.
        Now, we carry out these responsibilities with a very tight,
    efficient use of taxpayer resources, a very lean and talented,
    dedicated staff of professionals at the Treasury. You know,
    it's a remarkable achievement that, in a $14 trillion economy
    at a time of severe economic and financial crisis, enormous
    economic challenges here and from around the world, that the
    entire main Treasury staff, what we call the departmental
    offices, is about the size of a tax department at one of
    America's single iconic corporations.
        We play a lead role in the executive branch in helping find
    ways to save resources. Let me just cite two examples that are
    highlighted in my testimony.
        Within the Treasury, we've identified, in our last three
    budget requests, more than $1 billion in savings by
    consolidating functions and helping bring the Government
    payment system into the modern era by shifting to electronic
    processing of payments, paperless transactions. And with very
    careful management of the emergency programs established by the
    Congress to resolve our financial crisis, we have helped save
    hundreds of billions of dollars of taxpayer resources through
    the careful management of those investments. As you know, our
    overall investments in the banking system alone are likely to
    generate a very substantial profit to the American taxpayer,
    estimated, today, in the range of $20 billion.
        Now, the President and the congressional leadership are
    meeting this morning on the budget for this year. Of course,
    we're 6 months into the year now. House Republicans outlined,
    this morning, a proposed strategy for how we reduce our
    deficits over the long term. A group of bipartisan Senators are
    working hard to reach agreement on a comprehensive, multiyear
    set of reforms to put us on a path back to living within our
    means as a country.
        So, I want to just conclude by emphasizing how important it
    is that we reach a bipartisan agreement on how to restore
    fiscal sustainability by reducing spending where we can, but
    still investing in the types of reforms, like education, that
    are essential to our economic future, and by enabling us to
    meet our commitments to our seniors and those less fortunate
    Americans.
        The economy is healing, job creation is accelerating,
    businesses are investing, but we have a long way to go to heal
    the damage caused by this crisis, and we face enormous
    challenges, including from--countries new competitors around
    the world. So, I think all of us in Washington have a
    responsibility to demonstrate that we can solve these problems,
    not just talk about them.

                               PREPARED STATEMENT

        So, I look forward to working with you, and I appreciate
    very much your support for the exceptionally talented and
    professional staff of the Treasury that carry out such an
    enormously complicated set of responsibilities.
        [The statement follows:]
                   Prepared Statement of Timothy F. Geithner
        Chairman Durbin, Ranking Member Moran, members of the subcommittee,
    thank you for the opportunity to testify about the President's fiscal
    year 2012 budget for the Department of the Treasury.
        The Congress has given the Treasury a very broad mission, with
    responsibilities that touch many aspects of the lives of Americans.
        The Treasury is responsible for raising the resources necessary to
    fund critical Government functions, from national defense to protecting
    national parks. As the Government's financial manager, we process
    payments on a daily basis of almost $100 billion, including Social
    Security payments to 54 million Americans each month. We design and
    deliver tax credits to help support business investment and help
    families finance a college education. We design and enforce the
    financial sanctions necessary to prevent the spread of nuclear weapons
    and the finance of terrorism.
        The Treasury plays an important role in helping shape the
    President's overall economic policies. Our lead policy responsibilities
    include tax policy, international economic policy, and the stability of
    the U.S. financial system, which is the focus of the recently
    established Financial Stability Oversight Council that I chair.
        Unlike most Federal agencies, the Treasury's annually appropriated
    budget is about people more than programs, with most of the resources
    we seek from the Congress directed to supporting the talented public
    servants charged with these important economic and financial
    responsibilities. Salaries and operating costs make up 96 percent of
    our budget, and most of the rest is for investments in technology they
    require to function.
        In the President's budget for fiscal year 2012, the administration
    requested slightly more than $14 billion, $13.3 billion of which is for
    the Internal Revenue Service (IRS). This request includes efficiency
    savings and program reductions across all Treasury bureaus, as well as
    a number of targeted investments to allow us to better address some of
    the most important economic challenges facing the United States.
        Let me begin by summarizing the core economic and financial
    priorities that shape this budget request.
                         strengthening economic growth
        As we work to strengthen the economy and help get more Americans
    back to work, we are responsible for a range of initiatives designed to
    help support business investment.
        As part of the Small Business Jobs Act of 2010, the Treasury is
    implementing two new programs--the Small Business Lending Fund and the
    State Small Business Credit Initiative--designed to improve access to
    capital for small businesses.
        We are working to encourage private sector investment in start-ups
    and small businesses operating in moderate and low-income communities
    through investments in the Community Development Financial Institutions
    Fund and the New Markets Tax Credit Program.
             assisting homeowners and repairing the housing market
        In the face of the worst housing crisis in a generation, the
    Treasury plays an important role in the Government's programs to
    prevent avoidable foreclosures and support the continued repair of the
    housing market.
        The Treasury's Home Affordable Modification Program (HAMP), which
    is one of several critical homeownership assistance programs under our
    Making Home Affordable initiative, has helped more than 630,000
    families stay in their homes. By setting affordability standards and
    providing a framework for homeowner assistance that the private sector
    can follow, HAMP has also driven industry improvements that have
    resulted in 2 million additional modifications outside the program. We
    continue to refine and strengthen our housing programs and are taking
    additional steps to help ensure Americans are better served by their
    mortgage companies, including publishing a quarterly compliance
    scorecard for each of the 10 largest HAMP servicers and requiring all
    Making Home Affordable participating servicers to assign a single point
    of contact to each homeowner requesting a HAMP modification.
        Another key priority is comprehensive housing finance reform. In
    February, the administration laid out a plan to wind down Fannie Mae
    and Freddie Mac and reform our Nation's housing finance system. We look
    forward to working with the Congress in the coming months to develop
    legislation that will help create a safer and more stable housing
    finance market.
                   repair and reform of the financial system
        Our programs to help strengthen and reform the financial system
    have made very substantial progress, but we still face a number of
    challenges ahead.
        The financial recovery bank programs under the investment portion
    of the Troubled Assets Relief Program (TARP) are now estimated to
    provide a substantial positive return to the taxpayer. On March 30, we
    announced that TARP's bank programs officially turned a profit. Moving
    forward, we're working to exit our remaining investments and continue
    recovering taxpayer dollars. Ultimately, we expect TARP's bank programs
    will produce a lifetime profit of nearly $20 billion.
        We are also continuing to work in cooperation with the Federal
    Housing Finance Agency to protect taxpayers and reduce the ultimate
    cost of the Government's support for the housing market through the
    Government Sponsored Enterprises (GSEs). In the President's fiscal year
    2012 budget, the net cost of rescuing Fannie Mae and Freddie Mac is
    projected to drop by 44 percent from $131 billion today to $73 billion
    over the next 10 years as those companies continue to pay back
    dividends on the Government's investment. In fact, in each of the last
    two quarters, the net cost of the Government's investment in Fannie Mae
    and Freddie Mac has declined, because those firms have paid more back
    in dividends than they have requested in new funding.
        We are helping shape the rules to implement the comprehensive
    reforms to the financial system passed by the Congress last year,
    including stronger protections for consumers and tougher limits on
    risk-taking by banks. These reforms will help make our financial system
    more secure and protect the American taxpayer, but to be effective we
    need to fully fund their implementation and enforcement.
                                   tax reform
        The President has proposed to reform our corporate tax system to
    make America more competitive.
        We look forward to working with Members of Congress and the
    business community to design a comprehensive, revenue neutral reform of
    the corporate tax system that would lower tax rates, eliminate special
    tax breaks, and encourage investment in the United States.
        promoting u.s. economic and national security interests globally
        The Treasury plays a critical role in helping advance U.S. economic
    interests abroad and protecting against foreign threats to our economic
    and financial security. Our request sustains the Department's
    investment in counterterrorism and financial crime programs. This
    includes funding for implementing targeted economic sanctions against
    foreign threats to the United States and stopping the flow of money to
    terrorist organizations and their support networks.
                improving the efficiency of government services
        As we pursue these core priorities, we are working to deliver
    savings, program reductions, and improvements in the overall efficiency
    of government. As a result of these savings, our budget requests for
    fiscal year 2012 in five accounts are below the fiscal year 2010
    enacted levels, and in three accounts are below the fiscal year 2008
    enacted levels.
    Taxpayer Services and Tax Enforcement
        The customer service and enforcement programs at the IRS provide
    one of the best values in the Federal Government. Every $1 invested in
    IRS yields nearly $5 in increased revenue from noncompliant taxpayers.
    The targeted investments in this budget request are expected to produce
    more than $1.3 billion in additional annual revenue once fully
    implemented in fiscal year 2014.
        In fiscal year 2010, the IRS enforcement efforts brought in $57.6
    billion in additional tax revenues. This is a 53 percent increase in
    enforcement revenue since 2003 and a clear example that the investment
    in the IRS over the past few years is producing significant returns.
        Over the last decade there have been nearly 4,500 changes to the
    tax law, providing IRS with a challenging and constantly changing
    business environment. Despite this fact, service levels have increased
    and each year the IRS has delivered a successful filing season.
        The IRS continues to implement information programs and online
    applications to help taxpayers find and understand information. Use of
    the popular IRS Web tool, ``Where's My Refund.com'' has nearly tripled
    since 2006 to 67 million users. This modernization has not only helped
    improve IRS' daily interactions with taxpayers but has also provided
    the platform for significant productivity increases in IRS operations.
        Today, we receive nearly 100 million tax returns electronically
    each year. In the past these returns would have been opened, sorted,
    and transcribed manually. Last year, nearly 70 percent of individual
    tax returns were filed electronically compared to a mere 10 percent 15
    years ago. The efficiency savings have allowed us to consolidate 10
    submission processing sites into six and reduce the need for manual
    submission processing jobs. We will repurpose an additional processing
    site later this year.
        Our information technology modernization effort will decrease the
    time it takes to process and post-taxpayer information from 2 weeks to
    1 day, allowing the IRS to issue faster refunds and customer service
    representatives to answer taxpayer questions based on more up-to-date
    information.
    The Treasury's Electronic Payments Initiatives
        Modernizing processes and reducing waste are key components not
    only of the IRS portion of the Treasury's budget but also of our
    overall efforts to make sure the Department operates more efficiently
    and effectively.
        The Treasury now makes 82 percent of its payments electronically.
    We are taking action to further increase electronic payments. Effective
    May 2011, all newly enrolled Federal beneficiaries will receive
    payments electronically. By March 2013, we plan to move all existing
    beneficiaries to electronic payment.
        Productivity increases have already allowed the Financial
    Management Service to repurpose the Austin, Texas payment center as a
    debt collection center. Debt collection efforts last year alone totaled
    more than $4 billion, a 41 percent increase over fiscal year 2000.
        Automation of our debt financing functions has allowed the Bureau
    of Public Debt to decrease staffing by more than 20 percent over the
    last 5 years. Additionally, we transitioned to an entirely electronic
    process for issuing payroll savings bonds earlier this year.
        We are working to further automate debt financing.
        In early 2012, we will no longer issue over-the-counter paper
    savings bonds. Instead, we will focus on supporting electronic means to
    issue bonds to individuals, reducing the cost of staffing, postage,
    paper forms, and processing fees.
        Overall, these efforts to increase the Treasury's paperless
    transactions with the public are expected to produce more than $500
    million in cost savings and efficiencies over the next 5 years. These
    savings, which include reductions in personnel and facilities costs,
    will create a more efficient Department and allow us to increase the
    quality of the services we provide.
    Reducing Fraud and Improper Payments
        The Treasury will also expand upon and maintain the
    administration's VerifyPayment.gov portal to prevent ineligible
    recipients from receiving payments from the Federal Government. The
    Treasury will also continue to improve the management of the delinquent
    debt portfolio by implementing reforms that will increase collection of
    delinquent tax and nontax debt, including child support, by more than
    $5 billion over the next 10 years.
    Overall Improvements in Efficiency
        The Treasury will cut the number of data centers we currently
    maintain by one-third by 2015, resulting in significant dollar and
    energy consumption savings.
        These overall savings build on substantial improvements over the
    last 2 years.
        The Treasury's fiscal year 2009, fiscal year 2010, and fiscal year
    2011 budgets collectively included a total of more than $1 billion in
    savings and offsets. The Treasury's fiscal year 2012 budget alone
    identifies nearly $1 billion in savings, including $336 million in
    direct cost savings and efficiencies and $630 million in offsets
    primarily from assets seized as a result of violations of U.S.
    sanctions.
        These savings allow us to finance some very important investments.
    Any substantial cut to the IRS budget will hurt revenue collection and
    service to taxpayers, resulting in unanswered phone calls and letters.
    Cuts to the remaining Treasury responsibilities would weaken our
    ability to support reforms that are critical to economic recovery and
    repair of the financial system. Cuts to the Community Development
    Financial Institutions Fund program would limit our ability to attract
    private investment to communities hit hardest by the economic crisis.
        To carry out the Treasury's responsibilities, we need to be able to
    retain and support the dedicated public servants that make up the
    career staff of the Treasury and its Bureaus.
        These are a very talented group of people, working extremely hard
    in the face of the most challenging economic and financial problems in
    many decades. They have played a vital role in helping restore economic
    growth and a measure of financial stability.
        I look forward to working with you to ensure we continue to attract
    and retain a diverse, highly skilled workforce that delivers enhanced
    results for the American public.

        Senator Durbin. Thank you, Mr. Secretary.
        I've been notified by the staff that Senator Lautenberg has
    an opening statement. And I'll extend the same courtesy to
    Senator Kirk, if he would like to make one.

                    STATEMENT OF SENATOR FRANK R. LAUTENBERG

        Senator Lautenberg. Thanks, Mr. Chairman.
        Little could be more important than to view where it is
    that we are and where it is we're going.
        Welcome, Secretary Geithner.
        We learned, last week, that that the Nation's jobless rate
    hit a 2-year low in March, another sign that the economy is
    continuing its slow but steady recovery.
        And if I may add a personal note here, the company I ran
    before I came here is the company that releases the labor
    statistics that we see, a company called ADP. Yesterday, I'll
    take another moment of personal privilege--we said goodbye to
    my--to the founder of ADP--a partner, a humble man who worked
    very hard and created a company that today has 45,000
    employees. We did it from nothing--nothing to help us along
    except our intelligence and our muscle. And I'm not sure that I
    provided much of the intelligence.
        Right now, we've got to help Americans get back to work.
    That's got to be our top priority. And that's why I was pleased
    to see President Obama's budget call for critical investments
    we need to spark job creation. But, we can't make those
    investments if we don't start paying more attention to the
    revenue side in the Government's ledger. I was a CEO for many
    years, and I know that you can't run a company, or a country,
    without revenues. No matter how much you cut expenses, if you
    don't increase the revenues, you're headed for disaster.
        And that's why I voted, last year, to end the Bush tax cuts
    for the top 2 percent of wage earners. Windfalls for the
    wealthy don't create jobs, reduce the deficit, or help us
    invest in our future. And I urge President Obama to keep the
    commitment in his budget to let the Bush tax cuts for the
    wealthy expire at the end of 2012, because if the wealthiest
    among us don't pay their fair share, we'll be denying children
    and grandchildren the future that they deserve.
        The President's budget also funds the landmark Wall Street
    reforms that we passed last year. This new law will protect our
    economy from the kind of meltdown we suffered through in 2008.
    And that's why I'm deeply concerned that the Tea Party
    Republican plan to cut funding for reform is in place. If the
    Republicans--Tea Party Republicans succeed, Wall Street could
    return to its reckless ways, which will threaten our economic
    recovery and undermine our ability to create jobs.
        We also need to strengthen investment in our Nation's
    infrastructure by repairing crumbling roads and bridges and
    building much needed new projects like high-speed rail.
    Construction of a 21st century rail system will make it easier
    for people to get where they need to go, improve our
    environment, and spark job creation.
        President Obama has proposed creating an infrastructure
    bank to invest in products that will--projects that will get
    America moving. And I look forward to hearing your commentary,
    Mr. Secretary.
        I'm also eager to hear from the Secretary about how we can
    make taxes fairer, keep Wall Street in check, and accelerate
    our economic recovery.
        Senator Lautenberg. And I thank you, Mr. Chairman.
        Senator Durbin. Thanks, Senator Lautenberg.
        Senator Kirk.
        Senator Kirk. No opening statement, thank you.
        Senator Durbin. Thanks a lot, Senator Kirk.

                 FINANCIAL MANAGEMENT DURING BUDGET UNCERTAINTY

        Mr. Secretary, before we get to important policy and budget
    questions, I have to address the issue of crisis management. We
    have been lurching from short-term continuing resolution to
    short-term continuing resolution. And I would like to ask you
    if you would tell me what impact this has had on the management
    of your agency and operations.
        Second, we are now starting to have very active discussions
    among Senators about what to do if the Government shuts down
    after Friday--how many staff will still be around, whether
    anyone will answer the phones, whether there will be a skeletal
    staff or more. And I'd like to know what your preparations have
    been at the Department of the Treasury, and what services might
    be affected, from your Department, when it comes to that.
        The final question is larger than the first two, and that
    is: Around the corner is another looming crisis, which you
    spoke to yesterday, and that is the extension of the debt
    ceiling. Some Senators have already come to the floor and said,
    flat out, ``We don't care. We're not going to vote for an
    extension of the debt ceiling.'' Please tell us what the impact
    of failing to extend the debt ceiling would be on the American
    economy.
        Three very simple questions.
        Secretary Geithner. Mr. Chairman, thank you. Very
    consequential questions.
        The Office of Management and Budget (OMB) has been
    coordinating the work of the executive branch in preparing for
    a shutdown. I think the Director of the Office of Management
    and Budget, Jack Lew, sent to the agencies, yesterday, a set of
    detailed guidance for how they would manage through, what
    critical services they would have to retain, would be
    permitted, under the law, to retain, and which they could no
    longer function with. I just want to emphasize that, confidence
    is very important to economic recoveries. There are a lot of
    things happening in the world today that carry some risk to the
    global economy and financial system. It is very important that
    we in Washington demonstrate that we are going to be doing
    things that are going to help reinforce confidence, support
    recovery. And part of that requires making sure that Government
    can carry out its critical functions. And those functions would
    be impaired during a shutdown.
        We would be happy to brief your staff in more detail on
    exactly what would happen for the critical functions we're
    responsible for at the Treasury, but let me just say, they're
    very material.
        Now, you're right, of course, to highlight the fact that to
    say it again, if we force the Government to live week by week
    now, more than 6 months into the fiscal year, we risk
    undermining the recovery now underway. And I think our first
    obligation to the American people, given the trauma still
    caused by this crisis and the depth of the damage we still
    face, is to make sure we're doing everything we can to ensure
    that we're reinforcing business confidence, helping get more
    Americans back to work, repairing the damage caused by the
    crisis--a shutdown will get in the way of that, of course.
        Now, you're right to say that, in the next several weeks,
    the Congress will run out of room. Under the debt limit, it
    will be forced to raise the basic debt limit. You asked the
    question, ``What happens if we do not? If the Congress does not
    raise the debt limit?'' As I said in my recent letters, and as
    all my predecessors have said, the consequences of that would
    be catastrophic to the United States. Default by the United
    States would precipitate a crisis worse than the one we just
    went through. I think it would make the crisis we went through
    look modest in comparison. It would force us, of course, to cut
    payments to military, cut critical payments to our seniors. And
    it would be a reckless, irresponsible act of this country. I
    find it inconceivable that the Congress would not act to
    increase the limit.
        I welcome that all the leaders of both parties, in both
    houses of Congress, have reaffirmed the importance of making
    sure that this country, the United States of America, will meet
    its obligations. Of course, that requires the Congress to act
    in a timely manner to increase the limit.
        If we take no additional actions, we face that--we run out
    of room on May 16. There are a series of measures my
    predecessors have used in the past, that the Congress has
    authorized, that would give the Congress a little bit more
    time, but those measures don't buy us nearly as much time as
    they did in the past, because our debt and deficits are so
    large now. So, they will buy us an additional few weeks if the
    Congress doesn't act.
        Now, of course, even resorting to those measures does
    create some risk of adding to uncertainty in the markets. So,
    you don't--you'd rather us not do that. But, we'll do
    everything we can to make sure that we meet our obligations,
    and, of course, encourage the Congress to act in a timely
    manner.

                     DEBT CEILING AND ECONOMIC CONSEQUENCES

        Senator Durbin. Let me ask you this question, Mr.
    Secretary. The United States Dollar is viewed as the most
    credible global currency, and if we default and don't extend
    our debt ceiling, what impact could this have on the reputation
    of the dollar and our economy?
        Secretary Geithner. Again, it would be catastrophic. If you
    call into question the willingness of the Government of the
    United States to meet its obligations, you will shake the basic
    foundations of the entire global financial system. It is
    inconceivable that America would do that. And I'm--of course,
    I'm totally confident that the Congress will act to avoid that.
        But, you know, again, to think about it in a direct sense,
    what it does is, it will raise, dramatically, the borrowing
    cost, permanently, for all Americans. Every business, for a
    very long period of time, would raise a much higher cost of
    borrowing. Every family would raise a higher cost of borrowing.
    Unemployment would rise dramatically. Thousands, if not
    hundreds of thousands, of businesses would fail. And, of
    course, you would shake the confidence of the world in U.S.
    financial assets and treasuries. It would be a deeply
    irresponsible act. Again, inconceivable.
        Senator Durbin. Thank you.
        Senator Moran.
        Senator Moran. Mr. Chairman, thank you.
        Mr. Secretary, I appreciate your exhortation about the
    necessity of raising the debt ceiling, and the consequences
    that you describe would occur. I also would welcome you and the
    administration raising the same kind of concerns in describing
    the scenario that will occur if we do not get our debt under
    control. There are consequences to the value of the dollar, to
    the standard of living, to inflation. And I very much, again,
    would encourage the administration to join with the Congress--
    Republicans and Democrats--to find a path toward a long,
    sustainable reduction in our national debt. There are bad
    consequences--you certainly described one scenario of events,
    but there's another scenario that will come if we do not
    respond appropriately, responsibly, to the ever increasing
    debt.

                   TAX REFORM AND CFPB FUNDING AND STRUCTURE

        One of the things we can do, in addition to cutting
    spending, is to get a tax code in place that is fair, that
    treats American business and individual taxpayers in a way that
    makes sense in a global economy and, again, would--I'd be
    interested in hearing what the Treasury Department is doing in
    regard to the so called grand plan for tax reform, or major
    modifications in our tax code.
        I'm learning from Senator Durbin to ask all my questions at
    the very beginning, so that the clock is on your time, not
    mine.
        And finally, a much more specific one. I indicated, in my
    opening statement, that I'm introducing legislation today in
    regard to the board of the CFPB. And I'd like your view as to
    the appropriations process. You're funding that--the Federal
    Reserve is funding that today. I'd like to see greater
    oversight by the Congress in regard to the appropriation
    process--a five-person commission or board, as compared to an
    individual. And then, perhaps most importantly, can you tell
    what the administration's timeline is for submitting a
    nomination to the Senate for the person to head that bureau?
        Secretary Geithner. Excellent questions. Thank you for
    raising them.
        Of course, you're absolutely right that it is critically
    important, as I said in my opening statement, that the Congress
    come together, on a bipartisan basis, and lock in a set of
    multiyear reforms that put us back on a path to living within
    our means as a country. That's very important to future
    economic growth. There is no alternative to doing that. It's
    very important. If we don't do that, you're right, you would
    put at risk future economic growth. And we need to come
    together. We can't keep putting it off indefinitely.
        You have before you a--not just a process under way by a
    group of bipartisan Senators, but looking at a comprehensive
    plan that the fiscal commission which Senator Durbin served on,
    which is a very comprehensive, very balanced, reasonable
    starting point for discussion. You know, this is not beyond our
    capacity, as a country, to solve. In fact, if you look at how
    the world views the United States today, the world investors
    are very confident we're going to solve this problem. But we
    have to earn that confidence. We have to justify that
    confidence. And that requires us acting. And you're right to
    emphasize it. I completely agree with you.
        You asked about tax reform. I think it's inevitable that
    the Congress and the administration come together and reform,
    comprehensively, the U.S. tax code, not just for individuals,
    but for corporations. You have a very compelling model for
    doing that, in the Commission's proposal--a lot of merits in
    that basic approach, which is to broaden the base and use some
    of the savings from broadening the base to lower rates and
    lower future deficits. We are--as I said in my opening
    statement, we are designing a corporate tax reform that's
    comprehensive, that would lower the statutory corporate rate
    very substantially, and pay for that by reducing or eliminating
    a set of special preferences for individual industries and
    activities of the United States. We think that's absolutely
    necessary to improve incentives for investment in the United
    States. And we're hopeful that we're going to be able to work
    with the Congress on doing that, perhaps ahead of the
    comprehensive reform of the individual code, which is likely to
    come--I think it's going to have to come in the next few years.
        And again, that's very important, because we want to do
    everything we can to make it more likely that American
    companies build their next plant in the United States and that
    foreign companies build their next plant here, too. And tax
    incentives are important to that.
        Senator Moran. Mr. Secretary, in addition to the National
    Commission on Fiscal Responsibility and Reform, does the
    administration--is there a plan in the works on corporate tax?
        Secretary Geithner. Yes. We have been working on a
    comprehensive proposal to help get the process in the Congress
    moving. And we've been consulting closely with your colleagues
    on the tax-writing committees about how to design that, and
    with the business community. And I'm actually quite optimistic
    we're going to be able to start that process with a very strong
    pro-investment, pro-growth, pro-competitiveness proposal.
        Now, it, of course, is going to have to be revenue neutral,
    given the broader fiscal challenges we face, but I think we can
    do that.
        Now, you raised a set of important questions about the
    CFPB. I can't answer your last question, which is, ``How soon
    are we going to nominate?'' But, of course, it's very important
    that we nominate and confirm a director, because the full
    authorities the Congress gave this bureau do not come into
    place until we have a confirmed director. Some happen in
    advance of a confirmed director, but not all. And so,
    obviously, we'd like to do that. We're consulting with the
    Congress. We want to nominate somebody who can be confirmed.
    That is why it's taking us a little bit of time. As you know,
    it's been a challenge for us to find--to confirm a number of
    positions for important financial responsibilities.
        You said you were going to propose legislation to establish
    a different set of checks and balances on the bureau. And, of
    course, I understand that motivation. But, I believe, as you
    would suspect, that the Congress, having considered a range of
    alternative models, came up with a very good model that
    combines strong authority and independence with a set of very
    powerful checks and balances. The most powerful of those in
    this structure are that the decisions of this bureau are
    subject to review and approval by the Council of Financial
    Supervisors and Regulators that the Congress established. That
    creates, in some ways, a stronger set of checks and balances
    than I think exists for many other financial regulators,
    independent or not; and I think the Congress got that balance
    right.
        Again, of course, if you look at what happened in our
    country in this crisis, you saw really appalling, unforgivable
    failures in consumer protection. It is very important that we
    fix that. And I think the Congress, you know, thinking about it
    for a long time, a lot of difficult debates, came up with a
    good balance.
        Senator Moran. If I could follow up, Mr. Chairman? Thank
    you.
        Can you think of any downside to not having a director
    confirmed by the operation date in July? Is that--
        Secretary Geithner. Absolutely. You know, what happens at
    what we call the transfer date, which is a date where the
    authority that exists among existing Federal agencies for
    consumer protection is transferred to this new bureau. You
    know, that responsibility is shared among, I think, seven
    different Federal agencies. So, we're going to centralize that,
    consolidate that. But, there are other authorities to write
    rules that only take effect when there's a confirmed director.
        And now let me tell you about the consequences of that
    delay. I think one of the biggest problems we had in our system
    was, we held banks to a set of standards, no similar standards
    established for entities that provide consumer finance, lent to
    individuals without protection. So, what happened over time is,
    a lot of that basic business of consumer finance moved outside
    the banking system to nonbank financial institutions that were
    not supervised adequately. And that created, of course,
    appalling vulnerability to fraud and predation for individuals,
    but it also created this huge unfairness for banks-- for
    community banks, as well. So, one of the most important things
    the Congress did is to say, ``We're going to establish a level
    playing field across banks and nonbanks so that the business
    can't just shift to where there's no regulation. And if we
    delay, we starve funding or delay full powers for the agency,
    then you're going to be putting banks at a disadvantage again.
    And they're going to face again the possibility of having that
    business competed away by entities that aren't subject to
    oversight and supervision. So, that would be an unfortunate
    consequence of delay.
        Senator Durbin. Senator Lautenberg.
        Senator Lautenberg. Thanks, Mr. Chairman.

                 ECONOMIC CONSEQUENCES OF A GOVERNMENT SHUTDOWN

        Mr. Secretary, might a consequence of a shutdown result in
    an inflationary reaction?
        Secretary Geithner. I think that's an excellent question.
    And I don't think I would frame that as the most significant
    risk. I think the most significant risk is that you leave
    entities that are doing vital things, not just supporting
    Americans in combat, not just making payments to seniors,
    providing benefit checks that Americans depend on for their
    living, processing tax returns--you put those things at risk.
    The risk is, for a long period of time, you create uncertainty,
    and that could slow momentum of recovery. So, I would think--
    not about a risk that we accelerate inflation so much as what
    we do is, we take a little bit of the momentum, the wind, out
    of the recovery, and therefore slow the pace of getting more
    Americans back to work.

                                BUSH'S TAX CUTS

        Senator Lautenberg. House Republicans claim that cutting
    programs like Head Start and medical research is going to solve
    the deficit problem. But, they refuse to look at the revenue
    side of things. I mentioned that earlier. And how important is
    it to, for instance, let the Bush tax cuts for the wealthy
    expire at the end of next year to help to eliminate the budget
    deficit?
        Secretary Geithner. It's critically important. I'll give
    you an example of how to--if the Congress extends those tax
    cuts that go to 2 percent of the most fortunate Americans in
    the country, we have to go borrow $1 trillion over 10 years.
    It's those, plus the estate tax exemptions. We cannot afford to
    do that. It is not a responsible act of Government, of asking
    my successors to go out and borrow $1 trillion over 10 years to
    finance tax cuts for the richest 2 percent of Americans. We
    cannot afford it. There's no credible case for doing it.
        And you cannot restore fiscal sustainability--you cannot
    restore a modicum of balance to our fiscal position and still
    preserve our capacity to invest in things critical to U.S.
    economic growth and critical to our commitments to our seniors
    if you sustain those tax cuts that we cannot afford.

                         FUNDING FOR WALL STREET REFORM

        Senator Lautenberg. The administration's budget calls for
    increased funding for agencies implementing the Wall Street
    reform law. House Republicans failed in their attempts to block
    this historic law. So, they proposed, instead, to cut the
    funding for these agencies. In your capacity--you're head of
    the Financial Stability Oversight Council--what effect might
    these proposed cuts have on Wall Street reforms and our ability
    to prevent another financial crisis?
        Secretary Geithner. Well, I think you said it right.
    Those--the cuts are designed to starve those agencies of the
    ability--deny them the ability to enforce a set of basic,
    sensible protections for consumers and investors. And if they
    were passed, they will have that effect.
        I'm confident they won't pass, because we think it would be
    irresponsible to pass them. But, if they did pass--become law--
    they would have that effect of depriving us of the ability to
    fix what we got so devastatingly wrong, at enormous cost to the
    American people, a financial crisis, you know, without recent
    precedent, enormous damage to the country. And so, I think it's
    very important the Congress equip the executive branch and the
    regulatory agencies with the resources and the people we need
    to enforce those basic, sensible rules of the game.

                               SANCTIONS ON LIBYA

        Senator Lautenberg. Mr. Secretary, yesterday you lifted the
    sanctions against former Libyan Foreign Minister Moussa Koussa,
    a man who's been linked to numerous terrorist attacks,
    including Pan Am 103, which killed 270 people, 189 of whom were
    Americans. In your consultation with Secretary Clinton
    regarding lifting these sanctions, did you discuss what other
    levers might be available to be sure that he's held accountable
    for these crimes?
        Secretary Geithner. I know my colleagues in the national
    security community have discussed that, and I'd be happy to
    talk to them, pass on your concern and question, and ask them
    to come talk to you about how we can be responsive to your
    concern.

                               DEFICIT REDUCTION

        Senator Lautenberg. What would the estimate be of the
    revenues needed to help us stabilize things and continue
    looking to improvements in our economy?
        Secretary Geithner. Well, the central question we face is
    how to get the deficits down to a level where we put our
    national debt, as a share of the economy, on a declining path.
    You have to first stabilize it at an acceptable level, and then
    you have to start to reduce it. And that requires we get our
    fiscal deficits down to a level below 3 percent of the gross
    domestic product. That's a level at which our revenues and our
    commitments, apart from interest, are in balance.
        Now, to do that--we proposed, in our budget, a way to do
    that. You have, in the Commission proposal, a more ambitious
    way to do that. But, that provides--both those examples provide
    a package a balanced package of tax reforms and reductions in
    spending and our commitments that would achieve that measure of
    balance without putting at risk future economic growth, without
    causing material damage to the economy. Those are things we
    can--changes we can afford to make, changes that we can accept.
    And both those examples give you a measure of what you want to
    do to make sure you have a balanced package.
        Again, the challenge is not to just reduce the deficit. The
    challenge is to do it in a way that doesn't hurt future
    economic growth and hurt investment in the United States, is
    fair to the American people--judged as fair as--the American
    people. And that requires you do it in a balanced,
    comprehensive way. I think it's within our capacity to do, as a
    Nation. I think this is something we should make sure we let
    Americans know, because they're uncertain about this, that this
    is something we can do at acceptable costs, with time for
    people to adjust.
        Senator Lautenberg. Well said, Mr. Secretary. Thank you.
        Senator Durbin. Senator Kirk.
        Senator Kirk. Thank you.

                 FUNDING FOR TREASURY'S INTERNATIONAL PROGRAMS

        I want to turn to your budget request. You requested a 4
    percent increase. And a couple of accounts stood out. There's a
    request for $3.4 billion for the Treasury international
    programs, which was a 58 percent increase more than fiscal year
    2011. And then food security accounts was a 1,027 percent
    increase request in your budget. And debt relief was a 336
    percent increase in your budget. Can you review, quickly?
        Secretary Geithner. Absolutely. You know, usually I testify
    separately on the international piece of our budget. The
    Treasury piece of the--what's called the foreign assistance
    budget is about 5 percent of the total foreign assistance
    budget. And our piece, the piece we're responsible for, is for
    funding the institutions, like the World Bank, the
    international financial institutions. And in those
    institutions, we get enormous leverage for every $1 of taxpayer
    resources.
        The specific request you refer to includes a variety of
    commitments that the Government of the United States made in
    the past, under Republican and Democratic administrations, and
    a set of new commitments targeted in areas where we think
    there's the highest return to our basic national security and
    economic interests.
        I'll give you an example. In food security, what we've
    proposed to do is to help seed a multilateral fund to help
    support improvements in agricultural productivity and
    investment in developing countries, because, of course, the
    enormous challenges of poverty in those countries. But, that's
    also an example where there's a very high return to American
    technology and American innovation, because we're the most
    productive farmers in the world.
        I'd be happy to talk in more detail to you and your staff
    about that. But, it's worth noting, we're 5 percent of the
    foreign assistance budget, but our resources in that 5 percent
    leverage multiple dollars, both by bringing other people to the
    table and borrowing. And so, the total resources that 5 percent
    supports is more than one-and-a-half times the entire 150
    account budget.
        So, as we figure out how we reduce spending and reduce our
    deficits--and we're going to have to reduce spending--we want
    to make sure we're preserving things where we have the biggest
    bang for the buck, the biggest improvement, the biggest return
    on the marginal dollar taxpayer resources. And that's what our
    request provides.
        Senator Kirk. I'm worried--we have appropriated money that
    apparently is going directly to the Islamic Republic of Iran
    under your administration, meaning that the Treasury Department
    manages our relationship with the International Bank for
    Reconstruction and Development (IBRD), International Finance
    Corporation (IFC), and Multilateral Investment Guarantee Agency
    (MIGA). The IBRD has a $344 million unexpended balance to Iran.
    Since we own 16.8 percent of the bank, that's 58 million United
    States dollars that would be provided to Iran. The IFC--$17
    million, since we own 24 percent. That's 4 million U.S. dollars
    from the taxpayer. The MIGA are going to provide $127 million
    to Iran. We own 18.5 percent of that. It's a total of $85
    million, direct from the U.S. taxpayer. And I understand these
    payments are made directly to the Finance Ministry of the
    Islamic Republic of Iran. Is that about right?
        Secretary Geithner. Senator, you and I are in the same
    exact place in this, we oppose lending by the World Bank and
    its entities to Iran. We have opposed them for a long period of
    time. And the last loans that were approved by the World Bank
    board were approved in 2005.
        Senator Kirk. I guess what I'm talking about is, you
    haven't cut these checks yet, but you're about to.
        Secretary Geithner. Well, I'm not sure which checks you're
    referring to. Again, there----
        Senator Kirk. These are 2005 loans----
        Secretary Geithner. Yes, 2005 loans. That's the last time
    the World Bank approved a loan. We opposed----
        Senator Kirk. Yes.
        Secretary Geithner [continuing]. That loan then----
        Senator Kirk. No, but I what I'm saying is----
        Secretary Geithner [continuing]. And fought against it over
    that period of time, and, of course, as you know, working very,
    very hard to dramatically tighten the financial sanctions on
    Iran now----
        Senator Kirk. Yes.
        Secretary Geithner [continuing]. With substantial success.
        Senator Kirk. Let me just say, you do not have substantial
    success. I have written you a classified annex, and I hope you
    read it, a very--before you testify again, on this subject, I
    hope you read that very carefully.
        Secretary Geithner. Of course I would. And again, I'd be
    happy--I know that you--I know you care a lot about these
    issues, as we do. And I'd be happy to talk to you in more
    detail about it. But, I will say again that the financial
    sanctions programs that my colleagues have helped us design, in
    cooperation with the national security community, have resulted
    in a dramatic, incredibly powerful tightening of the basic
    economic sanctions on the Government of Iran.
        Senator Kirk. With all----
        Secretary Geithner. It's very important we do that.
        Senator Kirk. With all due respect----
        Secretary Geithner [continuing]. And we will continue----
        Senator Kirk. I urge you------
        Secretary Geithner [continuing]. To look for ways to
    tighten it further.
        Senator Kirk. Before you testify before the Congress again
    and make a statement like that, I would absolutely urge you to
    review the record.
        Secretary Geithner. And again--and we're happy to work with
    you and your colleagues in ways to go further. And we--of
    course, this job requires a relentless focus, because, when we
    tighten something here, what happens is, over time, unless you
    stay on it, it--the stuff will shift gradually; people get
    around it. So, it requires relentless focus. Happy to talk to
    you in more detail about it.

                        FEDERAL DEBT AND ECONOMIC CRISIS

        Senator Kirk. In March, the U.S. Government raised a net of
    $128 billion and it spent a net of $1.05 trillion, meaning your
    spending-to-raising ratio was--you spent $8 for every $1 that
    you raised. You covered it by borrowing $786 billion and
    reducing your cash balance $72 billion, to an ending balance,
    for the U.S. Government, of $118 billion in the bank. Is that
    your estimate of how your March went?
        Secretary Geithner. Well, I'd have to check those numbers.
    But, keep going. Go ahead. I'll be happy to----
        Senator Kirk. So, Erskine Bowles, yesterday, testified
    before the House that we are facing the most predictable
    economic crisis in history. Would you agree with him?
        Secretary Geithner. I agree that our long-term fiscal
    challenges are an imperative for the country to solve, as I
    said before, in response to Senator Moran's questions. And I
    agree it's very important we do it. Of course, we have lots of
    other challenges, too. Our challenge is how to--it's to do that
    in a way that doesn't hurt the recovery, hurt the economy, hurt
    our long-term strength and competitiveness.
        Senator Kirk. I'll ask the last question. If you were the
    Chinese, would you lend us another trillion?
        Secretary Geithner. Of course. Let me just repeat something
    I said before. The world still views the United States and the
    American political system as up to the challenge of delivering
    reforms that make our economy stronger and our fiscal position
    more sustainable. If you look at what we pay to borrow today,
    there's still enormous confidence around the world in the
    capacity of this political system, people in Washington, coming
    together and solving these problems, because we've always done
    it in the past. But, we have to earn that confidence every day.
    And that's why these efforts underway, including the ones that
    Senator Durbin was part of in the Fiscal Commission, are so
    important. And it's important, again, that the Congress find a
    way to come together and lock in comprehensive restraints that
    reduce those long-term deficits. It's completely within our
    capacity to do, and we have to make sure we justify that
    confidence that you see in markets every day now.
        Senator Kirk. Thank you, Mr. Chairman.
        Senator Durbin. Thank you, Senator.

                               WALL STREET REFORM

        Mr. Secretary, before joining the administration, you were
    in New York, at the Federal Reserve, and in the eye of the
    storm as this recession came upon us. You witnessed, and
    participated in, discussions that led to an effort to save
    financial institutions from ruin. And I think, by most
    standards, the fact that the money has been repaid to our
    Government--the TARP money--with interest, in most instances,
    is an indication of recovery among those financial
    institutions.
        The purpose of Wall Street reform was to make certain we
    never had to walk that road again. We had to make sure that we
    put in place oversight and regulation so that the excesses
    which led to our recession were not repeated.
        Since passage of that legislation, there has been a steady
    effort by Wall Street to undo that Wall Street reform. We've
    seen it in many aspects. I'm not going to raise the issue, but
    I'm battling an issue over interchange fees, you may have heard
    of. And clearly, when it comes to the consumer financial
    responsibility effort, there is an effort to slow down that
    implementation, or stop it.
        As you step back and look at the banking industry, from the
    darkest days, beginning this recession, until today, I see
    profit reports which suggest that most are doing quite well. Is
    there any indication that you can point to of weakness in our
    financial institutions that has been brought on by too much
    Government regulation and oversight?
        Secretary Geithner. Let me say a few things in response to
    that. I think the U.S. financial system, as a whole, is in a
    dramatically stronger position today than it was in the years
    running up to the crisis, not just from the depths of the
    crisis, but relative to where it was before the crisis. There's
    much more capital in the banking system, much less leverage.
    The weakest parts of the system have been washed away by the
    crisis, appropriately so. And I think what we have left is much
    stronger.
        The challenges we face in the financial system today are--
    as Senator Moran referred to, is, community banks across the
    country, who got themselves too exposed to commercial real
    estate are still facing a lot of challenges. And that's hurting
    their small business customers. And, as you know, the housing
    finance market is still deeply damaged, really at the early
    stage of--just the beginning of repairing that basic challenge.
    So, we've got a lot of challenge to go.
        But, I believe these reforms are absolutely essential to
    the basic health of the American private sector, are absolutely
    essential to credibility of the American financial system,
    globally, when we ask people to invest in the United States,
    absolutely essential to the ability of this financial system to
    take the savings of Americans and channel them to people that
    have an idea and want to build a growing company. And we have
    to make sure that we meet the basic challenge of the
    legislation in designing sensible rules. They have to have a
    balance. You know, they have to preserve competition, some
    measure of efficiency, a loss of dynamism, innovation. But, we
    have to do a dramatically better job of protecting the economy,
    protecting the innocent, protecting investors and consumers
    from the kind of abuses we felt.
        And I think our biggest challenges now are to make sure
    those reforms get designed well, they're allowed to take
    effect, they're administered by people who have the resources
    and the independence and the authority to carry out those
    responsibilities, not subject to political influence. And we're
    at the early stage of that process of implementation.

                               FORECLOSURE CRISIS

        Senator Durbin. Mr. Secretary, yesterday I went to an
    opening of a housing project in Lawndale, which is on the west
    side of Chicago. Coincidentally, it was the same location where
    Dr. Martin Luther King stayed when he lived in Chicago for a
    short period of time. And they were quite proud of the fact
    that they have 45 units. The CDFI had a lot to do with it. And
    as I went to this ribbon cutting, I drove through the
    neighborhood. And I will tell you that virtually every third
    home was boarded up with plywood, indicating it was in
    foreclosure and not currently occupied. It strikes me that this
    is still an unresolved issue--and you've alluded to it--about
    the value of real estate in America and our housing crisis.
        Can we really expect a solid recovery of this economy
    unless or until we mark-to-market and understand what the true
    value of real estate is? With so many Americans facing the
    prospect of being under water in their own personal debt on
    their homes, are we delaying the inevitable of facing a
    resolution of this crisis?
        Secretary Geithner. I don't think so. It's important that
    we not do that. I think you're absolutely right to remind
    everybody that the housing market in the United States is still
    in crisis. It's not just in California, Florida, Nevada, and
    Arizona, the states--most affected by the rise in prices and
    the collapse in prices of construction. But, it's in cities
    across the country. And there are still millions more Americans
    at risk of losing their homes.
        There are two really important things that we have to do in
    the near term to reduce--to address that problem and help
    repair it. One is, we have to get the economy stronger. Really
    the only way, and the most powerful way, to make sure that you
    bring the market back to a reasonable level, protect the value
    of people's homes, reduce the risk of foreclosure, is to get
    more Americans back to work, make sure incomes are growing.
    Overwhelmingly, that's going to dominate the outcomes.
        But, it's also very important that we continue to make sure
    that we use all the tools we have to make sure that servicers
    and banks are giving people a chance to stay in their homes if
    they can afford to do that. Now, the programs we have, have
    reached millions of Americans, but there's millions more at
    risk. And we want to make sure we do everything we can to make
    sure that, again, people who have--who, given a chance, can
    afford to stay in their home, have that basic chance. Doing
    those two things are important.
        But, again, the most important thing is to make sure
    everything we do is motivated today by the challenge of getting
    the economy stronger, more Americans back to work. That's the
    best thing we can do for those communities still caught up in
    all the trauma. And it is going to take several more years,
    under the best of circumstances, to heal that pain, still.
        Senator Durbin. I'm over time, but I'm just going to say,
    very briefly--2 years ago, I addressed the bankruptcy code as a
    way to have some reckoning in this process so that banks would
    know, if they were about to foreclose, or pushed forward
    foreclosure, leading to bankruptcy, that, ultimately, there
    would be a bankruptcy judge who would have the power to change
    the terms of the mortgage and keep the people in their homes.
    It was fought by the financial institutions. It wasn't
    enthusiastically supported by the administration. And it
    failed. And here we are today in a situation where I cannot
    reconcile, in my mind, how a bank believes that foreclosing on
    a home, boarding it up, letting the weeds grow in the front
    yard and the vandals come in and rip out all the copper
    plumbing until it reaches the point that it becomes a burned
    out, hollow building and has to be torn down is in the best
    interest of the banks, let alone the country and the
    neighborhood. That, to me, is what's happening over and over
    again. I lived through this in my hometown of East St. Louis,
    Illinois, and it looks like Dresden, after the bombing, for all
    the vacant land that's there. And I'm seeing it happen in
    Chicago. I'm seeing it happen in King County, Illinois. And I
    see no end in sight.
        I know we've tried. I understand what you're saying, ``the
    overall economy is part of it,'' but I don't believe we have
    addressed the responsibility of the financial institutions in
    this situation.
        Secretary Geithner. I--well, I just want to associate
    myself with something very important in this context. You've
    said it for a long time--is that the servicers have done a
    really terrible job of helping fix and repair and heal and help
    people through a mess that they helped contribute to. And they
    are not putting enough resources in this effort. They are not
    doing a good enough job of helping homeowners navigate through
    a very complicated, difficult process. They have to do a better
    job. And, as you know, we're involved in a series of efforts
    that try to bring more force to a more rapid resolution of
    those problems.
        Senator Durbin. I would say to you, in closing, Mr.
    Secretary, on this subject, we have given them a lot of
    carrots. It's time to find a stick.
        Senator Moran.
        Senator Moran. Mr. Chairman, thank you.

                              BANKING REGULATIONS

        Let me follow up on a topic that--a path you started down.
        When Senator Durbin describes that neighborhood with the
    boarded up houses, it brings me back to the value of community
    banking, in which I--just my commonsense human nature tells me
    there is a different reaction--if you're the banker who is
    lending to the house down the street, down the road, you have a
    lot of care and compassion for your community, and you drive by
    that house every day; you're going to have a response of trying
    to figure out, ``How do we get this house back in some owner's
    hands?'' And I--again, it gives me the opportunity to reiterate
    what I said in my opening statement, that--and the reason
    this--the real estate aspect of this is so prevalent in my mind
    is, I've had numerous bankers, a half a dozen, tell me that
    with new regulations, they no longer are making home loans. I
    think this is a terrible, sad circumstance, in our country,
    when your hometown banker says, ``It's no longer worth the
    regulatory cost, the fingerprinting of my employees, to make a
    loan to somebody who lives in our town.''
        In Kansas and much of Illinois, we have large rural
    communities--and we have large areas of rural communities in
    which our bankers know their community very well. And the idea
    that you can't go to your hometown banker and get a home loan
    is trouble--is hugely troublesome to me.
        Also, a conversation I had with one of our regional
    bankers, who was telling me, for the first time in their bank's
    history, instead of the bank--the regional bank calling a
    community bank, saying, ``We're interested in buying your
    bank,'' it's now the community bankers who are calling the
    regional banks, saying, ``I can't afford this anymore.'' The
    regulatory costs have to spread among such a large group of
    borrowers--a larger asset base, that we're seeing, in my view,
    the demise of something that is very important to the life of a
    community; that's the local financial institution. And while,
    if that occurs as a result of market forces, that's one thing
    to me. But, if that occurs because we have an over-regulated
    lack-of-commonsense regulatory scheme, we ought to be able to
    fix that problem.
        Secretary Geithner. I agree with you. And let me just
    associate myself with your central point. One of the great
    strengths of this financial system is that we have not just
    some of the largest, strongest, most innovative global
    financial companies, but we have 8,000 small community banks
    that provide a level of diversity, responsiveness, customer
    service care that is a huge asset for the country. And we want
    to make sure we do everything we can to sustain it.
        And I do not believe that is at risk in any meaningful
    sense. In fact, the financial reforms that the Congress passed
    went the extra mile to make sure that institutions that were
    not part of the problem, did not cause the problem, were not
    subject to a greater burden from these reforms. They're largely
    protected from the additional regulations, which are really
    designed to get at the largest, most risky institutions and
    risky practices.
        Now, what--most of what you're seeing happen in the
    community banks today is the result of the fact that a number
    of them--not all of them--got themselves too exposed to
    commercial real estate and risk. And what you saw--what you've
    seen is, bank examiners, who got a little bit caught by excess
    in parts of the country, as they do in every crisis, they're
    over-correcting now. And the burden you hear banks across the
    country express concern about is the concern that examiners now
    are becoming too aggressive and making it harder for them to do
    things that are economically sensible loans to viable
    customers. And that's a very important thing to try to
    counterbalance and resist.
        The Chairman of the Federal Reserve, the Chairman of the
    Federal Deposit Insurance Corporation, our bank supervisors,
    are aware of this problem and they have been working to try to
    mitigate it. They're independent of the Treasury. I should say,
    I can't control what they do in this context. But, I know
    they're concerned about it, too.
        But, I hear what you hear, too, which is, across the
    country, community banks still say that ``We're getting a
    little bit too much heat from our examiners at a time when we
    want to increase lending.'' And we want to make sure we can
    help counteract that.
        Now, the Congress did pass a very well-designed set of
    programs to help banks--community banks--get access to capital
    to help support lending and help give more resources to State
    small business credit programs across the country, which we're
    doing. And that will help a little bit, too, because not all
    these banks can go out and raise capital now, even the ones
    that have viable businesses. And so, we think that's a good,
    sensible response.
        But, I do agree with your concern. And I am, personally,
    completely committed to make sure that we preserve that great
    strength of diversity of a banking system that has thousands
    and thousands of small community banks operating on Main
    Streets, trying to do a better job and meet the needs of their
    customers.
        Senator Moran. Well, I'm never quite certain as to
    whether--how much of the problem is additional regulation, how
    much of it is additional enforcement or--and, in part, is just
    the uncertainty of the enforcement: What is coming next?
        Secretary Geithner. Yes.
        Senator Moran. So, there's a reluctance to lend money. And
    I have had this conversation with you previously, and with
    Chairman Bernanke, and with Sheila Bair. We've been down the
    line. Everybody is sympathetic, and yet the problem continues.
    And I would say--and I'm not necessarily here advocating for my
    bankers; I'm here advocating for what I think is important to
    the economy in putting people to work is banks that can make
    loans. In communities across our country, across Kansas, access
    to credit is a determining factor as to whether or not you're
    going to grow or expand your business. And we have a reluctance
    on the part of bankers, because of the regulatory burden or
    uncertainty or enforcement that is making it very difficult for
    those things to occur. And I don't know whether you would have
    somebody at--again, the OTC is firewalled----
        Secretary Geithner. Yes.
        Senator Moran.--I guess it's part of the Treasury, but
    not--you don't have direct. But, it would be great to have
    somebody who would ultimately sit down with community bankers
    and their customers and say--because I get this, as you would--
    as I'm doing to you, people do this to me--``Fight bureaucracy.
    Fight paperwork. Get rid of the unnecessary burden.'' It's very
    hard to fight the word ``bureaucracy.'' But, if we can have the
    specific examples of the rules and regulations or the
    enforcement action that make no sense, we can address those
    individually, as compared to the big picture of, you know,
    fighting the bureaucrat.
        So, if you have suggestions of who I could get in a room
    with bankers and their customers, to see if there are the
    individual items of regulation, or the regulators that are not
    following the protocols of the exam process, so we can get some
    certainty back into this process.
        Secretary Geithner. Happy to work with you on that. And I
    think you're right to call attention to it. And I would point
    out that if you look at the broad measures of what businesses
    report, in terms of credit terms and availability, and if you
    look at the very broad measures of access to credit to
    businesses, price of credit, lending terms they face is--it's
    now starting to improve; not as soon as we'd like, not as
    quickly as we'd like, but much faster than credit, for example,
    of consumer--or somebody who wants to borrow to finance a house
    is improving. And that's encouraging, but we want to reinforce
    it. And I think we have a long way to go.
        Senator Moran. Mr. Secretary, I have one additional
    question that I'd like to ask you personally, if you can--if I
    can catch you, for a few moments, after this hearing.
        Secretary Geithner. Sure.
        Senator Moran. Thank you.
        Senator Durbin. Senator Lautenberg.

                  FUNDING TO FIGHT ILLEGAL TOBACCO TRAFFICKING

        Senator Lautenberg. Mr. Secretary, it's estimated, by the
    Treasury, that Federal revenue lost due to illegal tobacco
    trafficking may reach as high as $4\1/2\ billion annually. Now,
    the Congress provided $3 million this year for the Alcohol and
    Tobacco Tax and Trade Bureau to hire agents and improve
    enforcement efforts. However, the President's budget, next
    year, would eliminate these positions. Now, without filling
    these jobs, how will the Treasury have the resources it needs
    to carry out effective tobacco taxing?
        Secretary Geithner. Senator, I know this is important to
    you, and I'm aware of your concern. And I'd like to try to work
    with you to see if we can address it.
        And let me tell you a little bit of what's guiding our
    judgment. You know, we're finding, across the board, that
    we're--you know, we're having to do more with less. Where we
    have limited enforcement resources, we're trying to make sure
    we devote them to where we have the highest return, in terms of
    revenues and other objectives the Congress gives us. And so,
    that's forced us to cut back in some areas. This is an example.
        I know why you're concerned about it, because it makes it
    easier for people to evade these things. That erodes the
    revenue base of States. And so, I think it's important, in this
    context. I'd be happy to work with you on this.
        We do have a lot of--because of what the Congress enabled
    us to do the last 2 years--we have a lot enforcement efforts
    underway which we think have some deterrent value. But,
    obviously, we want to do as much as we can with the few
    resources we can. And I'd be happy to work with you on how best
    we can do that.
        Senator Lautenberg. So, we need the people to get the job
    done.
        Secretary Geithner. We do. Absolutely. And what we did is
    to--temporarily, is, we used those resources to use IRS agents
    to help them in a separate, and they're doing a lot of
    important things----
        Senator Lautenberg. That imposes an extra burden on those
    who have the audits to do, and----
        Secretary Geithner. It does. And, you know, as you've seen,
    there are some people who want to cut the IRS resources, too.
    But, again, what we want to do is to make sure that, with the
    resources you give us, we allocate them to where they have the
    highest possible return. And I know why this is important to
    you.

                          INFRASTRUCTURE BANK PROPOSAL

        Senator Lautenberg. Yes. The administration has recommended
    an infrastructure bank to fund transportation projects of
    national significance. Now, at a time when budgets are
    stretched so thin, how would the administration's proposal
    focus Federal dollars to maximize our country's economic
    competitiveness?
        Secretary Geithner. Well, as you know, we face a huge long-
    term infrastructure deficit that puts enormous burden--it hurts
    the competitiveness of American businesses by raising the cost
    of doing business, bringing their products to market. And so,
    as you think about the long-term challenge we face, we have to
    find a way to finance, responsibly, much higher levels of
    infrastructure across the country.
        We believe an infrastructure bank or fund is--should be
    part of the solution. It can't be the entire solution. And what
    it does is give us the chance to get better use of limited
    taxpayer resources to borrow from the market and bring private
    capital alongside what the Government does directly so get--we
    get more power, more bang, more ammunition behind these
    financing projects.
        And there's a lot of interest in this in the Congress, as I
    know how--you've been a big supporter of this. There are some
    new ideas in the Congress, too. And we'd like to work with you
    and your colleagues to figure out how we get something done.
        Again, one of the most important things we can do to help
    get more Americans back to work, to help increase employment
    opportunities for people most affected by the crisis, in
    construction, for example, and for our long-term
    competitiveness, is to invest substantially more in
    infrastructure projects that have a high return over time. And
    we cannot do that adequately through the traditional mechanisms
    the Congress has used to fund, for example, transportation
    budgets.
        Senator Lautenberg. Will we hear some of what might be
    considered, in the near future, so that we can get on with
    this?
        Secretary Geithner. Yes. We're--again, we've--have a series
    of detailed proposals we've been modifying as a way to get more
    support in the Congress. And there's a bunch of new ideas on
    the Hill that we want to work with you on. And again, I think
    this is something that we should be able to do. It's not a
    partisan issue. It's traditionally had a lot of bipartisan
    support. And it's a good, efficient use of taxpayer resources.

                             CORPORATE TAX HOLIDAY

        Senator Lautenberg. Well, some companies are pushing for a
    tax holiday if they repatriate income that's currently invested
    overseas. These companies believe that it's going to--that it
    will boost the U.S. economy, create jobs. I'm skeptical about
    it, but some have suggested that a tax holiday may make sense
    in the larger context of corporate tax reform. How do you feel
    about that kind of proposal?
        Secretary Geithner. That's something we would not consider
    outside the context of corporate tax reform, because--for the
    reasons you said, on the basis of how it's been--of the
    experience in the past. It's a--well, I won't say--I'll say it
    directly--it has not produced an increase in investment, job
    creation. And it's expensive. So, we would not support it
    outside the context of corporate tax reform. But, in the
    context of comprehensive corporate tax reform, we think there
    may be a way to try and do that in a way that would be
    responsive to these broader interests of trying to get more of
    those resources held overseas, to bring them back. But, not
    outside of that context----
        Senator Lautenberg. No, because it's believed that, by
    keeping these companies from bringing back the income that
    they've earned, that we're not only losing revenues, but we're
    also increasing competition within--for jobs within our own
    country.
        Secretary Geithner. That's right. That's why it's a very
    good idea to try to do comprehensive reform that lowers the
    statutory rate, broadens the base, and again, improves the
    incentives for people to bring back those resources and invest
    more in the United States. And that's what our reforms--we're
    going to try and do. And you'll see, in that proposal, that
    we're going to try to find a way to be responsive to that
    broader interest. Again, what we want to do is improve
    incentives for people investing more of those resources here in
    the United States.

                              FUNDING FOR THE CFPB

        Senator Lautenberg. Our colleagues on the other side of the
    aisle have proposed to cut the new CFPB's budget this year to
    $80 million. The CFPB estimates that we'll need approximately
    $143 million to do its job. If the House Republicans get their
    way, how is that going to affect the CFPB's ability to start up
    and fulfill its mission of protecting consumers?
        Secretary Geithner. Well, again, the purpose of those cuts
    are to starve this entity of the resources it needs to get
    going. And what that will do is put at risk--I gave one example
    to Senator Moran, but I'll repeat that and tell you another
    one. What the--the most important priorities of this bureau
    from day one are to simplify and improve disclosure for people
    who want to get a loan to buy a house or to borrow against
    their credit card. And providing more simple disclosure, so
    people understand how to borrow responsibly, can shop for a
    better deal, is an overwhelmingly sensible simple objective.
    You will delay--make it harder for the agency to do that. The
    other thing that would make it harder to do, if you starve it
    of resources, is--as I said to Senator Moran, is, you'll leave
    banks with an unlevel playing field, where they're competing
    against nonbank finance companies, without constraint, who
    might be trying to take advantage of their customers in that
    context. That's not good for banks or for consumers. Those are
    two examples of what you put at risk.
        Senator Lautenberg. Thanks, Mr. Secretary.
        Thanks, Mr. Chairman.

                      FINANCIAL CRIMES ENFORCEMENT NETWORK

        Senator Durbin. Mr. Secretary, in my opening statement, I
    mentioned the Financial Crimes Enforcement Network, which--I
    don't know if many people follow it, but FinCEN, as it's known,
    collects red flags on suspicious financial transactions from
    banks and other financial entities. Hundreds of Federal, State,
    and other local law enforcement agencies access this data to
    track the financial paper trail of criminal financial activity,
    including terrorist financing, organized crime, and drug
    trafficking.
        In many places, like Chicago and New York City, local law
    enforcement entities have direct access to this data. In fact,
    in Illinois, 75 users ran more than 20,000 searches on the
    FinCEN database in 2010.
        Under the Treasury proposal for next year's budget, all
    those searches would have to funnel through just two staffers
    at the State level. The Treasury would save $1.3 million with
    the proposed cuts in this agency. It seems to me that FinCEN
    has a significant role in dealing with the use of our financial
    network by wrongdoers: criminals, drug traffickers, would-be
    terrorists. This proposed cut seems to me to be penny-wise and
    pound foolish. Can you comment?
        Secretary Geithner. Yes, Mr. Chairman. Thank you for
    raising this. And I understand your concerns. And we will work
    with you to try to mitigate that effect.
        And you're right, and I appreciate very much what you said
    in your opening statement, about the important role FinCEN
    provides, as a whole. And, of course, we're always looking for
    ways to make sure that we're directing them to things that can
    have the maximum positive impact in reducing the ability of
    people to take advantage of our financial system, in this case.
    And this is one example.
        Now, you're concerned about the effect this would have on
    local law enforcement officials, particularly in the really
    major cities' largest law enforcement operations in the
    country; and I am optimistic we can find a way to try to
    address those concerns. Of course, in our proposal, we're
    preserving direct access for them to the resources of FinCEN.
    But, I understand your concerns, and I think we can work with
    you to try to mitigate those.
        Senator Durbin. Senator Moran.
        Senator Moran. Mr. Chairman, thank you.

                                 IRAN SANCTIONS

        I'm not exactly sure--Mr. Kirk--I think his conversation
    with you is--was about the World Bank. I did want to make
    certain that you understand the importance of enforcement--
    strict and strong enforcement--of the Comprehensive Iran
    Sanctions and Accountability Act that the Congress passed
    several years ago. And I assume that you would tell us that
    you're taking your job very seriously.
        Secretary Geithner. Absolutely. We are taking it very
    seriously. And again, we had a very powerful program. The law
    the Congress passed gave us much more power. And it's had a
    dramatic impact on our capacity to make sure that other
    countries around the world joined us in tightening the
    constraints on the Government of Iran.
        But, as Senator Kirk reminded us, and as I said, this is an
    ongoing challenge, and it requires a relentless focus to try to
    make sure you catch every opportunity for evasion, and stay on
    it. And again, we've got some incredibly talented people with a
    great record in this area. And we work every day to try to make
    sure we can do a better job. And the Congress gave us much more
    powerful tools.
        Senator Moran. There's no additional--there's no need for
    additional--authority, statutory authority, or--you have the
    tools that you need?
        Secretary Geithner. I don't think so. I think our big
    challenge, as you know, is to try to get other countries to
    come with us. You know, we don't do material business, really,
    now, and--but much of the rest of the world does. And so, what
    we've been successful doing with these new powers is to tighten
    the net by getting other countries to come with us. But, you
    know, we've got some more work to do not that front.

                         ADDITIONAL COMMITTEE QUESTIONS

        Senator Lautenberg. Mr. Chairman, thank you.
        Mr. Secretary, thank you for your consideration.
        [The following questions were not asked at the hearing, but
    were submitted to the Department for response subsequent to the
    hearing:]
                Questions Submitted by Senator Richard J. Durbin
        Question. The Appropriations Subcommittee on Financial Services and
    General Government maintains jurisdiction over the annual
    appropriations for the Office of Foreign Assets Control (OFAC), a
    Department of the Treasury office dedicated to administering and
    enforcing economic and trade sanctions. On February 25, 2011, President
    Obama signed an Executive order freezing Libyan assets in United States
    banks, significantly limiting Muammar Gaddafi's ability to access funds
    to support attacks on his own people. The Washington Post reported that
    OFAC quickly identified $32 billion in Libyan assets and that United
    States banks began freezing funds within minutes of the Executive order
    going into place.
        What authority does Treasury have to freeze foreign assets when
    there is a threat of a humanitarian and/or national security crisis?
    How is this decision made?
        Answer. In issuing an Executive order imposing economic sanctions,
    the President generally invokes the authority of the International
    Emergency Economic Powers Act, and declares a national emergency to
    deal with a particular threat to the national security, foreign policy,
    or economy of the United States. Treasury's OFAC then acts under
    delegated Presidential national emergency powers to implement
    provisions of the Executive order, which can include blocking targeted
    assets under U.S. jurisdiction.
        Question. How is OFAC ensuring that U.S. financial institutions are
    complying with the directive to freeze Gaddafi's assets? What are the
    consequences of noncompliance?
        Answer. OFAC uses a variety of tools to ensure compliance by U.S.
    financial institutions. In the case of a new sanctions program, OFAC
    immediately posts notice of the sanctions' legal requirements via
    several electronic means to the United States and international
    financial community. By law, holders of blocked assets must report to
    Treasury within 10 days after blocking assets, although they typically
    will report major blockings within 2 to 4 days. OFAC has the authority
    to impose civil penalties if appropriate. OFAC also works very closely
    with Federal and State financial regulators, which require financial
    institutions to maintain adequate programs to ensure compliance with
    OFAC regulations. OFAC is actively engaged with U.S. financial
    institutions to address implementation issues and it may issue
    subpoenas to obtain information when there is an indication that a
    financial institution has failed to act properly.
        Question. What happens to these funds after they are frozen? Will
    they be made available to the Libyan people when the political
    situation is stabilized in that country?
        Answer. In taking action to block Libyan Government assets under
    the President's Executive order, the United States has protected those
    assets from misappropriation by the Gaddafi regime, and is depriving
    the regime of the use of those assets for its ongoing campaign of
    violence against the Libyan people. On July 15, 2011, the United States
    recognized the Transitional National Council (TNC) as the legitimate
    governing authority for Libya. To assist the TNC and the Libyan people
    during this time of transition, we are working with the State
    Department to make a portion of the frozen assets available to the TNC
    as soon as possible. We are keenly focused on the humanitarian and
    other essential needs of the Libyan people, and we are working closely
    with our international partners to address those needs. To that end, on
    August 25, the United Nations Security Council's Libya Sanctions
    Committee agreed to a United States ``extraordinary expenses'' request
    facilitating the issuance of United States licenses to authorize the
    release of up to $1.5 billion in Libyan assets for humanitarian and
    other essential needs. Consistent with TNC instructions and State
    Department guidance, we have authorized the release of funds for
    humanitarian and other urgent needs. These efforts are being negotiated
    carefully to provide for adequate oversight and transparency in how the
    funds will be used. Going forward, we will continue to work closely
    with the State Department, the TNC and our international partners to
    determine an appropriate plan for releasing assets in light of the
    situation on the ground as it evolves. While we seek to provide the TNC
    with the resources necessary to address humanitarian and other
    essential needs, we also will work with the State Department, the TNC
    and our international partners to continue safeguarding these assets
    for the Libyan people in a manner consistent with our United Nations
    obligations.
        Question. The Comprehensive Iran Sanctions, Accountability, and
    Divestment Act of 2010 (Public Law 111-195) tightened economic
    sanctions on Iran in response to its nuclear weapons program, focusing
    in particular on Iran's petroleum industry. The administration has also
    taken steps through the Treasury Department and the United Nations
    Security Council to tighten sanctions even further against Iran.
        In 2010, The New York Times reported that over the last decade, the
    Federal Government awarded more than $107 billion in contract payments,
    grants, and other benefits to foreign and multinational American
    companies while they were doing business in Iran--including nearly $15
    billion paid to companies that defied United States sanctions law by
    making large investments that helped Iran develop its oil and gas
    reserves.
        What steps has Treasury taken to enforce these sanctions,
    especially with regard to recipients of Federal funds? What further
    steps does Treasury plan to take?
        Answer. Treasury's Office of Terrorism and Financial Intelligence
    has been engaged in an aggressive campaign to implement the
    Comprehensive Iran Sanctions, Accountability, and Divestment Act of
    2010 (CISADA), reaching out to countries around the world through
    travel and correspondence.
        Treasury's outreach on CISADA has had a tremendous effect, and the
    great majority of financial institutions with which we have engaged
    have chosen to close their correspondent accounts with United States-
    designated, Iranian-linked financial institutions, thus shutting down
    avenues that Iran's designated banks had relied upon to engage in
    financial activities.
        Treasury aggressively implements and enforces sanctions against
    entities and individuals subject to such sanctions. Since the adoption
    of United Nations Security Council Resolution 1929 in June 2010,
    Treasury has designated dozens of Iranian entities and individuals for
    involvement in Iran's proliferation-related activities or for being
    responsible for human rights abuses in Iran. Actions taken pursuant to
    Executive Order 13382, which targets WMD proliferation networks and
    their supporters, have included designations of affiliates of the
    Islamic Revolutionary Guard Corps and the Islamic Republic of Iran
    Shipping Lines; Tidewater, an Iranian port operator; entities
    subordinate to Iran's Aerospace Industries Organization; and additional
    Iranian-linked financial institutions, including Europaisch-Iranische
    Handelsbank, Post Bank of Iran, Bank Refah, and the Bank of Industry
    and Mine, bringing the total number of designated Iranian-linked
    financial institutions to 21. Treasury also continues to work with
    international partners to implement robust international sanctions on
    Iran so that Iran feels pressure not only from U.S. actions but also
    from increasing isolation from the international financial system.
        On September 28, 2010, the President signed Executive Order 13553,
    authorizing the freezing of assets of officials of the Government of
    Iran or persons acting on behalf of the Government of Iran who are
    responsible for or complicit in, or responsible for ordering,
    controlling, or otherwise directing, the commission of serious human
    rights abuses against persons in Iran or Iranian citizens or residents,
    among others. The Annex to Executive Order 13553 listed eight
    Government of Iran officials for their involvement in human rights
    abuses. Treasury has since designated additional Government of Iran
    officials for their involvement in serious human rights abuses.
        The State Department enforces the energy-related provisions of the
    Iran Sanctions Act, as amended by CISADA, and as a result, I must defer
    to the State Department on questions regarding the energy-related
    sanctions.
        Question. Over the last decade, the Treasury Department has granted
    nearly 10,000 licenses for commerce involving countries listed as state
    sponsors of terrorism--using loopholes for humanitarian and
    agricultural aid to sell items such as cigarettes, chewing gum, hot
    sauces, weight loss remedies, and even sports rehabilitation equipment
    for the institute that trains Iran's Olympic athletes.
        What steps has Treasury taken to ensure that only agricultural and
    humanitarian goods are waived into countries such as Iran? What more
    can be done?
        Answer. Under the Trade Sanctions Reform and Export Enhancement Act
    of 2000 (TSRA), Congress requires Treasury to grant licenses to U.S.
    companies seeking to export agricultural commodities, medicines, and
    medical devices to certain sanctioned countries. By the terms of the
    statute, OFAC is limited in its ability to deny licenses for goods that
    fall within the categories as defined in the statute. For example, TSRA
    takes its definition of ``agricultural commodities'' from section 102
    of the Agricultural Trade Act of 1978 (7 U.S.C. 5602). In interpreting
    the definition of ``agricultural commodities,'' Treasury looks to the
    Department of Agriculture, which is better equipped to determine what
    qualifies under the definition. Similarly, TSRA relies on section 201
    of the Federal Food, Drug, and Cosmetic Act (21 U.S.C. 321) to define
    medicine and medical devices. Circumstances for denying TSRA licenses
    include when the importing entity ``promote[s] international
    terrorism'' or when it is unlawful to export to an entity that is
    subject to any restriction for its involvement in weapons of mass
    destruction or missile proliferation.
        Question. When United States companies attempt to do business in
    Africa, they are often at a disadvantage due to competition from
    foreign governments who operate outside of the Organisation for
    Economic Co-operation and Development arrangement, notably the Chinese.
    Often African buyers prefer the quality of American products but are
    attracted to the inexpensive, flexible concessional financing offered
    by the Chinese and others. United States companies complain that United
    States Government tools to level the playing field in the face of these
    Chinese tactics, including Export-Import Bank's War Chest, are too
    restrictive.
        What steps has Treasury taken to level the playing field in
    overseas markets for United States companies facing Chinese
    concessional financing and other tactics?
        Answer. China's accession to the international arrangement that
    disciplines the provision of official export credits, thereby
    subjecting China's export credit and tied aid activity to clear
    financing and transparency rules, is a top priority for the
    administration. Senior Treasury offices and I have raised this issue
    with our Chinese counterparts, and, at the recent May Strategic and
    Economic Dialogue meetings, the United States and China ``recognize[d]
    the importance of transparency and fairness in providing export
    credits'' and ``agree[d] to exchange views on the importance of the
    export credit system.'' We will continue to engage the Chinese on this
    important issue.
        The Ex-Im Bank War Chest is available to match tied aid that
    violates the international rules or that is a threat to long-run U.S.
    market share/access in emerging markets. Separate from the War Chest,
    Ex-Im also has the legal authority to match Chinese export credits,
    whether or not they are consistent with the international rules. This
    authority was recently used in a Pakistan rail transaction, where Ex-Im
    provided matching financing to a United States company competing
    against a Chinese company with Chinese Government financing that did
    not conform to international standards and practices.
        Question. The Treasury Department is 1 of 20 U.S. Government
    agencies represented on the Trade Promotion Coordinating Committee.
    What is the Treasury Department currently doing to coordinate and boost
    American export promotion and financing operations?
        Answer. In addition to Treasury's general efforts to support the
    administration's work to increase exports, Treasury is responsible for
    promoting balanced and strong growth in the global economy through the
    G-20 Financial Ministers' process and other appropriate mechanisms.
        Treasury has advocated for a rebalancing of global demand, which is
    an essential part of achieving a strong and long-lasting global
    economic recovery. Faster domestic demand growth abroad, particularly
    by countries with trade surpluses, will enable countries with trade
    deficits to boost their exports, and narrow or eliminate their current
    account deficits. A more evenly balanced global economy will contribute
    to a more sustainable global recovery.
        Question. In addition to Treasury's role, which executive agency
    should and which, if any, is leading the interagency process on this
    effort?
        Answer. The President's National Export Initiative is being
    coordinated by the Commerce Department under the umbrella of the Trade
    Promotion Coordinating Committee.
                                domestic finance
        Question. In January 2011, news reports raised concerns about
    several banks that were found to have taken advantage of servicemembers
    by overcharging for mortgages and improperly starting foreclosure
    proceedings. These banks violated the Servicemembers Civil Relief Act
    (SCRA) and added financial stress to the already stressful lives of
    military families. JP Morgan Chase alone sent refunds to 4,000
    servicemembers who were overcharged for mortgages or against whom the
    company improperly started foreclosure proceedings. JP Morgan Chase
    admitted that it overcharged military personnel on their mortgages and
    wrongfully foreclosed on 14 active-duty families, despite SCRA and its
    prohibition on foreclosures against servicemembers.
        What can the Treasury Department do to prevent violations of SCRA
    from happening in the future, including wrongful foreclosures and
    violations of the mortgage interest cap?
        How can Treasury promote proper training on Servicemembers Civil
    Relief Act (SCRA)?
        Answer. The Office of Servicemember Affairs (OSA), located within
    the Consumer Financial Protection Bureau (CFPB), will play an important
    role in educating servicemembers on the protections afforded by the ,
    as well as ensuring that any SCRA-related complaints filed with the
    CFPB are handled in an efficient and timely manner. Although the
    Department of Justice (DOJ) and the prudential regulators enforce the
    statute, the CFPB will help raise awareness of the law and its
    protections, both within the military community and within the
    financial community. To that end, the OSA recently signed a joint
    Statement of Principles with the Judge Advocate Generals of the Army,
    Navy, Air Force, Marine Corps and Coast Guard, and will work with them
    and the DOJ on this mission. After alleged violations of the SCRA came
    to light earlier this year, Holly Petraeus, Assistant Director for the
    OSA, wrote a letter to the CEOs of the Nation's 25 largest banks,
    asking them to review their policies and procedures to ensure that they
    were complying with the SCRA. Assistant Director Petraeus has also been
    engaging the military community across the country to raise awareness
    of the unique financial protections available to military families,
    including those afforded by the SCRA.
                                     ______

                   Questions Submitted by Senator Ben Nelson
                                domestic finance
        Question. I continue to hear from both banks and home builders in
    Nebraska that examiners are turning regulatory guidance on commercial
    real estate (CRE) lending into hard caps.
        For example, it's my understanding that community banks are being
    told they can't give home builders loans because the bank has reached
    its 100 percent of capital threshold on construction loans. This cap is
    being enforced in areas of high housing demand. Builders still can't
    get a loan. Is it true that regulators are not allowing these loans to
    be made to creditworthy builder borrowers with viable projects because
    a bank has reached the 100 percent of capital CRE threshold?
        Answer. Treasury does not regulate community banks. However,
    Treasury does have a policy interest in ensuring that banks continue to
    provide credit to small businesses, including home builders, consistent
    with safety and soundness, in order to support economic recovery and
    market stability.
        Policy guidance issued jointly by Federal banking regulatory
    agencies in 2006 \1\ set supervisory criteria for significant CRE
    concentration:
    ---------------------------------------------------------------------------
        \1\  See, e.g., FDIC FIL-104-2006, Commercial Real Estate Lending
    (Joint Guidance), December 12, 2006.
    ---------------------------------------------------------------------------
      --total reported loans for construction, land development, and other
            land (often called for acquisition, construction, and
            development [ACD]) represent 100 percent or more of the
            institution's total capital; or
      --total commercial real estate loans as defined in the Guidance
            represent 300 percent or more of the institution's total
            capital and the outstanding balance of the institution's CRE
            loan portfolio has increased 50 percent or more during the
            prior 36 months.
        These criteria are explicitly intended neither as limits nor safe
    harbors, but rather as preliminary steps to identify institutions that
    may have CDE concentration risks, and this policy remains in effect.
    The policy states that the effectiveness of an institution's risk
    management practices will be a key component of the supervisory
    evaluation of the institution's CRE concentrations. Examiners will
    engage in a dialogue with the institution's management to assess CRE
    exposure levels and risk management practices. Institutions that have
    experienced recent, significant growth in CRE lending will receive
    closer supervisory review than those that have demonstrated a
    successful track record of managing the risks in CRE concentrations.
        In recent years many banks did exceed these concentration criteria
    and encountered financial difficulties. Some of these banks are no
    longer in business. Troubled banks are subject to stringent regulatory
    restrictions based on each bank's circumstances. It is our
    understanding that very few banks are currently above, at or near the
    100 percent ACD benchmark.
        While it is regulatory policy to encourage prudent lending,
    including to small home builders, such credit may be more challenging
    to obtain now than previously. Among other factors, some lenders have
    tightened their own credit standards, some builders have less financial
    strength, lower property values provide less collateral, and housing
    market conditions remain weak or fragile in many areas.
        Question. I continue to hear from home builders in Nebraska that
    they are unable to obtain financing to build homes for qualified home
    buyers. These builders are typically small businesses building 25 or
    fewer homes a year that rely primarily on commercial banks and thrifts
    as their primary source of construction loan financing.
        A common complaint I hear from such builders is that overly
    restrictive actions by Federal banking regulators and examiners go well
    beyond the steps needed to ensure safety and soundness. Have your
    institutions noted any specific regulatory obstacles to your ability to
    lend to small businesses including home builders?
        Answer. Treasury does not regulate community banks. However,
    Treasury does have a policy interest in ensuring that banks continue to
    provide credit to small businesses, including home builders, consistent
    with safety and soundness, in order to support economic recovery and
    market stability.
        Policy guidance issued jointly by Federal banking regulatory
    agencies in 2006 \1\ set supervisory criteria for significant CRE
    concentration:
      --total reported loans for construction, land development, and other
            land (often called for acquisition, construction, and
            development [ACD]) represent 100 percent or more of the
            institution's total capital; or
      --total commercial real estate loans as defined in the Guidance
            represent 300 percent or more of the institution's total
            capital and the outstanding balance of the institution's CRE
            loan portfolio has increased 50 percent or more during the
            prior 36 months.
        These criteria are explicitly intended neither as limits nor safe
    harbors, but rather as preliminary steps to identify institutions that
    may have CDE concentration risks, and this policy remains in effect.
    The policy states that the effectiveness of an institution's risk
    management practices will be a key component of the supervisory
    evaluation of the institution's CRE concentrations. Examiners will
    engage in a dialogue with the institution's management to assess CRE
    exposure levels and risk management practices. Institutions that have
    experienced recent, significant growth in CRE lending will receive
    closer supervisory review than those that have demonstrated a
    successful track record of managing the risks in CRE concentrations.
        In recent years many banks did exceed these concentration criteria
    and encountered financial difficulties. Some of these banks are no
    longer in business. Troubled banks are subject to stringent regulatory
    restrictions based on each bank's circumstances. It is our
    understanding that very few banks are currently above, at or near the
    100 percent ACD benchmark.
        While it is regulatory policy to encourage prudent lending,
    including to small home builders, such credit may be more challenging
    to obtain now than previously. Among other factors, some lenders have
    tightened their own credit standards, some builders have less financial
    strength, lower property values provide less collateral, and housing
    market conditions remain weak or fragile in many areas.
        Question. It is my understanding that through economic sanctions
    the United States has been able to freeze nearly $33 billion in Libyan
    assets. I understand that other nations have been able to freeze Libyan
    assets as well.
        How will the United States and NATO dispense with these frozen
    assets?
        Answer. As of June 15, approximately $37 billion of cash and
    securities under U.S. jurisdiction have been blocked pursuant to
    Executive Order 13566. This amount includes assets of the Central Bank
    of Libya and the Libyan Investment Authority, among others. In taking
    action against Libyan Government assets under the President's Executive
    order, the United States has protected those assets from
    misappropriation by Colonel Muammar Gaddafi and his associates and
    deprived the Gaddafi regime of the use of those assets for its ongoing
    campaign of violence against the Libyan people. On July 15, 2011, the
    United States recognized the Transitional National Council (TNC) as the
    legitimate governing authority for Libya. To assist the TNC and the
    Libyan people during this time of transition, we are working with the
    State Department to make a portion of the frozen assets available to
    the TNC as soon as possible. We are keenly focused on the humanitarian
    and other essential needs of the Libyan people, and we are working
    closely with our international partners to address those needs. To that
    end, on August 25, the United Nations Security Council's Libya
    Sanctions Committee agreed to a United States ``extraordinary
    expenses'' request facilitating the issuance of United States licenses
    to authorize the release of up to $1.5 billion in Libyan assets for
    humanitarian and other essential needs. Consistent with TNC
    instructions and State Department guidance, we have authorized the
    release of funds for humanitarian and other urgent needs. These efforts
    are being negotiated carefully to provide for adequate oversight and
    transparency in how the funds will be used. Going forward, we will
    continue to work closely with the State Department, the TNC and our
    international partners to determine an appropriate plan for releasing
    assets in light of the situation on the ground as it evolves. While we
    seek to provide the TNC with the resources necessary to address
    humanitarian and other essential needs, we also will work with the
    State Department, the TNC and our international partners to continue
    safeguarding these assets for the Libyan people in a manner consistent
    with our United Nations obligations.
        Question. Is there a precedent for how to dispense with such
    assets?
        Will Treasury coordinate with the Department of State in this
    process?
        Is there any consideration to use these funds to either offset
    military operations in Libya or to help rebuild Libya in the aftermath
    of the current conflict?
        Answer. While we do not have a precedent for making funds available
    on this scale, consistent with TNC instructions and State Department
    guidance, we have authorized the release of funds for humanitarian and
    other urgent needs. Treasury is coordinating with the State Department
    regarding U.S. efforts to make a portion of the frozen assets blocked
    pursuant to Executive Order 13566 available to the TNC as soon as
    possible. The funds are not being considered as a means to offset
    military operations, but would be used to address humanitarian and
    other essential needs, as well as support the Libyan people as they
    chart a democratic, prosperous, and secure future for their country.
        Question. To date, what has been discussed and what is possible
    regarding the use of these funds?
        Does Treasury anticipate needing any new authorities to handle
    these assets?
        If new authorities aren't required, what existing authorities will
    be used to dispense with these funds?
        Is there anything that Congress can do to facilitate proper
    disposal of these assets?
        Answer. As of June 15, approximately $37 billion of cash and
    securities under U.S. jurisdiction have been blocked pursuant to
    Executive Order 13566. This amount includes assets of the Central Bank
    of Libya and the Libyan Investment Authority, among others. In taking
    action against Libyan Government assets under the President's Executive
    order, the United States has protected those assets from
    misappropriation by Colonel Muammar Gaddafi and his associates and
    deprived the Gaddafi regime of the use of those assets for its ongoing
    campaign of violence against the Libyan people. On July 15, 2011, the
    United States recognized the Transitional National Council (TNC) as the
    legitimate governing authority for Libya. To assist the TNC and the
    Libyan people during this time of transition, we are working with the
    State Department to make a portion of the frozen assets available to
    the TNC as soon as possible. We are keenly focused on the humanitarian
    and other essential needs of the Libyan people, and we are working
    closely with our international partners to address those needs. To that
    end, on August 25, the United Nations Security Council's Libya
    Sanctions Committee agreed to a United States ``extraordinary
    expenses'' request facilitating the issuance of United States licenses
    to authorize the release of up to $1.5 billion in Libyan assets for
    humanitarian and other essential needs. Consistent with TNC
    instructions and State Department guidance, we have authorized the
    release of funds for humanitarian and other urgent needs. These efforts
    are being negotiated carefully to provide for adequate oversight and
    transparency in how the funds will be used. Going forward, we will
    continue to work closely with the State Department, the TNC and our
    international partners to determine an appropriate plan for releasing
    assets in light of the situation on the ground as it evolves. While we
    seek to provide the TNC with the resources necessary to address
    humanitarian and other essential needs, we also will work with the
    State Department, the TNC and our international partners to continue
    safeguarding these assets for the Libyan people in a manner consistent
    with our United Nations obligations.
                                     ______

                   Questions Submitted by Senator Jerry Moran
        Question. There is an aerospace industry issue which has come to my
    attention that I'd like to get your thoughts on. It is in reference to
    trade finance and our ability to provide defensive competitive matching
    in instances of Government financing from the official export credit
    agencies of other countries. I understand that this is a looming issue
    for aircraft manufacturers and I further understand that the
    administration has at its disposal an existing provision in U.S. law
    (section 1912 of the Export-Import Bank Act Amendments of 1978) that
    could be used to address this competitive situation. It appears to me
    that the Congress instituted a competitive matching tool for these
    exact circumstances--one of its supporters, Senator Adlai Stevenson,
    stated very clearly on the Senate floor during debate: ``The
    [Section's] purpose . . . is not to declare or to accelerate a credit
    war. Its purpose is to put the United States in a position to end a
    credit war.'' And, on the House side, Representative Hannaford
    declared: ``These circumstances demand an appropriate response from our
    own government. The Export-Import Bank can and should be the instrument
    of our response.''
        Does the administration have any intentions to deploy this tool in
    the fight against such lending practices in support of the aerospace
    industry and its hundreds of thousands of workers, as well as for all
    U.S. industries who are or will be facing similar competitions in the
    near-future.
        Answer. Section 1912 is a provision that allows Treasury to
    authorize Ex-Im Bank to provide matching financing when it determines
    that foreign noncompetitive official export credits are being offered
    into the United States that are inconsistent with certain standstills,
    arrangements or practices. Upon receipt of information that foreign
    noncompetitive official exports are being offered, Treasury would
    initiate an inquiry as to whether the statutory criteria under section
    1912--which would be fact specific and depend on the scope of an
    individual case--have been met.
                                domestic finance
        Question. Recognizing the distinct differences between large
    banking institutions and insurance companies with small bank
    subsidiaries, Congress included language in the Dodd-Frank Act stating
    the Volcker Rule should ``appropriately accommodate the business of
    insurance.'' Is it your understanding that these provisions allow for
    insurance companies to continue to sponsor and invest in private equity
    pursuant to this insurance exception? Do you anticipate any further
    clarification of this question in any proposed rule?
        Answer. The Volcker Rule includes specific provisions to
    accommodate the business of insurance. Only two types of insurance
    companies are subject to the Volcker Rule:
      --insurance companies that are affiliates of insured banks or
            thrifts; and
      --non-bank financial companies supervised by the Federal Reserve
            Board.
        Under the Volcker Rule, activity for the general account is
    permitted if the activity is already in compliance with State insurance
    investment law, regulation, and guidance; and the appropriate Federal
    banking agencies, after consultation with the Financial Stability
    Oversight Council and the relevant State insurance commissioners, have
    not jointly determined that such investment laws, regulations, and
    written guidance are insufficient to protect the safety and soundness
    of the banking entity, or of the financial stability of the United
    States. These permitted activities are subject to a prudential
    ``backstop'' that prohibits such activity if it would result in a
    material conflict of interest, material exposure to high-risk assets or
    high-risk trading strategies, a threat to the safety and soundness of
    the banking entity, or a threat to the financial stability of the
    United States.
        The rulemaking agencies are currently drafting the regulations that
    will implement the Volcker Rule and it is likely that a forthcoming
    Notice of Proposed Rulemaking will further clarify this accommodation
    of the business of insurance.
        Question. As you are aware, the Dodd-Frank Act allows for an
    insurance expert to serve on the Financial Stability Oversight Council
    (FSOC). When do you think the President will have a nominee for that
    position, and do you expect that the nomination will be submitted
    before any regulations that may affect the insurance industry are voted
    on by the FSOC?
        Answer. The FSOC is progressing in a prudent and informed way in
    its decisionmaking, and is relying on the considerable expertise
    already extant among its members to ensure that it benefits from a wide
    variety of views.
        On June 27, 2011, the President nominated Mr. Roy Woodall as the
    independent member of the FSOC. Mr. Woodall brings extensive experience
    and insurance expertise to the FSOC. He served as the Senior Insurance
    Policy Analyst at the Department of the Treasury from 2002 to 2011, and
    has served as President of the National Association of Life Companies
    and former Commissioner of Insurance for the Commonwealth of Kentucky
    over the span of his distinguished career.
        The FSOC also benefits from the service of Mr. John Huff, the
    Director of the Missouri Department of Insurance, Financial
    Institutions and Professional Registration, who was selected as a
    member by the State insurance commissioners. Mr. Huff offers a breadth
    of knowledge and the important perspective of the primary functional
    insurance regulators.
        Secretary Geithner has appointed Mr. Michael McRaith as the
    director of the Federal Insurance Office (FIO). Mr. McRaith, who joined
    the FIO as director in June 2011, was previously the director of the
    Illinois Department of Insurance. He brings significant experience and
    judgment to the FIO and as a member of the FSOC.
                  consumer financial protection bureau (cfpb)
        Question. Can you please describe for me how the CFPB's budget will
    be audited upon its standing up in July of this year? Who will perform
    the audits and how will the results of the audits be made public?
        Answer. The CFPB is required to have two independent audits in
    2011. The first is an audit of the financial transactions of the
    Bureau, which is being performed by the Comptroller General of the
    United States. Under the Dodd-Frank Act, the Comptroller General shall
    submit to the Congress a report of this audit, which is typically made
    available to the public on the Web site of the Government
    Accountability Office. The CFPB is also required to order an annual
    independent audit of the CFPB's operations and budget under section
    1016A of the Department of Defense and Full-Year Continuing
    Appropriation Act of 2011. The CFPB will publish its audited financial
    statements and the annual independent audit on its Web site.
                                     ______

                    Questions Submitted by Senator Mark Kirk
                                domestic finance
        Question. In a recent conversation with Chicago's City Treasurer,
    she reminded me that a downgrade in U.S. debt would not only effect
    borrowing by the Federal Government, but would cascade down to the
    States. Keeping last week's downgrade of Spain's and Greece's debt in
    mind, I believe that the Federal Government's fiscal discipline
    initiatives will both help States control their interest costs and
    prove that the United States continues to be a model for the rest of
    the world. How can the United States demonstrate national and global
    leadership for spending reforms and debt reduction?
        Answer. Addressing the challenges we face in the short term to
    revive our economy and in the long-term economic path to growth
    requires fiscal responsibility. We need to reduce annual deficits, now
    roughly 10 percent of GDP, to the point where the overall debt burden
    begins to fall as a share of the economy. This must be a multi-year
    process, with cuts phased in over time, so as not to risk our economy
    as it emerges from the recession.
        Our objective is to build a bipartisan consensus on a
    comprehensive, and balanced fiscal reform plan. We must reduce
    Government spending while financing productive investments in areas
    critical to future economic growth, along with generating more revenue
    and reducing the rate of growth in spending on health care and
    retirement security.
        We must take a balanced approach that includes shared sacrifice in
    order for our Government to live within its means. I remain optimistic
    that we can address our fiscal challenges in a bipartisan manner that
    sets an example for the world, renews investor confidence, and
    demonstrates to the American people that we can work together to
    improve the well-being of our economy and our country.
        Question. On January 21, the Treasury's official blog wrote that,
    ``Adopting a policy that payments to investors should take precedence
    over other U.S. legal obligations would merely be default by another
    name, since the world would recognize it as a failure by the U.S. to
    stand behind its commitments.'' If a State fails to make timely
    payments of obligations, for example, if it delays payment of Federal
    education funds to local schools, would the State be considered in
    default under your definition? If failure to stand behind commitments
    would constitute a default for a State government, what responsibility
    would Treasury have to stand behind a State's legal obligations?
        Answer. Where a State has a legal obligation to make payments at a
    specified time, nonpayment would be recognized by investors and others
    as a failure by that State to meet its commitments. The resulting
    damage to that State's creditworthiness would likely be severe.
    However, Treasury does not have a general responsibility to stand
    behind a State's legal obligations.
        Question. I would like to ask you about a State that has been
    becoming more of a rogue player on the international stage--Argentina.
    At least one member of the House has asked for review of Argentina's
    GSP status. There have been reports that Argentina has discussed
    overlooking Iranian ties to terrorists' attacks on Argentina's soil in
    order to get some economic concessions. All of this is going on while
    the Republic of Argentina has been negotiating with the Paris Club to
    repay the $9 billion in debt that resulted from Argentina's 2001
    sovereign debt default. Of this $9 billion, about $360 million is owed
    to the United States. Private U.S. creditors are still owed $3.5
    billion--nearly 10 times as much as the debt the U.S. Government is
    seeking to recover. Currently, Argentina holds more than $54 billion in
    foreign reserves. What is Treasury's office of International Affairs
    doing to recover these funds, which Argentina is clearly able to pay?
    What is the message that we send to Argentina and other States by
    allowing it to get away with incendiary economic behavior?
        Answer. I can assure you that the Treasury Department is carefully
    monitoring several problem areas associated with Argentina's conduct
    toward United States investors and unfulfilled obligations to
    international agreements and institutions. We are pressing the
    Government of Argentina to uphold its international commitments as a
    member of the G-20, International Centre for Settlement of Investment
    Disputes, International Monetary Fund (IMF), and other multilateral
    fora, and normalize relations with its creditors. Specifically, with
    regard to the Paris Club, the Treasury Department has sought and will
    continue to seek full repayment from Argentina on behalf of U.S.
    taxpayers.
        Question. The President's budget claims Treasury's funding
    ``Enables the implementation of critical reforms to the U.S. financial
    regulatory system through support for the Dodd-Frank Wall Street
    Reform.'' What safeguards and oversight exist to ensure that this
    funding is used effectively and that the new programs implemented under
    Dodd-Frank are being used effectively and efficiently? I am advocating
    a set a principles based on quantitative metrics to use in evaluating
    appropriations bills that can measure Dodd-Frank's effectiveness:
      --Programs must be subject to rigorous performance evaluation
            requirements and oversight/enforcement that includes
            quantitative metrics and goals;
      --New regulatory measures must not duplicate existing ones; and
      --Programs that cannot minimize fraud and abuse should not be
            considered for expanded funding.
        Answer. On January 18, 2011, President Obama issued Executive Order
    13563, ``Improving Regulation and Regulatory Review,'' directing
    executive agencies to streamline and simplify regulations, seeking to
    ensure cost-effective, evidence-based regulations that are compatible
    with economic growth, innovation, job creation, and competitiveness.
        On July 11, 2011, he also issued Executive Order 13579,
    ``Regulation and Independent Regulatory Agencies,'' which calls upon
    independent agencies, to the extent permitted by law, to comply with
    provisions of Executive Order 13563. This includes the Executive Order
    13563 provision that asks agencies to develop a plan under which the
    agency will periodically review its existing significant regulations to
    determine whether any such regulations should be modified, streamlined,
    expanded, or repealed so as to make the agency's regulatory program
    more effective or less burdensome in achieving the regulatory
    objectives. The implementation of Dodd-Frank provides financial
    regulators with both an opportunity and a responsibility to implement
    the most efficient and effective rules for the financial system, to
    avoid duplicative or conflicting rules, and to eliminate those that are
    outdated.
        Question. What is the status of Treasury investigations into
    additional violations of the Iran Sanctions Act of 1996 (ISA) and the
    2010 Comprehensive Iran Sanctions, Accountability, and Divestment Act
    (CISADA)? How many companies and/or banks is the Treasury Department
    currently investigating for violations of the ISA and CISADA? Can you
    provide a timeframe of when additional designations are to be expected?
        Answer. As a matter of longstanding policy, Treasury does not
    comment on any possible or pending investigations, including possible
    sanctions. Accordingly, it would not be appropriate for me to comment
    on any particular financial institutions that may be under
    investigation until a final determination has been made regarding
    sanctions.
        Since the enactment of CISADA on July 1, 2010, and the publication
    of the Iranian Financial Sanctions Regulations on August 16, 2010,
    Treasury has been engaged in an aggressive campaign, involving dozens
    of foreign countries and scores of financial institutions, to explain
    the choice put to foreign financial institutions by CISADA between
    continued direct access to the United States financial system or
    continued involvement with Iran's proliferation efforts, its support
    for terrorism, and sanctioned Iranian-linked parties such as United
    States-designated banks and the Islamic Revolutionary Guard Corps. The
    response to Treasury's outreach has had a tremendous effect, and the
    great majority of financial institutions with which we have engaged
    have chosen to close their correspondent accounts with United States-
    designated, Iranian-linked financial institutions, thus closing off
    avenues that Iran's designated banks had relied upon to engage in
    financial activities. CISADA, in short, has proven to be a very
    powerful tool to further isolate and pressure Iran. Nonetheless,
    Treasury has concerns that a limited number of foreign financial
    institutions may be continuing to engage in activities that could
    result in a finding under CISADA. We are actively investigating those
    situations.
        The State Department is responsible for implementing the Iran
    Sanctions Act and the energy-related provisions of CISADA, and as a
    result, I must defer to the State Department questions regarding the
    energy-related sanctions.
        Question. Given that Spain appears like the next domino to fall in
    the European sovereign debt crisis, are you concerned that additional
    United States taxpayer funds may be required to support the IMF? Since
    the Congressional Research Service (CRS) estimates that Spain may need
    more than $500 billion for international bailout, do you anticipate
    that the IMF will need to utilize and/or expand the recently activated
    New Arrangements to Borrow (NAB), to which the United States has
    pledged more than $100 billion to date?
        Answer. The IMF has sufficient resources at this time to meet its
    members' needs for balance of payments support.
        With the activation of the NAB in April, IMF resources currently
    available for new lending programs total almost $400 billion.
        Currently, no additional Eurozone members are requesting IMF
    support. It is important to keep in mind that the bulk of the financing
    for European crisis countries has been provided by Europe, and that in
    these cases the IMF typically has only provided about one-third of the
    total financial support.
        Question. On March 29, out of profound concern that the
    administration is not fully and faithfully enforcing CISADA, Senators
    Kyl, Lieberman, and I sent an unclassified letter to Secretary Clinton
    and to you with a 54-page classified annex detailing additional
    sanctions violations of which we are aware. Can you commit to a date
    when we can expect a response to this letter?
        Answer. In addition to the unclassified response letter sent on May
    2, my staff provided a classified briefing on CISADA matters on May 19.
        Question. As you know, section 104 of CISADA ``urges the President,
    in the strongest terms, to consider immediately using the authority of
    the President to impose sanctions on the Central Bank of Iran.''
    According to CRS, authorities for such a designation ``could include
    section 311 of the USA PATRIOT Act (31 U.S.C. 5318A), which authorizes
    designation of foreign banks as ``of primary money laundering
    concern.'' Do you plan to impose sanctions on the Central Bank of Iran
    (CBI)?
        Answer. United States financial institutions are prohibited, with
    very limited exceptions, from doing any business directly or indirectly
    with all Iranian banks, including the CBI. Treasury recognizes that
    section 104 of CISADA urges us to consider imposing sanctions on CBI,
    and along with our colleagues in the administration, has been
    considering a range of possible actions. This follows on several years
    of intense focus by Treasury on the CBI. We have, for example,
    highlighted our concerns regarding the CBI's conduct in FinCEN
    advisories on two occasions. Treasury also has noted previously that
    the CBI and Iranian commercial banks have requested that their names be
    removed from global transactions to make it more difficult for
    intermediary financial institutions to determine the true parties in
    the transaction, and we remain concerned that the CBI may be
    facilitating transactions for sanctioned Iranian banks. That said,
    designating a central bank would be a very significant step, with
    ramifications that may well extend far beyond a similar action against
    a commercial bank. For such an action to have the desired effect, it is
    essential that we obtain the cooperation of our allies to ensure that
    it increases the pressure on Iran. We continue to monitor the
    activities of the CBI and to work closely with our allies on the full
    range of pressures we can bring to bear on Iran.

                              SUBCOMMITTEE RECESS

        Senator Durbin. Thank you, Senator Moran.
        And thank you, Mr. Secretary.
        The record of this hearing remains open for a period of 1
    week, until noon on Tuesday, April 12. Subcommittee members may
    submit statements or questions for the Secretary to consider.
        And this hearing of the subcommittee stands recessed.
        [Whereupon, at 11:25 a.m., Tuesday, April 5, the
    subcommittee was recessed, to reconvene subject to the call of
    the Chair.]

                  MATERIAL SUBMITTED SUBSEQUENT TO THE HEARING

        [Clerk's Note.--The following testimony(ies) were received
    subsequent to the hearing for inclusion in the record.]
    Prepared Statement of PolicyLink, The Food Trust, and The Reinvestment
                                      Fund
        Chairman and distinguished Senators of the subcommittee, thank you
    for the opportunity to share our support for a Healthy Food Financing
    Initiative (HFFI). PolicyLink is a national research and action
    institute advancing economic and social equity by Lifting Up What
    Works; The Food Trust is a nonprofit organization working to ensure
    that everyone has access to affordable, nutritious food; and The
    Reinvestment Fund is a Community Development Financial Institution
    (CDFI) that creates wealth and opportunity for low-wealth people and
    places through the promotion of socially and environmentally
    responsible development.
        Our three organizations, along with a diverse coalition of
    stakeholders, which includes representatives from the grocery industry,
    health, civil rights, agriculture and the community development finance
    community, support the creation of HFFI to address the problem of
    ``food deserts'' in urban and rural areas across the Nation. This
    problem can be solved in many communities using a successful model that
    is underway in the State of Pennsylvania and is now being replicated
    throughout the country.
        HFFI is a program worthy of investment as it promotes health,
    creates jobs, and sparks economic development. HFFI will provide loan
    and grant financing to attract grocery stores and other fresh food
    retail to underserved urban, suburban, and rural areas, and renovate
    and expand existing stores so they can provide the healthy foods that
    communities want and need. Over time, with continued investment, HFFI
    could solve the problem of food deserts in urban and rural communities
    across the country.
        For decades, low-income communities, particularly communities of
    color, have suffered from a lack of access to healthy, fresh food. USDA
    research determined that more than 23.5 million Americans are living in
    communities without access to high-quality, fresh food. Studies
    repeatedly show that residents of many low-income neighborhoods must
    travel long distances for healthy food, or rely on corner stores and
    fast food outlets offering high-fat, high-sugar foods. For instance, a
    recent multistate study found that low-income census tracts had half as
    many supermarkets as wealthy tracts, and four times as many smaller
    grocery stores. Another multistate study found that 8 percent of
    African Americans live in a tract with a supermarket, compared to 31
    percent of whites. Nationally, low-income ZIP codes have 30 percent
    more convenience stores, which tend to lack healthy food, than middle
    income ZIP codes.
        And, a nationwide analysis found there are 418 rural food desert
    counties where all residents live more than 10 miles from a supermarket
    or a supercenter--this is 20 percent of rural counties. In rural
    communities, inadequate transportation can be a particular challenge.
    In Mississippi, which has the highest obesity rate of any State, more
    than 70 percent of food stamp eligible households travel more than 30
    miles to reach a supermarket. Adults living in rural Mississippi food
    desert counties are 23 percent less likely to consume the recommended
    fruits and vegetables than those in counties that have supermarkets,
    controlling for age, sex, race, and education.
        Controlling for population density, rural areas have fewer food
    retailers of any types compared to urban areas, and only 14 percent the
    number of chain supermarkets. For instance, in New Mexico, rural
    residents have access to fewer grocery stores than urban residents, pay
    more for comparable items, and have less selection. The same market
    basket of groceries costs $85 for rural residents versus $55 for urban
    residents.
        The results of this lack of healthy food options are grim--these
    communities have significantly higher rates of obesity, diabetes, and
    other related health issues. Over the past decade, obesity rates have
    more than doubled in children and tripled in adolescents. In 2010,
    PolicyLink and The Food Trust conducted a review of more than 130
    studies on the issue of access to healthy food and found a direct
    correlation between diet-related diseases and access. A California
    study found that obesity and diabetes rates were 20 percent higher for
    those living in the least healthy ``food environments.'' In
    Indianapolis, a study found that BMI values corresponded with access to
    supermarkets and fast food restaurants. Researchers estimated that
    adding a new grocery store to a high-poverty neighborhood translates
    into a 3-pound weight decrease.
        Fortunately, changing access changes eating habits. For every
    additional supermarket in a census tract, produce consumption increases
    32 percent for African Americans and 11 percent for whites, according
    to a multistate study. A survey of produce availability in New Orleans'
    small neighborhood stores found that for each additional meter of shelf
    space devoted to fresh vegetables, residents eat an additional .35
    servings per day. In fact, of 14 studies that examine food access and
    consumption of healthy foods, all but one of them found a correlation
    between greater access and better eating behaviors. This is also true
    for food stamp recipients. Proximity to a supermarket was found to be
    associated with increased fruit and vegetable consumption.
        The problems associated with lack of access go beyond health. Low-
    income communities are cut off from all the economic development
    benefits that come with a local grocery store: the creation of steady
    jobs at decent wages and the sparking of complementary retail stores
    and services nearby. Grocery stores operate as important economic
    anchors for communities, providing a vital service and bringing
    customers that can also support other nearby business. Securing new or
    improved local grocery stores can improve local economies and create
    jobs.
        President Barack Obama's proposed fiscal year 2012 budget includes
    a proposal to invest $330 million, including $250 million in New
    Markets Tax Credits, in a national HFFI. Specifically, the Initiative
    would provide:
      --$35 million through USDA's Office of the Secretary, with additional
            ``other funds of Rural Development and the Agricultural
            Marketing Service available to support the USDA's portion of
            the Healthy Food Financing Initiative'';
      --$25 million through the Treasury Department's CDFI Fund
      --$20 million through Health and Human Services
      --$250 million through the Treasury Department's New Markets Tax
            Credits Program.
        An HFFI would attract investment in underserved communities by
    providing critical loan and grant financing. These one-time resources
    will help fresh food retailers overcome the higher initial barriers to
    entry into underserved, low-income urban and rural communities, and
    would also support renovation and expansion of existing stores so they
    can provide the healthy foods that communities want and need. The
    program would be flexible and comprehensive enough to support
    innovations in healthy food retailing and to assist retailers with
    different aspects of the store development and renovation process.
        Grocery industry representatives find that there are obstacles to
    grocery store development in underserved low-income communities, but
    also that those obstacles can be overcome. The development process for
    building a new grocery store is lengthy and complex, and retailers
    often find that stores in low-income communities have high start-up
    costs, appropriate sites are hard to find, and securing financing is
    difficult. Grocery operators in both urban and rural areas cite lack of
    access to flexible financing as one of the top barriers hindering the
    development of stores in underserved areas.
        HFFI is modeled after the successful Pennsylvania Fresh Food
    Financing Initiative (FFFI), a public/private partnership launched in
    2004. Using a State investment of $30 million, the program has led to:
      --projects totaling more than $190 million;
      --88 stores built or renovated in underserved communities in urban
            and rural areas across the State;
      --improved access to healthy food for more than 400,000 residents;
      --more than 5,000 jobs created or retained;
      --increased local tax revenues; and
      --much-needed additional economic development in these communities.
        Stores range from full-service 70,000 square foot supermarkets to
    900 square foot food shops; and from traditional grocery stores to
    farmers' markets, cooperatives, and corner stores selling healthy food.
    Approximately two-thirds of the projects were in rural areas and small
    towns with the remainder in urban areas.
        HFFI is a viable, effective, and economically sustainable solution
    to the problem of limited access to healthy foods. It can bring triple
    bottom-line benefits, achieving multiple goals: reducing health
    disparities and improving the health of families and children; creating
    jobs; and, stimulating local economic development in low-income
    communities.
        HFFI would incorporate the key components that allowed the
    Pennsylvania program to be so effective at attracting private dollars,
    garnering the commitment of store operators, getting fresh food retail
    stores and markets successfully developed, and stimulating local
    economies.
        The Pennsylvania FFFI has been cited as an innovative model by the
    U.S. Centers for Disease Control and Prevention; the National
    Conference of State Legislatures; Harvard's Kennedy School of
    Government; and the National Governors Association. There is
    significant momentum in many States and cities across the country to
    address the lack of grocery access in underserved communities. Several
    States and/or cities are in the process of replicating the successful
    Pennsylvania FFFI Program, and many others have begun to examine the
    needs and opportunities in their communities. For example:
      --The State of New York has launched the Healthy Food, Healthy
            Communities Initiative, a business financing program to
            encourage supermarket and other fresh food retail investment in
            underserved areas throughout the State that will provide loans
            and grants to eligible projects. New York City has launched a
            complementary FRESH Program that will encourage supermarket
            development through tax and zoning incentives and a single
            point of access to city government for supermarket operators.
      --The City of New Orleans recently launched the Fresh Food Retailer
            Initiative Program (FFRI) that will provide direct financial
            assistance to retail businesses by awarding forgivable and/or
            low-interest loans to grocery stores and other fresh food
            retailers.
      --The California Endowment, NCB Capital Impact, and other community,
            supermarket industry, and government partners have been working
            to create a supermarket financing program in California that is
            expected to be launched in the first half of 2011.
        A national HFFI could amplify the impact in each of these States
    and leverage the work already underway to ensure swift implementation.
    Moreover, a national HFFI would ensure that all State and communities
    could solve their food desert problems with new stores and other
    healthy food retail projects.
        In the midst of our current economic downturn, the need for a
    comprehensive Federal policy to address the lack of fresh food access
    in low-income is critical. We urge the subcommittee to support full
    funding for a Healthy Food Financing Initiative, for the benefit of
    communities across the Nation. Thank you for the opportunity to share
    our perspectives with you today.

      FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR FISCAL
                                   YEAR 2012

                                  ----------

                             WEDNESDAY, MAY 4, 2011

                                           U.S. Senate,
               Subcommittee of the Committee on Appropriations,
                                                        Washington, DC.
        The subcommittee met at 10:17 a.m., in room SD-138, Dirksen
    Senate Office Building, Hon. Richard J. Durbin (chairman)
    presiding.
        Present: Senators Durbin, Lautenberg, and Moran.

                      COMMODITY FUTURES TRADING COMMISSION

    STATEMENT OF HON. GARY GENSLER, CHAIRMAN

                 OPENING STATEMENT OF SENATOR RICHARD J. DURBIN

        Senator Durbin. Good morning. I'm pleased to convene this
    hearing to consider the fiscal year 2012 funding request of two
    key Federal regulatory agencies within the jurisdiction of the
    Senate Committee on Appropriations Subcommittee on Financial
    Services and General Government--the Commodity Futures Trading
    Commission (CFTC) and the Securities and Exchange Commission
    (SEC). Before I go further, let me apologize for being a few
    minutes late, but I opened a session this morning and it took a
    few minutes to get that started.
        I welcome my distinguished Ranking Member, Senator Jerry
    Moran, other colleagues who've joined me on the dais today, and
    others that may arrive during the course of the proceeding.
        Joining us today to present testimony on the critical work
    of these agencies; to share how they've used the resources
    provided over the past several years; and to explain the
    details of their budgetary needs for the next fiscal year, are
    the Honorable Gary Gensler, chairman of the CFTC, and the
    Honorable Mary L. Schapiro, chairman of the SEC.
        The subcommittee has received a statement for the record
    from Colleen M. Kelley, president of the National Treasury
    Employees Union, regarding the funding for the SEC. And if
    there's no objection, I ask that it be included in the record
    of these proceedings.

                           CRITICAL MARKET OVERSIGHT

        The CFTC and the SEC both occupy pivotal positions at the
    forefront of stimulating and sustaining economic growth and
    prosperity in America, while protecting the marketplace from
    fraud and manipulation. Market users, financial investors, and
    the U.S. economy rely on the vigilant oversight of these two
    agencies in today's rapid-paced, evolving, and often volatile,
    global marketplace.
        It's clear that Chairman Gensler and Chairman Schapiro,
    their fellow commissioners, and their respective staff, have
    invested inestimable hours in paving the way toward a more
    reliable regulatory foundation--one that will safeguard the
    stability and integrity of the futures and securities markets.
    Particularly at this time in history, we depend on their
    foresight and leadership to implement promptly, prudently, and
    transparently the array of comprehensive reforms designed to
    strengthen our regulatory framework.

                                  CFTC MISSION

        The CFTC carries out market surveillance, compliance, and
    enforcement in the futures arena. It detects, deters, and
    punishes abusive trading activity and the manipulation of
    commodity prices which could have a negative impact on
    consumers and the economy.
        Adding to the challenge of the CFTC's mission is a
    significantly transformed, globalized, electronic, around-the-
    clock, and highly diversified marketplace. With the enactment
    of the Dodd-Frank Act financial regulatory reform, the CFTC's
    mission was substantially expanded to embrace oversight of the
    swaps marketplace, the vast, once-in-the-shadows world of over-
    the-counter (OTC) derivatives.
        To grasp the vast scope of the CFTC's additional
    responsibility, it's useful to consider the long-regulated U.S.
    futures marketplace, historically policed by the CFTC, that has
    the notional value of approximately $40 trillion--enormous by
    anyone's calculation. It pales in comparison to the U.S. OTC
    derivatives marketplace now coming under the CFTC's purview,
    with a notional value not of $40 trillion, but $300 trillion--
    nearly eight times the amount of the regulated futures market.

                                  SEC MISSION

        As the investor's advocate, the SEC is responsible for
    maintaining fair, orderly, and efficient stock and securities
    markets. The SEC conducts day-to-day oversight of major market
    participants, monitors corporate disclosure of information to
    the public, and investigates and pursues civil and criminal
    enforcement actions.
        To fulfill its market oversight and investor protection
    functions, the SEC must monitor 1,800 investment advisers,
    7,500 mutual funds, and more than 5,000 broker-dealers with
    more than 160,000 branch offices. The SEC reviews the
    disclosures and financial statements of approximately 10,000
    reporting companies, oversees approximately 500 transfer
    agents, 15 national securities exchanges, 9 clearing agencies,
    and 10 nationally recognized statistical rating organizations.
        With the enactment of the Dodd-Frank Act last July, the
    SEC's responsibilities grew dramatically. Now the SEC is in the
    driver's seat for issuing 100 new rules; creating 5 new
    offices; producing more than 20 studies and reports; overseeing
    OTC derivatives markets and hedge fund advisers; registering
    municipal advisers and security-based swap market participants;
    enhanced supervising of Nationally Recognized Statistical
    Rating Organizations and clearing agencies; regulating asset-
    backed securities; and creating a new whistleblower program.

                                BUDGETARY NEEDS

        I welcome the opportunity today to look at the critical
    budgets of these two very, very important agencies. I am
    pleased that during the past several years that I've been
    honored to chair the subcommittee we have substantially and
    dramatically increased the funding of both of these agencies.
    In terms of resources in recent years, since fiscal year 2007
    funding for the CFTC has increased from $97.9 million to the
    $202.6 million recently enacted in the fiscal year 2011
    continuing resolution--a 107 percent hike in funding over a 4-
    year period. The SEC's funding has grown from $892 million in
    fiscal year 2007 to $1.185 billion in fiscal year 2011--a 33
    percent hike in funding in that time span.
        Compared to the allocation available to the subcommittee
    last July when we prepared our recommendations, we experienced
    a significantly reduced overall level for purposes of funding
    the decisions for the recently enhanced fiscal year 2011 full
    year continuing resolution. Encountering a substantial
    reduction in our available funds of more than $3.5 billion,
    representing a 13 percent cut below what we had to work with
    last July, was far from ideal.
        It also meant an overall decrease of $2.35 billion, or 10
    percent below a freeze at the fiscal year 2010 enacted level,
    making for some tough choices. The fiscal year 2012 forecast
    does not look rosy. I fully expect to face equally complicated
    and challenging funding requirements.

                               PREPARED STATEMENT

        I'm going to ask that the remainder of my statement be
    placed in the record, and I'd like to now turn it over to my
    Ranking Member, Senator Moran of Kansas, for any opening
    remarks he might have.
        [The statement follows:]
                Prepared Statement of Senator Richard J. Durbin
        Good morning. I am pleased to convene this hearing to consider the
    fiscal year 2012 funding requests of two key Federal regulatory
    agencies within the jurisdiction of the Appropriations Subcommittee on
    Financial Services and General Government: the Commodity Futures
    Trading Commission (CFTC) and the Securities and Exchange Commission
    (SEC).
        I welcome my distinguished ranking member, Senator Jerry Moran, and
    other colleagues who have joined me on the dais today, and others who
    may arrive during the course of these proceedings.
        Joining us today to present testimony on the critical work of their
    agencies, to share how they have used the resources provided over the
    past couple years, and to explain the details of their budgetary needs
    for fiscal year 2012 are the Honorable Gary Gensler, Chairman of the
    CFTC and the Honorable Mary L. Schapiro, Chairman of the SEC.
        The CFTC and the SEC both occupy pivotal positions at the forefront
    of stimulating and sustaining economic growth and prosperity in our
    country--while protecting the marketplace from fraud and manipulation.
        Market users, financial investors, and the U.S. economy rely on
    vigilant oversight by these two agencies in today's rapid-paced,
    evolving, and often volatile global marketplace.
        It is clear that both Chairman Gensler and Chairman Schapiro, their
    fellow Commissioners, and their respective staff have invested
    inestimable hours in paving the way toward a more reliable regulatory
    foundation--one that will safeguard the stability and integrity of the
    futures and securities markets. Particularly at this time in history,
    we depend on their foresight and leadership to promptly, prudently, and
    transparently implement the array of comprehensive reforms designed to
    strengthen our regulatory framework.
        The CFTC carries out market surveillance, compliance, and
    enforcement programs in the futures arena. The CFTC detects, deters,
    and punishes abusive trading activity and manipulation of commodity
    prices, which could have negative impacts on consumers and the economy.
        Adding to the challenge of the CFTC's mission is a significantly
    transformed, globalized, electronic, round-the-clock, and highly
    diversified marketplace. With the enactment of Dodd-Frank financial
    regulatory reform, the CFTC's mission was substantially expanded to
    embrace oversight of the swaps marketplace--the vast ``once-in-the-
    shadows'' world of over-the-counter (OTC) derivatives.
        To grasp the vast scope of the CFTC's additional responsibilities,
    it is useful to consider that the long-regulated U.S. futures
    marketplace historically policed by the CFTC has a notional value of
    approximately $40 trillion. Enormous--by anyone's calculation. But it
    pales in comparison to the U.S. OTC derivatives marketplace now coming
    under the CFTC's purview--with a notional value estimated at $300
    trillion--nearly eight times the notional amount of the regulated
    futures markets.
        As the ``investors advocate,'' the SEC is responsible for
    maintaining fair, orderly, and efficient stock and securities markets.
    The SEC conducts day-to-day oversight of the major market participants,
    monitors corporate disclosure of information to the investing public,
    and investigates and pursues civil and criminal enforcement actions
    against securities law violations.
        To fulfill its market oversight and investor protection functions,
    the SEC must monitor 1,800 investment advisers, 7,500 mutual funds, and
    more than 5,000 broker-dealers with more than 160,000 branch offices.
    The SEC reviews the disclosures and financial statements of
    approximately 10,000 reporting companies, oversees approximately 500
    transfer agents, 15 national securities exchanges, 9 clearing agencies,
    10 nationally recognized statistical rating organizations (NRSROs), as
    well as the Public Company Accounting Oversight Board, Financial
    Industry Regulatory Authority, Municipal Securities Rulemaking Board,
    and the Securities Investor Protection Corporation.
        With the enactment of the Dodd-Frank Act last July, the SEC's
    responsibilities grew considerably. Now the SEC is in the driver's seat
    for issuing 100 new rules, creating five new offices, producing more
    than 20 studies and reports, overseeing the over-the-counter
    derivatives market and hedge fund advisers; registering municipal
    advisers and security-based swap market participants; enhanced
    supervising of NRSROs and clearing agencies; regulating asset-backed
    securities; and creating a new whistleblower program.
        I welcome the opportunity today to conduct critical oversight of
    these two agencies through a candid discussion of where they are today,
    where they need to be, and how we can work to provide resources they
    need to satisfy their vital missions.
        I am pleased that over the past several years, this subcommittee
    has been able to substantially boost the funding approved for the CFTC
    and the SEC to help address pressing resource needs.
        In terms of resources in recent years, since fiscal year 2007,
    funding for the CFTC has increased from $97.981 million to the $202.675
    million recently enacted in the fiscal year 2011 continuing resolution,
    a 107 percent hike in funding. The SEC's funding has grown from $892.6
    million in fiscal year 2007 to $1.185 billion in fiscal year 2011, a 33
    percent hike in funding over the time span.
        Compared to the allocation available to this subcommittee last July
    when we prepared our fiscal year 2011 recommendations, we experienced a
    significantly reduced overall level for purposes of funding decisions
    for the recently enacted fiscal year 2011 full-year continuing
    resolution. Encountering a substantial reduction in our available funds
    of more than $3.5 billion, representing a 13 percent cut, below where
    we were last July was far from ideal. It also meant an overall decrease
    of $2.35 billion, or 10 percent, below a freeze at the fiscal year 2010
    enacted level--making for many tough choices and painful sacrifices.
        The fiscal year 2012 forecast does not look rosy. I fully expect to
    face equally complicated and challenging funding decisions as we
    prepare our bill for the ensuing fiscal year.
        Looking ahead, for fiscal year 2012, the President seeks funding of
    $308 million for the CFTC, an increase of $105 million (52 percent)
    more than the fiscal year 2011 enacted level of $206.7 million, which
    itself is an increase of $33.98 million, a 20 percent hike, above the
    fiscal year 2010 enacted level of $168.8 million.
        For the SEC, the President's fiscal year 2012 budget seeks base
    funding of $1.407 billion. This is an increase of $222.5 million (19
    percent) above the fiscal year 2011 enacted level of $1.185 billion,
    not including an additional $33 million in prior-year unobligated
    balances. The fiscal year 2011 base funding represents an increase of
    $74 million, or 7 percent, more than the fiscal year 2010 enacted level
    of $1.111 billion.
        Oversight Responsibility.--The Congress probably exercises its most
    effective oversight of agencies and programs through the appropriations
    process. It allows an annual check-up and review of operations and
    spending. Today's hearing provides a valuable opportunity to ask some
    key questions:
      --Are the CFTC and the SEC keeping pace with developments in the
            markets particularly the emerging prevalence of new-fangled,
            more complex financial products?
      --Do these agencies have the right mix of talent and specialized
            expertise to be vigilant watchdogs rather than timid lap dogs?
      --Are they ahead of the curve, rather than trailing behind, when it
            comes to stopping unscrupulous, greed-driven schemers who
            pursue selfish gain at the expense of the unwary and unwitting?
      --Do they have nimble, state-of-the-art, sophisticated information
            technology to augment and support their human capital?
      --What are the likely consequences of budget belt-tightening and
            possibly reduced resources?
        I look forward to hearing more about what each of these agencies
    have been able to accomplish since our last hearing, what resource gaps
    remain to be filled to make them more robust, responsive regulators,
    and how do we best get there amid growing deficits and spending cut
    sentiments.
        It will be helpful to hear from both Chairmen their honest
    appraisals about the resources they will require to achieve their
    missions, keep pace with change, and becomes as sophisticated as, if
    not more so, than the entities they monitor--while responsibly managing
    taxpayer dollars.

                        STATEMENT OF SENATOR JERRY MORAN

        Senator Moran. Chairman Durbin, thank you very much. Thank
    you for your kindness and your graciousness to me, and thank
    you for calling this hearing.
        And I welcome the two chairmen, Chairman Gensler and
    Chairman Schapiro.
        As we review the budget submissions for the CFTC and the
    SEC for fiscal year 2012, I look forward to hearing the details
    of your requests, your plans to carry out your core missions,
    and how you propose to implement the Dodd-Frank Act.
        Chairman Gensler, as you have said, derivative markets and
    effective oversight of those markets matter to corporations,
    farmers, homeowners, and small businesses. We all benefit from
    effective oversight that promotes fair and orderly derivative
    markets.
        However, to promote such markets and to assist the
    businesses that are dependent upon them, we must also have an
    orderly and transparent process which outlines how they should
    work.
        I have heard many concerns expressed that the CFTC is
    moving too quickly and has not adequately established the cost
    of new regulations, valuing speed over deliberation. I was
    pleased to see the CFTC acted last week to give the public more
    time to comment on the new regulations that you are proposing.
    While I welcome this extension, I also think that rules have
    been proposed in a sequence that has created some confusion.
        I've heard Chairman Gensler's recent comment about how the
    CFTC has revealed its mosaic of rules. However, I think a
    roadmap for implementation, rather than a random mosaic of
    rules, would be more helpful in getting us on the path to a
    fair and orderly marketplace and help us establish
    appropriation priorities. This call for a roadmap is intended
    to foster transparency and broaden understanding, and for any
    new regulatory framework to be effective, everyone involved
    must have a clear appreciation of their roles and
    responsibilities in the new system and how these changes will
    evolve in a logical sequence.
        In reviewing the budget requests of both the CFTC and the
    SEC, we recognize that protecting investors is important as
    first-time investors have turned to markets to help secure
    their retirements, pay for homes, and send their children to
    college. We also understand that your agencies are faced with
    innovations in the financial services arena that present
    regulators with increasingly complex markets to regulate.
    However, we're all aware of our budget deficit and fiscal
    constraints that will require all agencies to make decisions as
    to how best to allocate resources.
        Technological solutions will be necessary to keep up with
    the next generation of trading platforms and systems that
    operate at record-breaking pace. Staffing levels will have to
    be carefully considered so that they do not become
    unsustainable. This is not a new challenge. All agencies should
    be making strategic decisions on resource allocations driven by
    the agency's mission responsibilities, and grounded in analysis
    of their workload and their human capital resources and needs.
    Simply increasing funding does not ensure that an agency can
    successfully achieve its mission.
        In addition to making wise decisions about how to strike a
    balance between investments in new technology and staffing
    levels, agencies also must make sound decisions about what type
    of staff to hire and how best to utilize those positions. In
    reviewing the recent Inspector General (IG) report on the CFTC
    rulemaking process, I have concerns about how the CFTC has
    chosen to utilize staff the last year. For instance, as
    discussed in the IG report, the CFTC has ineffectively used its
    Office of the Chief Economist. Not only was this office left
    unfilled for nearly a year, but the CFTC went on a hiring spree
    for new lawyers during the same time. The IG report suggests
    that unless the CFTC can make a wiser hiring decision and
    engage in meaningful economic analysis, the Congress may need
    to provide additional direction on how the commission can spend
    money on hiring and how it should utilize its staff.
        In addition to the budget concerns I have another one is
    that the CFTC, despite tight budget deficits, has engaged in
    rulemakings that are discretionary and unnecessary according to
    the CFTC--the only economic analysis available. For example,
    proposed rulemakings on position limits and core principles are
    not required by the Dodd-Frank Act. This is not necessary for
    the CFTC to immediately move toward these rulemakings.
    Furthermore, the only reliable quantitative data available from
    the CFTC is a staff report that suggests such rules are
    unnecessary and, at most, premature. Pursuit of position limits
    and core principle rulemakings are direct examples of how the
    CFTC has failed to listen to the economist and failed to
    prioritize rulemakings under existing budget constraints.

                               PREPARED STATEMENT

        Chairman Gensler and Chairman Schapiro, you both have
    challenges--significant ones--in front of you. You must improve
    transparency in our securities market and uncover fraud and
    deception, while not over-regulating our markets and hindering
    our economic recovery.
        Chairman Durbin, I look forward to working with you as we
    consider the fiscal year 2012 budget requests for the CFTC and
    the SEC. Thank you.
        [The statement follows:]
                   Prepared Statement of Senator Jerry Moran
        Mr. Chairman, thank you for calling this hearing. Chairman Gensler
    and Chairman Schapiro, welcome.
        As we review the budget submissions for the Commodity Futures
    Trading Commission's (CFTC) and the Security and Exchange Commission
    (SEC) for fiscal year 2012, I look forward to hearing the details of
    your requests, your plans to carry out your core missions, and how you
    propose to implement the Dodd-Frank Act.
        Chairman Gensler, as you have said, ``derivatives markets and
    effective oversight of those markets matters to corporations, farmers,
    homeowners and small businesses.'' We all benefit from effective
    oversight that promotes fair and orderly derivatives markets. However,
    to promote such markets and assist the businesses that are dependent on
    them, we must also have an orderly and transparent process which
    outlines how they should work. I have heard many concerns expressed
    that the CFTC is moving too quickly and has not adequately established
    the cost of new regulations, valuing speed over deliberation. I was
    pleased to see that the CFTC acted last week to give the public more
    time to comment on the new regulations you are proposing. While I
    welcome this extension, I also think rules have been proposed in a
    sequence which has created confusion. I have heard Chairman Gensler's
    recent comment about how the CFTC has revealed its ``mosaic'' of rules.
    However, I think a roadmap for implementation, rather than a random
    mosaic of rules, would be more helpful in getting us on the path to a
    fair and orderly marketplace and help establish appropriations.
        This call for a road map is intended to foster transparency and
    broaden understanding. For any new regulatory framework to be
    effective, everyone involved must have a clear understanding of their
    roles and responsibilities in the new system and how those changes will
    evolve in a logical sequence.
        In reviewing the budget request of the both the CFTC and the SEC,
    we recognize that protecting investors is important as first-time
    investors have turned to the markets to help secure their retirements,
    pay for homes, and send their children to college. We also understand
    that your agencies are faced with innovations in the financial services
    arena that present regulators with increasingly complex markets to
    regulate.
        However, as we are all aware, our budget deficit and fiscal
    constraints will require all agencies to make decisions as to how to
    best allocate resources. Technological solutions will be necessary to
    keep up with next generation trading platforms and systems that operate
    at a record-breaking pace. Staffing levels will have to be carefully
    considered so that they do not become unsustainable. This is not a new
    challenge. All agencies should be making strategic decisions on
    resource allocation driven by the agency's mission responsibilities,
    and grounded in analysis of their workload and their human capital
    resources and needs. Simply increasing funding does not ensure that an
    agency can successfully achieve its mission.
        In addition to making wise decisions about how to strike a balance
    between investments in new technology and staffing levels, agencies
    must also make sound decisions about what type of staff to hire and how
    best to utilize those positions. In reviewing a recent Inspector
    General (IG) report on the CFTC rulemaking process, I have concerns
    about how the CFTC has chosen to utilize staff over the last year. For
    instance, as discussed in the IG report, the CFTC has ineffectively
    used the Office of the Chief Economist. Not only was this office left
    unfilled for nearly a year, but the CFTC went on a hiring spree for new
    lawyers during the same time. The IG report suggests that unless the
    CFTC can make wiser hiring decisions and engage in meaningful economic
    analysis, the Congress may need to provide additional direction about
    how the CFTC can spend money on hiring and how it should utilize its
    staff.
        An addition to budget concern I have is that the CFTC, despite
    tight budgets, has engaged in rulemakings that are discretionary and
    unnecessary, according to the only the CFTC economic analysis
    available. For example, proposed rulemakings on position limits and
    core principles are not required by Dodd Frank. Thus, it is not
    necessary for the CFTC to immediately move forward with these
    rulemakings. Furthermore, the only reliable quantitative data available
    from the CFTC is a staff report that suggests such rules are
    unnecessary and at most premature. Pursuit of position limits and core
    principle rulemakings are direct examples of how the CFTC has failed
    listen to its economists and failed to prioritize rulemakings under
    existing budget constraints.
        Chairman Gensler and Chairman Schapiro, you both have challenging
    tasks in front of you. You must improve transparency in our securities
    markets and uncover fraud and deception, while not over-regulating our
    markets and hindering our economic recovery.
        Chairman Durbin, I look forward to working with you as we consider
    the fiscal year 2012 budget requests of the CFTC and the SEC.

        Senator Durbin. Thank you Senator Moran.
        Senator Lautenberg.

                    STATEMENT OF SENATOR FRANK R. LAUTENBERG

        Senator Lautenberg. Mr. Chairman, thanks very much for
    holding the hearing and I ask for unanimous consent that my
    full statement will be included in the record.
        Senator Durbin. Without objection.
        Senator Lautenberg. And I take a moment of that time to
    just say that, how pleased I am to see each of you in your
    positions. And how delighted I am--delight's the wrong word--
    how satisfied I am that we're on to something, that we're going
    to change the way we did business in the past as a result of
    the finance reform legislation, to make sure that companies
    understand that there are obligations that they're going to
    have to meet.
        And I look at history. I used to run a company, a very big
    company--ADP. ADP does the Bureau of Labor statistics every
    month now, and the company pays more than 35 million people
    their paychecks and has fresh data to work from. And I learned
    something as the CEO of that company. As the company grew, I
    learned that the most satisfied investors are those who see a
    transparent approach to what's going on in the company. And I
    see that, the shortcuts to increased compensation without
    regard for the performance of the company or of the need of the
    employees.
        I furnished the Columbia Business School, my alma mater,
    with a chair. The chair was endowed in 2001, when I was out of
    the Senate for 2 years, and the chair was to say that we have
    to pay more attention to business ethics and corporate
    governance. And I point out without patting myself too hard on
    my, on the shoulder, that, that was in 2001, my friends. It was
    2001, which preceded 2008 by a long time.

                               PREPARED STATEMENT

        And so, I'm pleased to see that we're finally going to
    say--hey, you can't get away with the kinds of things that you
    did before. The public's entitled to know what happens when
    they put money into an investment, and its our responsibility
    to help guide them--and not worry so much about whether we're
    overburdening, but I worry about whether we're underburdening
    the, your respective agencies and letting things go back to
    where they were. That should never happen again in America. And
    I'm going to fight like the devil to make sure you have the
    resources to do your job with.
        [The statement follows:]
               Prepared Statement of Senator Frank R. Lautenberg
        Mr. Chairman, each week brings another reminder that our country is
    slowly--but steadily--recovering from the worst economic downturn since
    the Great Depression.
        Letting Wall Street regulate itself helped trigger this crisis,
    sending millions of Americans to the unemployment line and causing
    their retirement accounts to shrink.
        Under President Obama's leadership, we're rebuilding the economy
    from the ground up--laying a foundation that will make our country
    stronger and better prepared for the future.
        The cornerstone of this effort is last year's Wall Street reform
    law, which includes critical safeguards to protect the economy from
    another meltdown.
        This new law reins in the recklessness of the big banks and creates
    a watchdog to look out for consumers and make sure financial
    institutions follow the rules.
        In addition, these reforms ensure that ordinary investors get the
    information they need to make sound decisions--and bring the secretive
    derivatives market out of the shadows and into the sunlight.
        Unfortunately, House Republicans have been persuaded by their
    friends on Wall Street that the financial industry can regulate itself.
        They are trying to stop Wall Street reform by gutting funding for
    the new law.
        Make no mistake: without these new reforms and the funding to carry
    them out, Wall Street will return to its reckless ways, which will
    threaten our economic recovery and undermine our ability to create
    jobs.
        As a former CEO, I understand the need for a strong financial
    sector.
        But nothing is more important than putting people back to work and
    making sure that our economy is never again threatened by the risky
    bets of Wall Street gamblers.
        So I look forward to hearing from today's witnesses about how we
    can make sure the reform law works the way it was designed and protects
    the American economy and the American people.

        Senator Lautenberg. Thank you very much.
        Senator Durbin. Thanks a lot, Senator Lautenberg.
        And we'd like to invite our guests to make an opening
    statement if they'd care to.
        Mr. Gensler.

                       SUMMARY STATEMENT OF GARY GENSLER

        Mr. Gensler. Good morning. Thank you, Chairman Durbin,
    Ranking Member Moran, and members of the subcommittee. I thank
    you for inviting me to testify on behalf of the CFTC about the
    2012 budget request.
        I'm honored also to testify along with SEC Chair, Mary L.
    Schapiro, with whom we've worked very closely to implement the
    Dodd-Frank Act, and many other matters.
        The CFTC is a good investment for the American public. And
    though the CFTC is not a price-setting agency, rising prices
    for basic commodities, agriculture, energy and the like,
    highlight the importance of having effective market oversight
    to ensure integrity and transparency.
        Each part of our Nation's economy relies on a well-
    functioning derivatives marketplace. It's essential, as
    producers, merchants, and other end-users manage their risk. In
    essence what it does is allows a company to lock in a price at
    some future date. That's at the core of what we oversee.
        This price certainly allows companies to better invest and
    plan for their business. The business certainty that
    derivatives markets can provide exists to the degree only that
    people have confidence in the integrity of the markets,
    however. And the CFTC was created to oversee futures markets--
    first in the agriculture markets, later other commodities. But,
    of course, in the 1980s came along the swaps marketplace, and
    this new type of derivatives remained unregulated until the
    Dodd-Frank Act. With the passage of the Dodd-Frank Act, the
    U.S. swaps market, as the chairman noted--nearly $300 trillion
    in size, or roughly seven times the size of what we currently
    oversee--largely comes under our jurisdiction. Some of it, of
    course, is over at the SEC.
        So, we're working deliberately and efficiently, and I
    believe transparently, to put in place the rules that the
    Congress directed us to do. We've now at this point
    substantially completed that process. And as the Ranking Member
    said, we have the mosaic out, and we are allowing the public to
    look at that whole mosaic. We'll only move forward with final
    rules after we summarize the comments--and with 16,000 comments
    in, that's going to take some time to summarize and get
    commissioner feedback--but I think we'll be moving on final
    rules throughout the summer and into the fall of this year.
        As relates to the budget request of $308 million that the
    President put forward, there are many priorities. I'd like to
    just highlight, very quickly, four. One is technology. The
    budget request builds upon the support of this subcommittee
    that gave us $37 million in technology this year, to move up to
    $66 million. The swaps marketplace being seven times the size
    of the futures marketplace, we need that information. And
    though the Dodd-Frank Act established something called Swap
    Data Repositories, we're faced with the responsibility of
    aggregating futures data with swaps data and bringing it
    together. And what's more--there may be more than one data
    repository by asset class. And so we'll have to aggregate that
    information so that we can police the markets, and we need the
    technology to make sure that we can do that.
        Second, is the swap dealers themselves. The Dodd-Frank Act,
    for the first time, calls for comprehensive regulation of swaps
    dealers. To accomplish this, the CFTC will establish a new swap
    dealer and intermediary oversight program, or actually,
    division. We'll be moving some people over into this. But this
    area will need about 30 more staff, building upon a base of
    about 80 people that we currently have in that effort.
        Third, is clearinghouses. The Dodd-Frank Act requires a
    mandate that swaps that are standardized enough, be in central
    clearing. We currently oversee about 15 clearinghouses. We
    think that will grow to 20 or 21. With that roughly 50 percent
    increase of clearinghouses and an eight-fold increase in the
    underlying product, we're asking for about 30 new staff,
    bringing the staff in our clearing oversight from 40 up to 70.
        And then, last, among these four key priorities is
    transparency. The Dodd-Frank Act has real-time price reporting.
    It also has oversight of a new market mechanism called Swap
    Execution Facilities (SEFs). We're not entirely sure how many
    there will be. We think, our best estimate is at least 30 or 40
    of these new SEFs. We believe that we need at least 60
    additional staff, to oversee the markets. That jump is to about
    100 in this area, but it's for real-time reporting and
    transparency.
        Now, this is not to say we don't have other priorities--
    enforcement, overseeing position limit authority, market
    surveillance--but overall it's bringing our staff up from about
    720, where we think we'll end this year, with your help with
    this $202 million, to a request for 983 people.

                               PREPARED STATEMENT

        We recognize this budget deficit for the Nation presents
    enormous challenges for this subcommittee and the Congress and
    the public, but we cannot forget that the 2008 crisis was very
    real, and it still is very real. Reform will only be effective
    once we've completed final rules, but, yes, also only after we
    have significant resources to fulfill this extended mission.
        So, I thank you.
        [The statement follows:]
                       Prepared Statement of Gary Gensler
        Good morning Chairman Durbin, Ranking Member Moran and members of
    the subcommittee. I thank you for inviting me to today's hearing on the
    Commodity Futures Trading Commission's (CFTC) fiscal year 2012 budget
    request. I am pleased to testify on behalf of the Commission.
                         cftc deg.cftc mission
        The CFTC is a good investment for the American public, overseeing
    vast markets with a relatively small staff. At its core, the mission of
    the CFTC is to ensure the integrity and transparency of derivatives
    markets so that hedgers and investors may use them with confidence.
    Derivatives emerged as tools to allow producers and merchants to be
    certain of the prices of commodities that they planned to use or sell
    in the future. Derivatives markets are used to hedge risk and discover
    prices and work best when they are transparent and free from fraud and
    manipulation.
        The CFTC historically has been charged with overseeing one part of
    the derivatives market--the commodity futures markets. These markets
    have been around for more than a century. Initially, there were futures
    on agricultural commodities, such as wheat, corn, and cotton. The
    markets have grown to include contracts on energy and metals
    commodities, such as crude oil, heating oil, gasoline, copper, gold and
    silver, and contracts on financial products, such as interest rates,
    stock indexes, and foreign currency. These markets--and our regulatory
    oversight--affect tens of thousands of farmers, ranchers, oil
    producers, corporations, municipalities, pension funds, and anybody
    else who wants to hedge a risk and get the benefits of transparent
    pricing in competitive markets.
        Each part of our Nation's economy relies on a well-functioning
    derivatives marketplace. It is essential so that producers, merchants,
    and other end-users can manage their risks. It allows those companies
    to lock in prices for the future. Such price certainty allows companies
    to better make essential business decisions and investments. Thus, it
    is critical that market participants have confidence in the integrity
    of these price discovery markets.
        Though the CFTC is not a price-setting agency, rising prices for
    basic commodities--agricultural and energy--highlight the importance of
    having effective market oversight that ensures integrity and
    transparency.
        The CFTC fulfills its statutory mandate through market
    surveillance, industry oversight and enforcement. We pursue fraud, such
    as Ponzi schemes, and market manipulation. We oversee futures exchanges
    and clearinghouses. We process registration applications, rule reviews,
    appellate filings, and examinations of exchanges and clearinghouses.
    The CFTC is a cop on the beat that protects markets in commodities and
    derivatives from fraud, manipulation, and other abuses.
                          cftc deg.cftc scope
        The CFTC and its predecessors have overseen the commodity futures
    markets since the 1920s. A new type of derivatives called swaps,
    however, came around in the 1980s and remained unregulated until the
    passage of the Dodd-Frank Wall Street Reform and Consumer Protection
    Act (Dodd-Frank). That legislation expanded the CFTC's oversight to,
    for the first time, include both the futures and swaps markets. It also
    gave the CFTC new regulatory responsibilities. The Securities and
    Exchange Commission (SEC) will have similar jurisdiction over the
    securities-based swaps markets.
        The swaps market that Dodd-Frank tasks the CFTC with regulating has
    a notional amount roughly seven times the size of that of the futures
    market and is significantly more complex. The notional value of the
    U.S. futures market in December was approximately $36 trillion. Based
    upon figures compiled by the Office of the Comptroller of the Currency,
    the largest 25 bank holding companies currently have $277 trillion
    notional amount of swaps.
        Further, Dodd-Frank expands the CFTC's regulatory authority to
    include new types of entities, such as swap dealers, swap execution
    facilities (SEFs), and swap data repositories (SDRs). The swaps market
    is more complex than the futures markets because it includes customized
    bilateral hedging arrangements. Whereas all futures trade on exchanges,
    some swaps will continue to be traded over-the-counter.
               cftc deg.implementing the dodd-frank act
        The CFTC is working deliberatively, efficiently, and transparently
    to implement the Dodd-Frank Act. At this point, as we have
    substantially completed the proposal phase of our rule-writing to
    implement the Dodd-Frank Act. Since the President signed the Dodd-Frank
    Act last July, the CFTC has promulgated rules covering all of the areas
    set out by the act for swaps regulation, with the exception of the
    Volcker Rule, for which the act set a different timeline.
        With the substantial completion of the proposal phase of rule-
    writing, the public now has the opportunity to review the whole mosaic
    of rules. This will allow market participants to evaluate the entire
    regulatory scheme as a whole.
        To further facilitate this process, last week the CFTC approved
    reopening or extending the comment periods for most of our Dodd-Frank
    proposed rules for an additional 30 days.
        This time will allow the public to submit any comments they might
    have after seeing the entire mosaic at once. As part of this, I am
    hopeful that market participants will continue to comment about
    potential compliance costs as well as phasing of implementation dates
    to help the agency as we go forward with finalizing rules.
        We will begin considering final rules only after staff can analyze,
    summarize and consider comments, after the Commissioners are able to
    discuss the comments and provide feedback to staff, and after the CFTC
    consults with fellow regulators on the rules.
        One component that we have asked the public about is phasing of
    rule implementation. Over the last 2 days, CFTC staff has worked with
    the SEC staff to host a roundtable to hear directly from the public
    about the timing of implementation dates of Dodd-Frank rulemakings. We
    also opened a public comment file last month to hear specifically on
    this issue. The roundtable and public comments help inform the CFTC as
    to what requirements can be met sooner and which ones will take a bit
    more time.
               cftc deg.fiscal year 2012 budget request
        The President's budget proposes that $308 million be appropriated
    for the CFTC for fiscal year 2012 to remain available until expended
    through fiscal year 2013. This funding level would enable the
    Commission to perform its responsibilities both in the oversight of
    commodity futures markets and in beginning to oversee the swaps
    markets.
        In 2008, both the financial system and the financial regulatory
    system failed the test for the American public. Though there were many
    causes to the crisis, the unregulated swaps market played a central
    role. The President's budget request asks for $106 million more than
    our fiscal year 2011 funding level because the 2008 financial crisis
    was very real, and the Congress mandated that regulation be brought to
    the swaps market. An investment in the CFTC is warranted, because, as
    we saw in 2008, without oversight of the swaps market, billions of
    taxpayer dollars may be at risk.
        The CFTC's resources are used primarily on staff and technology.
        The CFTC peaked in staff in 1992 at 634, but staff levels were cut
    nearly 25 percent in the early 2000s to our lowest level of
    approximately 440 in 2007 and 2008. With the help of the Congress, CFTC
    staffing levels just this past year returned to our levels of the late
    1990s--the level needed to oversee the commodity futures markets at
    that time.
        At the end of fiscal year 2010, the CFTC employed 682 thoughtful,
    experienced, and hardworking staff. In the last 10 years, however,
    futures trading volume has increased more than fourfold. The number of
    actively traded futures and options contracts increased more than
    ninefold. We have moved from an environment with open-outcry pit
    trading to highly sophisticated electronic markets.

        The recently passed continuing resolution appropriates
    approximately $202 million to the CFTC, which would allow the
    Commission to grow modestly to approximately 720 employees. The
    President's fiscal year 2012 budget request would provide funding for
    983 employees. Though we are asking for an increase in funding to
    support approximately 37 percent more staff, it is in light of a
    congressional mandate that expands our scope more than sevenfold.

        Effective oversight of the markets requires that we invest in both
    staff and technology. We need staff to process registration
    applications, conduct surveillance, and rule enforcement reviews,
    investigate fraud and manipulation, and perform many other functions
    that computers alone cannot. But we also need technology to pursue
    automated surveillance to oversee the markets and to make our oversight
    more efficient.
        Despite rapid advances in technology and the increased size of
    regulated derivatives markets, funding for the CFTC has lagged behind
    the growth of the markets. While market participants have the
    technology to automate their trading, we do not yet have the resources
    to employ modern technology to automate our surveillance.
        Last year, we used about 18 percent of our budget--$31 million--on
    technology initiatives. The continuing resolution requires that we
    allocate $37.2 million toward technology in fiscal year 2011. The CFTC
    needs to make further investment in technology to efficiently oversee
    both the futures and swaps markets. Only through investment in the CFTC
    will we be able to adequately oversee the commodity futures and swaps
    markets and protect the American public. The President's fiscal year
    2012 budget provides for $66 million to be used on technology, which
    would increase the proportion of our budget used on technology to more
    than 21 percent.
        To put the CFTC's funding request in perspective, I might note that
    the CFTC's fiscal year 2010 year-end staff of 682 compares to
    approximately 800,000 people employed by U.S. brokerage firms,
    according to the Department of Labor's Bureau of Labor Statistics. That
    is out of a financial industry that employs 5.6 million people.
    Furthermore, the CFTC's funding request of $308 million compares to
    approximately $814 billion in annual revenues of the top 25 bank
    holding companies according to industry filings with the Federal
    Reserve. The CFTC's technology budget of approximately $31 million
    during fiscal year 2010 compares to about $20-25 billion spent by U.S.
    broker/dealers on technology initiatives per year, according to a
    presentation recently given to the CFTC's Technology Advisory Committee
    by the TABB Group.
                   cftc deg.detailed funding request
        The requested funding increase to cover statutory authorities
    includes resources to accomplish the following goals:
          Modernizing Information Technology and Establishing a New Group
            for Data.--The CFTC's fiscal year 2012 budget request includes
            $66 million for technology. The requested budget includes $41
            million to fulfill our pre-Dodd-Frank information technology
            requirements. This increase allows the CFTC to invest in
            technology in an effort to keep pace with the futures
            marketplace that is becoming increasingly populated by
            algorithmic and high-frequency traders.
          Technology will play a critical role in leveraging financial and
            human resources as the CFTC executes its expanded oversight and
            surveillance responsibilities pursuant to the Dodd-Frank Act.
            Accordingly, the CFTC will establish a new group for the
            collection, management, and analysis of data. This group will
            facilitate improved oversight and enforcement in the
            derivatives markets through the use of technology and data. It
            also will serve as the primary interface for market
            participants in adapting to the new data standards and
            reporting requirements for market data required under Dodd-
            Frank.
          The CFTC's fiscal year 2012 budget request includes $25 million
            for technology needed to implement Dodd-Frank. The resources
            requested are necessary for the CFTC to invest in direct data
            links to SDRs that are being established in the United States
            and internationally. The CFTC also must have the technology to
            aggregate and summarize the data for purposes of oversight and
            surveillance.
          Establishing and Staffing a New Swap Dealer and Intermediary
            Oversight Program.--Dodd-Frank creates two new categories of
            registrants: ``swap dealer'' and ``major swap participant.''
            Staff will be needed to regulate them for robust business
            conduct standards, record-keeping and reporting requirements,
            and capital and margin requirements. To effectively oversee
            swap dealers and major swap participants, the CFTC will create
            a new oversight program for these registrants.
          Initial estimates are that there could be approximately 300
            entities--compared to 127 Futures Commission Merchants (FCMs)
            that are currently registered with the CFTC (though other
            intermediaries are registered with the Commission, such as
            commodity trading advisers and commodity pool operators, the
            Commission only reviews FCMs due to resource constraints)--that
            will seek to register as swap dealers, FCMs or retail foreign
            exchange dealers.
          Given the resource needs of the CFTC, we are working very closely
            with self-regulatory organizations, including the National
            Futures Association (NFA), to determine what duties and roles
            they can take on in the swaps markets. In particular, we
            proposed rules that swap dealers would be required to be
            members of the NFA. This could facilitate the NFA taking on
            responsibilities related to registration and examination of
            swaps dealers. Nevertheless, the CFTC has the ultimate
            statutory authority and responsibility for overseeing these
            markets. Therefore, it is essential that the CFTC have
            additional resources to reduce risk and promote transparency in
            the swaps markets.
          The CFTC had 82 staff at the end of fiscal year 2010 responsible
            for overseeing intermediaries relating to pre-Dodd-Frank
            authorities. An additional 30 full-time equivalent (FTE) staff
            are requested for the new Swap Dealer and Intermediary
            Oversight Program for fiscal year 2012, for a total of 112 FTE.
            The requested FTE resources will be essential to fulfill
            significant responsibilities related to registrants.
          Clearing of Standardized Swaps Through CFTC-registered
            Derivatives Clearing Organizations (DCOs).--The Dodd-Frank Act
            requires that standardized swaps be cleared through CFTC-
            registered DCOs. It also requires that the CFTC review and
            examine systemically important DCOs for compliance on a yearly
            basis, which we do not currently have the resources to do.
            Clearing has lowered risk in the futures marketplace since the
            1890s. As of the end of the last fiscal year, the CFTC oversaw
            14 DCOs. Based on information we have received from potential
            new clearinghouses, we anticipate a 50 percent increase in DCOs
            to 20 or 21. The CFTC currently has 40 FTE allocated to
            clearing oversight and risk surveillance. We are requesting an
            increase of 30 FTE during fiscal year 2012 for that team to
            address the significant increase in the number of DCOs, the
            more complex nature of the swaps markets and the Congressional
            mandate that we annually examine systemically important DCOs.
            This would bring total staffing levels to 70. The requested FTE
            resources will be essential to fulfill responsibilities related
            to clearing.
          Oversight of SEFs and Designated Contract Markets (DCMs).--The
            CFTC will need additional staff to implement many new
            provisions related to the oversight of swaps trading activity
            as well as to oversee futures trading activities. These include
            procedures for the review and oversight of an entirely new
            regulated market category: SEFs. Staff in the Division of
            Market Oversight must establish and implement procedures for
            the review of new SEF applications and for the annual
            examination of the operations of SEFs, as well as any DCMs that
            offer swaps for trading. While the CFTC currently oversees 16
            DCMs, based on industry comments, we that anticipate 30-40
            entities will apply to register as SEFs.
          Further, additional staff is necessary to evaluate data on swaps
            trading activity to implement the Dodd-Frank Act's real time
            reporting provisions and to establish appropriate block trade
            levels. At the end of fiscal year 2010, the CFTC had 40 staff
            responsible for our pre-Dodd-Frank responsibilities to oversee
            futures exchanges. The President's request would increase that
            level to 62 FTE while adding 38 FTE to implement new Dodd-Frank
            Authorities during fiscal year 2012 for a total of 100 FTE.
          Market Surveillance, Position Limits, and SDRs.--The Dodd-Frank
            Act substantially expanded the responsibilities of the CFTC's
            Market Surveillance Unit in a number of critical ways. The
            Market Surveillance Unit currently administers a CFTC-set
            position limit regime for a total of nine agricultural futures
            contracts listed on DCMs. Under the Dodd-Frank Act, resources
            must be dedicated to implementing and enforcing new aggregate
            position limits that are required to be adopted that will cover
            both the futures market and some portion of the swaps market.
            These limits would apply to 28 agricultural, energy, and metals
            commodities.
          The CFTC also must establish and implement new procedures and
            monitoring mechanisms to ensure that swaps data is
            appropriately reported to SDRs. Such data must be properly
            monitored, maintained and made available to the CFTC and other
            regulators. In addition, the Commission must have sufficient
            resources to analyze swaps data, detect and prevent market
            abuses and systemic problems, and to prepare semi-annual
            reports on the swaps markets mandated by the Dodd-Frank Act.
            Initial estimates are that the CFTC will receive at least five
            SDR applications upon the general effective date of Dodd-Frank.
          The CFTC requests resources for 42 FTE to implement these new
            authorities during fiscal year 2012. The CFTC also is
            requesting 105 FTE to carry out pre-Dodd-Frank authorities in
            the areas of market surveillance, trade practice surveillance
            and data management, and analysis responsibilities. This would
            bring total FTE for these functions to 147 FTE.
          Enhanced Enforcement Authority.--The CFTC's enforcement program
            is operating with approximately 167 FTE. The Dodd-Frank Act
            significantly enhanced and expanded the CFTC's responsibility
            to police the markets for fraud, manipulation, and other abuses
            and will result in a substantial increase in the Commission's
            workload. The CFTC requires 68 additional FTE for the
            enforcement program in fiscal year 2012 over fiscal year 2010
            levels to reach a total of 235 FTE.
          Enhancing Consumer Education.--To enhance consumer protection,
            the CFTC will reorganize the Commission's current consumer
            education and protection functions into a single office. This
            group will focus on the design, implementation, and oversight
            of the CFTC's customer education and outreach program. This
            program will allow a significant increase in the CFTC's
            consumer outreach and education. In addition, we will establish
            a program to implement and administer the whistleblower
            requirements of the Dodd-Frank Act.
          Enhancing Legal Analysis.--As novel and complex legal and
            economic issues arise in the development and application of
            rules to implement Dodd-Frank, the Office of General Counsel
            need to grow from a fiscal year 2010 level of 50 FTE to 70 FTE
            during fiscal year 2012. This staffing level is essential to
            support all of its programs.
          Regulating Foreign Boards of Trade.--Currently, the Chief
            Counsel's Office in the CFTC's Division of Market Oversight has
            a single FTE dedicated to the processing of no-action requests
            from foreign boards of trade (FBOTs) seeking to permit direct
            access to their trading platforms by members based in the
            United States. Currently, 20 FBOTs operate in the United States
            based upon no-action letters dating back to 1999. We expect
            those 20 FBOTs to register with the CFTC, plus an additional 6
            to 10 FBOTs who have recently expressed an interest in becoming
            registered. The Dodd-Frank Act's establishment of the new
            category of registered FBOTs requires an increase of two FTE
            dedicated to FBOT matters to raise the total to three FTE.
          Ensuring U.S. Interests in the Global Marketplace.--The Office of
            International Affairs, which currently has 9 staff, requires 4
            additional professional staff to address the increasing global
            reach of the futures and swaps markets for a total of 13 staff.
            Dodd-Frank specifically mandates that the CFTC consult and
            coordinate with foreign regulatory authorities on the
            establishment of consistent international standards with
            respect to the regulation of swaps and futures. Additional
            staff is required to negotiate memoranda of understanding with
            other regulatory authorities.
          Broadening Economic Analyses.--Swaps vary substantially in terms
            of economic structure and will require expanded economic
            analyses. The Office of the Chief Economist, which employed 14
            FTE at the end of fiscal year 2010, requires 6 additional FTE
            for a total of 20 to expand the use of econometric and analytic
            techniques to the swaps marketplace to gauge the effects of
            market activities and the regulation of those activities.
                                   conclusion
        Financial markets are complex, global and interconnected, and they
    perform essential functions for American businesses. The derivatives
    markets allow producers, merchants, corporations, municipalities,
    nonprofit organizations, pension funds, and other end-users to lower
    their risk by locking in prices and rates in the future. This helps
    promote a vibrant economy.
        We recognize that the budget deficit presents significant
    challenges to the Congress and the American public. But we cannot
    forget that the 2008 financial crisis was very real. Thus the Congress
    responded and said that the swaps market must be regulated and
    overseen, significantly expanding the scope of the CFTC. It is
    important that we align the CFTC's funding with its expanded mission.
        The CFTC looks forward to working with the Congress and the
    administration to address the challenges outlined here and to secure
    the necessary funding to strengthen market integrity, lower risk,
    protect investors, promote transparency, and continue to restore health
    to the economy.

        Senator Durbin. Thank you Chairman Gensler.
        Chairman Schapiro.

                       SECURITIES AND EXCHANGE COMMISSION

    STATEMENT OF HON. MARY L. SCHAPIRO, CHAIRMAN
        Ms. Schapiro. Chairman Durbin, Ranking Member Moran, and
    Senator Lautenberg. Thank you for the opportunity to testify in
    support of the President's fiscal year 2012 budget request for
    the SEC. And I am, of course, pleased to appear with my
    colleague, Chairman Gensler.
        The $1.4 billion that we are requesting will allow us to
    adequately staff the SEC to fulfill our core mission of
    protecting investors, expand our information technology systems
    so that we can realize operational efficiencies and 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 2
    years. And we continue moving forward on multiple fronts
    designed to enhance our effectiveness and ensure robust
    oversight of the markets.
        In addition, we've embarked on a vigorous rulemaking 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've made a number of necessary changes and
    accomplished a great deal.
        But this year we find ourselves at a critical juncture, and
    that is because the 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 given to the SEC under the Dodd-Frank Act.
        As you know, separate and apart from that legislation, the
    SEC is responsible for essential market--financial market
    activities, such as pursuing fraud; reviewing public company
    disclosures; inspecting the activities of investment advisers,
    investment companies, and broker dealers; and ensuring fair and
    efficient markets.
        Over the past decade, the size and complexity of the
    securities markets have grown 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 manage increased to $38 trillion.
    Today, the SEC has responsibility for approximately 35,000
    entities, including direct oversight of more than 11,000
    investment advisers, 7,500 mutual funds, 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, 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.
        And because of the new legislation, we are taking on
    considerable new responsibilities for oversight of the OTC
    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.
        A budget of $1.4 billion would allow us to hire the experts
    and acquire the technology we need to effectively carry out
    both our core responsibilities and to begin to implement the
    Dodd-Frank Act. Of the 2012 requested amount, we estimate 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 SEC to continue development of 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
    from computer hard drives and cell phones, to capture evidence
    of sophisticated frauds.

                              PREPARED STATEMENTS

        Finally, it is important to note that under the Dodd-Frank
    Act the SEC's fiscal year 2012 funding request will be fully
    offset by matching collections of fees on securities
    transactions. Beginning with 2012, the SEC is required to
    adjust its fee rates so the amount collected will match the
    total amount appropriated for the SEC by the Congress. Because
    of this mechanism, the SEC funding will be deficit neutral.
        I thank the subcommittee for your support, and I look
    forward to working with you to improve the SEC'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 that you have.
        [The statements follow:]
                     Prepared Statement of Mary L. Schapiro
        Chairman Durbin, Ranking Member Moran, members of the subcommittee:
    Thank you for the opportunity to testify in support of the President's
    fiscal year 2012 budget request for the Securities and Exchange
    Commission (SEC).\1\ I welcome this opportunity to answer your
    questions and provide you with additional information on how the SEC
    would make effective use of the $1.407 billion that is requested for
    the coming fiscal year.\2\
    ---------------------------------------------------------------------------
        \1\ A copy of the SEC's FY2012 Budget Congressional Justification
    can be found on our Web site at http://www.sec.gov/about/
    secfy12congbudgjust.pdf.
        \2\ The views expressed in this testimony are those of the Chairman
    of the Securities and Exchange Commission and do not necessarily
    represent the views of the President or the full Commission.
    ---------------------------------------------------------------------------
        Over the past 2 years, we have worked tirelessly to make the SEC
    more vigilant, agile, and responsive, and are moving on multiple fronts
    to enhance the Commission's effectiveness and provide robust oversight
    of the financial markets. We have new senior leadership in all key
    positions and have embarked on a vigorous rulemaking agenda, addressing
    areas such as equity market structure, investment adviser custody
    controls, money market fund resiliency, asset-backed securities, large
    trader reporting, pay-to-play, and municipal securities disclosure.
        In addition to carrying out our longstanding core responsibilities,
    last year's enactment of the Dodd-Frank Act has added significantly to
    the SEC's workload. In the short term, it requires the SEC to
    promulgate more than 100 new rules, create five new offices, and
    produce more than 20 studies and reports. The law assigns the SEC
    considerable new responsibilities that will have a significant long-
    term impact on the Commission's workload, including oversight of the
    over-the-counter (OTC) derivatives market and hedge fund advisers;
    registration of municipal advisers and security-based swap market
    participants; enhanced supervision of nationally recognized statistical
    rating organizations (NRSROs) and clearing agencies; heightened
    regulation of asset-backed securities (ABS); and creation of a new
    whistleblower program.
        My testimony will provide an overview of the SEC's actions and
    initiatives during the past year. I will then discuss the fiscal year
    2012 budget request and the activities that these resources would make
    possible.
     sec deg.new leadership, organizational reform, and expertise
        Without a doubt, the most critical element to our success in
    improving the SEC's operations is the Commission's talented staff. Over
    the past 2 years, we have installed new management across the major
    divisions and offices of the SEC. These new senior managers are playing
    a vital role in our efforts to transform the Commission.
        During my first year, we brought in new leadership to run the four
    largest operating units--the Division of Enforcement, the Office of
    Compliance Inspections and Examinations (OCIE), the Division of
    Corporation Finance, and the Division of Trading and Markets. We also
    created a new Division of Risk, Strategy, and Financial Innovation to
    re-focus the SEC's attention on--and response to--new products, trading
    practices, and risks.
        This past year, we brought on board a new director to oversee the
    Division of Investment Management, and hired deputy directors in the
    Divisions of Trading and Markets and Corporation Finance. We also
    brought on board key leaders to help improve internal operations. This
    includes the creation of a new Chief Operating Officer position; the
    hiring of a new Chief Financial Officer to oversee the SEC's budget,
    accounting, and financial reporting; the hiring of a new Chief
    Information Officer to oversee the SEC's information technology
    program; and the hiring of the SEC's first Chief Compliance Officer. At
    all levels we have focused on hiring individuals with key skill sets
    that reflect the rapidly changing markets under our supervision.
        We're continuing to make significant progress in reforming how the
    SEC operates. Since 2009, the SEC has carried out a comprehensive
    review and restructuring of its two largest programs--enforcement and
    examinations--to ensure effective performance. The Enforcement Division
    has streamlined its procedures to bring cases more swiftly, removed a
    layer of management, created national specialized units, and added new
    staff with new skills to pursue complex fraud and market abuses. The
    SEC's examinations unit restructured its exam program after a top-to-
    bottom review, becoming more risk-based in its approach, enhancing
    staff training, and installing better systems to support examiners. And
    more recently, we have begun analyzing and implementing recommendations
    from the Boston Consulting Group, Inc., which the SEC retained to
    perform an independent organizational assessment pursuant to section
    967 of the Dodd-Frank Act.
        Also during the past year, to the extent permitted by available
    resources, we worked to improve training and education of SEC staff, to
    establish a deeper reservoir of experts throughout the SEC, and to
    modernize information technology, including a centralized system for
    tips and complaints, enforcement and examination management systems,
    risk analysis tools, and financial management systems.
                       sec deg.enforcing the law
        Enforcement of the securities laws is the foundation of the SEC's
    mission. Swift and vigorous proceedings directed at those who have
    broken the law are at the heart of the SEC's efforts to protect
    investors.
        In the past year, the SEC has continued our structural reforms of
    the enforcement program. We have created five national specialized
    investigative groups dedicated to high-priority areas of enforcement;
    adopted a flatter organizational structure to permit more staff to be
    allocated to front-line investigations; and created a new Office of
    Market Intelligence (OMI) to serve as the hub for the effective
    handling of tips, complaints, and referrals.
        The Dodd-Frank Act substantially expands the SEC's authority to
    compensate whistleblowers who provide the Commission with high-quality
    information about violations of the Federal securities laws. Last
    November, the SEC proposed rules mapping out the procedure for would-be
    whistleblowers to provide information to the Commission. The proposed
    rules describe how eligible whistleblowers can qualify for an award
    through a transparent process that provides them an opportunity to
    assert their claim to an award. Pending the adoption of final rules,
    enforcement staff has been reviewing and tracking whistleblower
    complaints submitted to the SEC.
        We also have added a series of additional measures to encourage
    corporate insiders and others to come forward with evidence of
    wrongdoing. These new cooperation initiatives establish incentives for
    individuals and companies to fully and truthfully cooperate and assist
    with SEC investigations and enforcement actions. This program will
    encourage ``insiders'' with knowledge of wrongdoing to come forward
    early, thus allowing us to shut down fraudulent schemes earlier than
    would otherwise be possible.
        These reforms, which were intended to maximize our use of resources
    and permit the SEC to move more swiftly and strategically, are already
    showing improvements. Over the past calendar year, court-ordered
    disgorgements are up 20 percent, while the amount of monetary penalties
    has almost tripled. Of course, numbers alone don't fully capture the
    complexity, range, or importance of our enforcement accomplishments.
    During the past year, the SEC:
      --Brought significant actions involving issues arising from the
            financial crisis, including actions against the former Chief
            Executive Officer and other executives of Countrywide
            Financial; Citigroup and its former Chief Financial Officer and
            Head of Investor Relations, Morgan Keegan; Goldman Sachs; State
            Street Bank; former executives of New Century Financial and
            IndyMac Bancorp; Brookstreet Securities; and ICP Asset
            Management and its president;
      --Obtained multi-million dollar settlements with Tyson Foods,
            Alcatel-Lucent, Technip, General Electric, and Johnson &
            Johnson for violations of the Foreign Corrupt Practices Act;
      --Filed our first case against a State involving municipal
            securities;
      --Brought accounting fraud cases against Dell, Diebold, DHB
            Industries, and Satyam Computer Services;
      --Charged a corporate attorney and Wall Street trader with insider
            trading in advance of at least 11 merger and acquisition
            announcements involving clients of the law firm where the
            attorney worked;
      --Charged a Food and Drug Administration (FDA) chemist with trading
            on confidential information about upcoming announcements of FDA
            drug approval decisions;
      --Brought a significant case alleging inappropriate use of
            confidential customer information by a proprietary trading desk
            at Merrill Lynch and an action against AXA Rosenberg in the
            challenging and rapidly evolving area of computer-based
            quantitative investment management;
      --Filed a variety of cases to halt Ponzi scheme operators and
            perpetrators of offering frauds, including those brought in
            conjunction with the Financial Fraud Enforcement Task Force's
            Operation Broken Trust sweep--indeed, in each of the past 2
            fiscal years we have filed more than twice as many Ponzi cases
            as we filed in fiscal 2008;
      --Brought actions alleging illegal trading on confidential
            information obtained from technology company employees
            moonlighting as expert network consultants and illegal trading
            by major hedge funds based on illegal tips; and
      --Brought an action alleging a $1.5 billion mortgage securities fraud
            scheme to defraud the U.S. Treasury's Troubled Asset Relief
            Program.
                    sec deg.strengthening oversight
        Strong regulation is essential to the fair, orderly, and efficient
    operation of markets. A vigorous examination program not only reduces
    the opportunities for wrongdoing and fraud, but also provides early
    warning about emerging trends and potential weaknesses in compliance
    programs.
        This past year, the SEC reorganized the Commission's national
    examination program in response to rapidly changing Wall Street
    practices and lessons learned from the Madoff and Stanford frauds. The
    SEC strengthened the national exam program to provide greater
    consistency and efficiencies across our 11 regions and to focus more
    sharply on identifying the higher-risk firms that it targets for
    examination. We also implemented new policies requiring examiners to
    routinely verify the existence of client assets with third-party
    custodians, counterparties, and customers. Additionally, the exam unit
    now assembles individual specialists with the appropriate skill-sets
    for the firm they are examining or the issues on which they are
    focusing. Finally, the SEC has also worked to enhance the training of
    examiners and bring on board specialists in risk management, trading,
    and complex structured products.
        These reforms are helping to deliver results in the exam program's
    work to evaluate risks, inform policy, and identify potential
    wrongdoing. In fact, in January 2011 alone, the Enforcement Division
    brought three significant cases stemming directly from exams. And going
    forward, the national exam program will continue to conduct sweeps in
    critical areas from trading practices to market manipulation to
    structured products.
                  sec deg.improving market structure
        No discussion of the SEC's actions over the past year would be
    complete without a discussion of May 6, 2010--the day our markets
    dropped more than 500 points in a matter of minutes, only to bounce
    back minutes later. That event reinforced the importance of our ongoing
    review of market structure, which we had launched months earlier with a
    concept release inviting comment on regulation of the changing
    financial markets.
        The U.S. equity market structure has changed dramatically in recent
    years. A decade ago, most of the volume in stocks was executed
    manually, whether on the floor of an exchange or over the telephone
    between traders. Now nearly all orders are executed by fully automated
    systems at great speed. The fastest exchanges and trading venues are
    now able to accept, execute, and send a response to orders in less than
    one-thousandth of a second.
        Speed is not the only thing that has changed. As little as 5 years
    ago, the great majority of U.S. equities capitalization was traded on a
    listing market--the New York Stock Exchange (NYSE)--that executed
    nearly 80 percent or more of volume in those stocks. Today, the NYSE
    executes approximately 22 percent of the volume in its listed stocks.
    The remaining volume is split among 15 public exchanges, more than 30
    dark pools, 3 electronic communication networks, and more than 200
    internalizing broker-dealers. Currently, more than 30 percent of the
    volume in U.S.-listed equities is executed in venues that do not
    display their liquidity or make it generally available to the public,
    reflecting an increase over the last year.
        The evolution of trading technologies has dramatically increased
    the speed, capacity, and sophistication of the trading functions that
    are available to market participants. The new electronic market
    structure has opened the door for entirely new types of professional
    market participants. Today, proprietary trading firms play a dominant
    role by providing liquidity through the use of highly sophisticated
    trading systems capable of submitting many thousands of orders in a
    single second. These high-frequency trading firms can generate more
    than 1 million trades in a single day and now account for more than 50
    percent of equity market volume.
        Over the past year, the SEC has engaged in a dedicated effort to
    study and learn from the experiences of May 6, with the aim of taking
    action to preserve the benefits of the current structure while
    minimizing its downsides. The SEC worked with Financial Industry
    Regulatory Authority (FINRA) and the exchanges to develop rules that
    trigger circuit breakers for certain individual stocks, clarify up
    front how and when erroneous trades would be broken, and effectively
    prohibit ``stub quotes'' in the U.S. equity markets. We adopted a rule
    that prohibits broker-dealers from providing their clients with
    unfiltered access to exchanges, and proposed the creation of a large
    trader reporting system that would enhance our ability to identify
    large market participants, collect information on their trades, and
    analyze their trading activity.
        We also proposed a new rule that would require the creation of a
    consolidated audit trail that would enable regulators to track
    information about trading orders received and executed across the
    securities markets. Today, there is no standardized, automated system
    to collect data across the various trading venues, products, and market
    participants. Each market has its own individual and often incomplete
    data collection system, and as a result, regulators tracking suspicious
    activity or reconstructing an unusual event must obtain and merge an
    immense volume of disparate data from a number of different markets.
    And even then, the data does not always reveal who traded which
    security, and when. To obtain individual trader information, the SEC
    must make a series of manual requests that can take days or even weeks
    to fulfill. In brief, the SEC's tools for collecting data and
    surveilling our markets are wholly inadequate to the task of overseeing
    the largest equity markets in the world.
                        sec deg.key rulemaking
        Over the past year, the SEC has pursued an active rulemaking agenda
    aimed at making our financial markets more secure, providing investors
    with more and better information, finding ways to make securities
    markets less volatile and more transparent, and promoting effective
    corporate governance. Even before passage of the Dodd-Frank Act, the
    SEC was in the midst of a productive period of rulemaking on diverse
    topics. Among the key ongoing and recently completed rulemakings are
    the following:
          Municipal Securities.--The SEC adopted rules that provide market
            participants with more meaningful and timely information
            regarding the health of municipal securities. In addition, as
            discussed below, we adopted rules to curtail pay-to-play
            practices by investment advisers seeking to manage public
            pensions.
          Proxy Enhancements.--The SEC adopted rules to facilitate exercise
            of shareholders' traditional State law right to nominate
            directors to corporate boards. We also improved disclosure
            relating to risk and compensation and revised the e-proxy rules
            so that additional materials could be provided to shareholders
            with the company's notice. And, we issued a concept release
            requesting public input on the mechanics of proxy voting and
            shareholder communications.
          Investment Adviser Disclosure.--In order to ensure that investors
            receive clear and accurate information from their advisers, the
            SEC adopted rules requiring advisers to provide clients with
            brochures that plainly disclose their business practices, fees,
            conflicts of interests, and disciplinary information.
          Mutual Funds Fees and Marketing.--The SEC proposed rules to
            create a more equitable framework for mutual fund marketing
            fees, known as 12b-1 fees. We proposed rules to help clarify
            the meaning of a date in a target date fund's name, as well as
            enhance information in fund advertising and marketing
            materials.
          Target Date Funds.--The SEC proposed rules that are intended to
            provide enhanced information to investors concerning target
            date retirement funds and reduce the potential for investors to
            be confused or misled regarding these funds.
          Money Market Funds.--The SEC took action to permit investors, for
            the first time, to access detailed information that money
            market funds now file with the Commission, including their
            ``shadow NAV'' (net asset value). While the SEC uses this
            information in its real-time oversight of money market funds,
            public disclosure can provide investors and market analysts
            with useful insight for their evaluation of funds. We also
            tightened the quality standards that apply to the funds'
            investments and are working with our regulatory colleagues to
            assess the various options for making sure these funds are as
            safe and resilient in the face of market stresses as investors
            are led to believe.
          Asset-backed Securities.--The SEC proposed rules that would
            revise the disclosure, reporting and offering process for ABS
            to better protect investors in the securitization market.
          Market Access.--The SEC took an important step to promote market
            stability by adopting a new market access rule. Broker-dealers
            that access the markets themselves or offer market access to
            customers will be required to put in place appropriate pre-
            trade risk management controls and supervisory procedures. The
            rule effectively prohibits broker-dealers from providing
            customers with ``unfiltered'' access to an exchange or
            alternative trading system. The rule should prevent broker-
            dealers from engaging in practices that threaten the financial
            condition of other market participants and clearing
            organizations, as well as the integrity of trading on the
            securities markets.
          Pay-to-Play.--The SEC adopted in June of last year a new rule to
            address so-called ``pay-to-play'' practices in which investment
            advisers make campaign contributions to elected officials in
            order to influence the award of contracts to manage public
            pension plan assets and other government investment accounts.
            The rule, adopted in response to a growing number of reports of
            such activities across the country, is intended to combat pay-
            to-play arrangements at the State and local government level in
            which advisers are chosen based on their campaign contributions
            to political officials rather than on merit.
        In addition to these items, enactment of the Dodd-Frank Act added
    significant new work to the SEC's agenda, including more than 100
    rulemaking provisions applicable to the SEC. To date, the SEC has
    issued 34 proposed rule releases, 7 final rule releases, and 2 interim
    final rule releases in connection with the Dodd-Frank Act. We have
    received thousands of public comments, held hundreds of meetings with
    market participants, completed seven studies, and hosted five
    roundtables. Key rulemakings under the Dodd-Frank Act include
    regulations for the supervision of OTC derivatives, private fund
    advisers, asset-backed securities, credit rating agencies, corporate
    governance, rewards for whistleblowers, and specialized disclosure
    provisions related to conflict minerals, mine safety, and resource
    extraction.
                         sec deg.sec resources
        This year finds the SEC at an especially critical juncture in its
    history. Not only does the Dodd-Frank Act create significant additional
    work for the SEC, both in the short and long term, but the Commission
    must also continue to carry out its longstanding core responsibilities.
    These responsibilities--pursuing securities fraud, reviewing public
    company disclosures and financial statements, inspecting the activities
    of investment advisers and broker-dealers, and ensuring fair and
    efficient markets--remain essential to investor confidence and trust in
    financial institutions and markets.
        Over the past decade, the SEC has faced significant challenges in
    maintaining a staffing level and budget sufficient to carry out its
    core mission. The SEC experienced 3 years of frozen or reduced budgets
    from fiscal year 2005 to 2007 that forced a reduction of 10 percent of
    the Commission's staff. Similarly, the SEC's investments in new or
    enhanced information technology (IT) systems declined about 50 percent
    from fiscal year 2005 to 2009.
        As a result of increased funding levels in fiscal year 2009 and
    fiscal year 2010, current SEC staffing levels have only recently
    returned to the level of fiscal year 2005, despite the enormous growth
    in the size and complexity of the securities markets since then. During
    the past decade, for example, trading volume has more than doubled, the
    number of investment advisers has grown by 50 percent, and the assets
    they manage have increased to $38 trillion. Six years ago, the SEC's
    funding was sufficient to provide 19 examiners for each $1 trillion in
    investment adviser assets under management. Today, that figure stands
    at 12 examiners per $1 trillion. A number of financial firms spend many
    times more each year on their technology budgets alone than the SEC
    spends on all of its operations.
        Today, the SEC has responsibility for approximately 35,000
    entities, including direct oversight of 11,800 investment advisers,
    7,500 mutual funds, and more than 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. The SEC also
    oversees approximately 500 transfer agents, 15 national securities
    exchanges, 9 clearing agencies, 10 NRSROs, as well as the Public
    Company Accounting Oversight Board, FINRA, Municipal Securities
    Rulemaking Board, and the Securities Investor Protection Corporation.
        In addition to our traditional market oversight and investor
    protection responsibilities, the enactment of the Dodd-Frank Act has
    added significant new responsibilities to the SEC's workload. These new
    responsibilities include a parallel set of responsibilities to oversee
    the OTC derivatives market, including direct regulation of participants
    such as security-based swaps dealers, venues such as swap execution
    facilities, warehouses such as swap data repositories, and clearing
    agencies set up as long-term central counterparties. In a similar
    fashion, under the Dodd-Frank Act the SEC has been given
    responsibilities for hedge fund advisers that are similar to those that
    the Commission has long overseen with respect to traditional asset
    managers. These hedge fund advisers include those that trade with
    highly complex instruments and strategies. Additionally, the SEC has
    new responsibility for registration of municipal advisers, enhanced
    supervision of NRSROs, heightened regulation of asset-backed
    securities, and the creation of a new whistleblower program.
                    sec deg.fiscal year 2011 budget
        Under the agreement that was recently approved by the Congress and
    signed by the President, the SEC's fiscal year 2011 appropriation is
    $1.185 billion, an increase of $74 million more than the fiscal year
    2010 enacted level. While the SEC is still working to finalize an
    operating budget for the balance of the year that will make effective
    use of these funds, I want to provide you with some insight into some
    of the Commission's priorities for the remainder of fiscal year 2011.
    Specifically, the fiscal year 2011 funding level provided by the
    Congress will allow the SEC to fill vacancies to meet key strategic
    needs, perform tasks required by the Dodd-Frank Act, and continue to
    improve Commission operations.
        It will permit us to address important staffing needs, particularly
    within the Division of Trading and Markets, Division of Enforcement,
    and OCIE, which will permit us to partially address the SEC's
    significant staffing capacity gap. These needs include revitalizing
    core programs such as enforcement and inspections activities, as well
    as addressing new responsibilities such as enhancing oversight of
    credit rating agencies and adding staff with expertise in critical
    areas such as derivatives.
        Additionally in the last 5 months of fiscal year 2011, we plan to
    make needed investments in the development, modernization, and
    enhancement of information technology that can lead to additional
    savings or aid staff productivity. We will be making key investments in
    general IT infrastructure modernization, including refreshing old
    technology and system hardware and software to avoid loss of
    productivity, facilitating the migration of the SEC's financial systems
    to a shared service provider, increasing system capacities to
    accommodate data growth, and increasing operational efficiencies
    through better monitoring of system performance. We will also continue
    making needed investments in systems and technologies needed to
    facilitate reporting of information required by the Dodd-Frank Act.
        Finally, in fiscal year 2011 we will also continue to advance the
    SEC's efforts to improve Commission operations. I have recently
    submitted a reprogramming request to improve efficiency by
    consolidating the functions of the Office of the Executive Director
    into the Office of the Chief Operating Officer. Also in fiscal year
    2011, we expect to undertake major reforms in the Office of Information
    Technology and Office of Human Resources, which provide critical back-
    office support to all SEC divisions and offices. The SEC also plans
    significant investment in the current fiscal year to respond to the
    recommendations made by the BCG as part of its recent independent
    assessment of SEC operations and organizational structure.
                   sec deg.fiscal year 2012 request
        The SEC is requesting $1.407 billion for fiscal year 2012, an
    increase of $222 million more than the new fiscal year 2011
    appropriation level. If enacted, this request would permit us to add
    about 780 positions by the end of fiscal year 2012 for both
    improvements to base operations and implementation of the SEC's new
    responsibilities.
        It is important to note that the SEC's fiscal year 2012 funding
    request would be fully offset by matching collections of fees on
    securities transactions. Currently, the transaction fees collected by
    the SEC are approximately 2 cents per $1,000 of transactions. Under the
    Dodd-Frank Act, beginning with fiscal year 2012, the SEC is required to
    adjust fee rates so that the amount collected will match the total
    amount appropriated for the Commission by the Congress. Under this
    mechanism, SEC funding will be deficit-neutral, as any increase or
    decrease in the Commission's budget would result in a corresponding
    rise or fall in offsetting fee collections.
        The fiscal year 2012 request is designed to provide the SEC with
    the resources required to achieve several high-priority goals: to
    adequately staff the Commission to fulfill its core mission; to
    continue to implement the requirements of the Dodd-Frank Act; and to
    expand the Commission's IT systems and management infrastructure to
    serve the needs of a more modern and complex organization. For purposes
    of my testimony today, I would like to summarize the request in each of
    these priority areas:
          Reinvigorating Core SEC Programs.--Forty percent (312) of the new
            positions would be used to strengthen and support core SEC
            operations, including protecting investors, maintaining orderly
            and efficient markets, and facilitating capital formation. As
            mentioned before, SEC staffing levels are just now returning to
            fiscal year 2005 levels, even as the Commission's
            responsibilities have grown along with the size and complexity
            of the securities markets. To help restore core capabilities,
            this budget request would permit us to add 49 positions to the
            enforcement program that would grow the 5 new specialized
            investigative units, bolster the agency's litigation program,
            and expand the new OMI which conducts risk assessment and
            handles thousands of tips, complaints, and referrals. In our
            examination program, this request would allow us to add 55
            personnel to augment risk assessment, monitoring, and
            surveillance functions and to conduct additional adviser and
            fund inspections. The request would also permit 37 staff to be
            added to the Division of Corporation Finance primarily to
            conduct more frequent disclosure reviews of the largest
            companies, 15 additional staff to the Division of Investment
            Management primarily to enhance oversight of money market funds
            and specialized products, and 11 new positions to be added to
            the Division of Risk, Strategy, and Financial Innovation to
            better equip the SEC to identify and address emerging risks and
            long-term issues of critical importance.
          Implementing the Dodd-Frank Act.--Sixty percent (468 positions)
            of the new positions would be used to implement the Dodd-Frank
            Act. Many of these new positions would be used to hire experts
            in derivatives, hedge funds, data analytics, credit ratings,
            and other new or expanded responsibility areas, so that the SEC
            may acquire the deeper expertise and knowledge needed to
            perform effective oversight. These new positions would support
            157 new positions focused on the derivatives markets; 102
            focused on hedge fund advisers; 43 to expand investigations of
            tips received from whistleblowers; 35 focused on municipal
            securities and examinations of newly registered municipal
            advisers; 33 focused on clearing agencies, including annual
            reviews of those determined to be systemically important; and
            26 focused on NSRSOs principally to perform the annual
            examinations required by the act. Also in fiscal year 2012, the
            SEC would invest in technology to facilitate the registration
            of additional entities and capture and analyze data on the new
            markets.
          The total fiscal year 2012 costs to implement the Dodd-Frank Act
            through these new positions and technology investments will be
            approximately $123 million. In addition to the new positions
            requested in fiscal year 2012, we also anticipate that about
            300 additional positions and additional technology investments
            will be required in fiscal year 2013 for full implementation of
            the Dodd-Frank Act.
          Investing in Information Technology.--The SEC's budget request
            for fiscal year 2012 will support information technology
            investments of $78 million. This level of funding would support
            vital new technology initiatives including data management and
            integration, document management, EDGAR modernization, market
            data, internal accounting and financial reporting,
            infrastructure functions, and improved project management. This
            funding will permit the SEC to develop risk analysis tools to
            assist with triage and analysis of tips, complaints, and
            referrals and to complete a digital forensics lab that
            enforcement staff can use to recreate data from computer hard
            drives and cell phones to capture evidence of sophisticated
            frauds. The budget request would also permit the hiring of
            additional staff in the Office of Information Technology,
            including experienced business analysts and certified project
            managers to oversee IT projects and staff to address financial
            statement and information technology deficiencies identified by
            the Government Accountability Office (GAO).
          Improving the SEC's Management Infrastructure.--The SEC's fiscal
            year 2012 request would permit the Commission to make further
            improvements to the Commission's basic internal operations and
            to bring administrative and support services capabilities into
            alignment with the requirements of today's SEC, and ensure that
            the Commission manages its resources wisely and efficiently.
            The budget request would permit the strengthening of the newly
            established Office of the Chief Operating Officer, including
            the development of a more robust operational risk management
            program and the build-out of a data management program. The
            budget request also contemplates an appropriate expansion of
            the SEC's administrative support functions, including the
            Offices of Financial Management, human resources,
            administrative services, and Freedom of Information Act and
            records management. The request also includes the necessary
            space rent and other noncompensation expenses necessary to
            support the level of staffing requested for fiscal year 2012.
            Additionally, the SEC is devoting significant management
            attention to improving program and management controls,
            including in response to audits and assessments by the Office
            of the Inspector General, the GAO, and management's own
            internal assessments.
          Addressing Material Weaknesses in Internal Controls.--In November
            2010, the SEC completed its Performance and Accountability
            Report, the equivalent of a company's annual report. A GAO
            audit found that the financial statements and notes included in
            the report were presented fairly and in conformity with U.S.
            GAAP. It also, however, identified two material weaknesses in
            internal controls over financial reporting: one in information
            systems, and a second in financial reporting and accounting
            processes. The root causes of these weaknesses are gaps in the
            security and functionality of the SEC's financial system,
            resulting from years of underinvesting in financial system
            technologies.
          These material weaknesses are unacceptable. Rather than try and
            solve each particular deficiency in piecemeal fashion, the SEC
            has committed to investing the time and resources to implement
            a long-term, comprehensive solution. To avoid the development
            risks of creating new technology and systems, the SEC is
            switching to a Shared Service Provider approach, migrating the
            Commission's financial system to the Department of
            Transportation (DOT). Other agencies, including the GAO, have
            migrated to DOT, and they have had very positive results, with
            clean audits free of material weaknesses. This will be a
            significant undertaking, which, assuming adequate funding, will
            culminate in the cutover to the new system in April 2012.
                                   conclusion
        Thank you, again, for your support for the SEC's mission, and for
    allowing me to be here today to present the President's budget request.
    I am happy to answer any questions that you might have.
                                     ______

     Prepared Statement of Colleen M. Kelley, President, National Treasury
                                Employees Union
        For a decade now, the National Treasury Employees Union (NTEU) has
    represented the men and women who work at the Securities and Exchange
    Commission (SEC). When the NTEU first began to represent the employees,
    we were able to help make great strides forward in improving the
    efficiency and effectiveness of the agency. The NTEU supported
    Investors and Capital Markets Relief Act gave the SEC the authority to
    develop a personnel system best suited to the Commission's needs and
    curtailed the staff turnover crisis that vexed the Commission. Employee
    morale and retention improved dramatically.
        However, starting in fiscal year 2005, the SEC began to take a
    wrong turn. It suffered through 3 years of frozen or reduced budgets
    resulting in a 10 percent reduction in staff as well as a failure to
    fully fund merit pay and retirement benefits which both labor and
    management agreed were needed to attract a workforce with the desired
    skills and experience. Some employees wondered if the leadership really
    supported strong and meaningful action against those who would engage
    in fraud and deception toward consumers and investors.
        Under Chairman Mary L. Shapiro, we believe there is a renewed
    commitment to rigorous protection of consumers. This protection is also
    enhanced by the Dodd-Frank Wall Street Reform and Consumer Protection
    Act which will help give the SEC the resources, tools, and authority it
    needs so that the staff can effectively protect investors. The NTEU had
    strongly supported passage of this legislation. We are also pleased
    that recent funding improvements at the SEC have now restored staffing
    to the 2005 levels.
        However, the job is far from done. During the recent period of
    almost flat funding for the SEC, trading volume more than doubled.
    Since 2003, the number of investment advisers has grown by roughly 50
    percent, as have the number of funds they manage. A $33 trillion
    industry of 35,000 separate entities is policed for fraud and illegal
    activities by a mere 3,800 employees of the SEC.
        With insufficient funding for even its historic duties, the SEC now
    has significant new duties under the Dodd-Frank Act. The NTEU believes
    that the President's request of $1.4 billion is the minimum needed to
    make sure that the SEC is able to do its job effectively. We ask that
    the Senate fund the SEC at an amount no less than the President's
    request.
        We understand these are difficult financial times both for the
    Federal Government and the American public. Therefore, several facts
    need to be understood. First, while the SEC is an appropriated agency,
    its funding is offset by fees collected from the securities industry.
    Because these fees offset the entire SEC budget, proper funding of the
    SEC does not contribute to the deficit. Second, as American families
    struggle in the current economic downturn, the SEC has returned
    billions of dollars to cheated investors. In 2010, the SEC distributed
    double its budget ($2.2 billion) to these innocent victims. The
    Congress should not be penny wise and pound foolish when it comes to
    protecting the investments of American consumers, only to see the
    victimized lose retirement investments or like time savings.
        During the difficulties in passing the fiscal year 2011 budget, the
    public already saw the flaws of an underfunded SEC. Operating under the
    fiscal restrictions of the continuing resolution, it was not possible
    to pursue some quality tips and investigations of potential misconduct,
    while other investigations were slowed down or delayed. The SEC
    suffered under a reduced ability to hire expert witnesses for trial and
    to take testimony of certain witnesses. Funding limitations lessened
    the number of exams that could be conducted of high-risk registrants,
    thus increasing the risk of undetected violations.
        Rather than a hiring freeze, as was put into place at the SEC
    during the continuing resolution, the SEC should have funding to hire
    needed new personnel to implement the provisions of the Wall Street
    Reform and Consumer Protection Act, as well as to be able to offer a
    competitive compensation package which allows the SEC to retain and
    attract staff with skill sets vital to keeping pace with rapidly
    changing markets and to identify systemic risks that may be created by
    entities subject to the SEC regulation. The SEC must have a budget that
    will fully fund its merit pay program as well as agreed-upon retirement
    benefits.
        The NTEU remains ready to work with the subcommittee and the SEC
    management to help meet the goals needed so employees can do their job
    of protecting the American consumer and investor.

           CFTC deg.SEC deg.RULE-WRITING TIMETABLE

        Senator Durbin. Thank you, Chairman Schapiro, and Chairman
    Gensler, as well.
        I don't think it's any surprise that the tables have turned
    politically here on Capitol Hill since the passage of the Dodd-
    Frank Act. And with the new Republican majority in the House of
    Representatives and a larger Republican presence in the Senate,
    some of the critics of the Dodd-Frank Act and those who voted
    against it now are questioning not only whether it was a good
    decision, but whether or not it's being implemented fairly and
    effectively.
        And they have gone so far--many of them--as to just flat
    out say, ``We want to delay this''--for 1 year, 18 months,
    maybe longer. In the instance of one issue that I'm involved
    in--2\1/2\ years they want to put off the implementation of
    some of the Dodd-Frank Act provisions. So this go-slow approach
    is being argued and justified as necessary because the Dodd-
    Frank Act, in their opinion, either did the wrong thing or,
    whatever they did, did it too fast, and can't be implemented
    effectively.
        Now, I take a look at some of the comments that have been
    made, Chairman Gensler, about this, and wonder if you would
    comment on whether or not the timetable in the Dodd-Frank Act
    for the new rules, the comment periods and the promulgation of
    these rules, is in fact one that you can live with, that you
    can produce a good work product with.
        Second, I look at the report of your IG which, who said
    back in April, just a few weeks ago, that it was their office's
    feeling that you were focusing too much on the legal side of
    these rules and not enough on the economic or cost-benefit side
    of these rules. And that is a legitimate question that I think
    you should address as well. So could you address those two
    issues?
        Mr. Gensler. I thank you, Mr. Chairman.
        I think that the financial crisis was very real. There are
    still 7 million people probably out of work because of it, and
    millions who have homes that are worth less than their
    mortgages, and pensions that aren't securing their futures. And
    I think part of it was the derivatives market. It's not the
    only reason for the crisis, but it was a key part of it. Let us
    not forget AIG.
        In terms of our rule-writing, I think that we've been very
    deliberate. We've been very public. We've had, I think, close
    to a dozen roundtables and 14 public hearings. We had more than
    700 meetings that we posted on our Web site with market
    participants and investors and the like, and end-users. And we
    have now out for comment these roughly 50 rules that will be
    the whole mosaic, and people will come in and give us comments
    on them.
        In terms of the time schedule, the Congress did lay out 1
    year. We'll not complete the task in 1 year. We've done the
    proposal phase in roughly 9 months, working closely with the
    SEC. I think that we'll only take up final rules as we
    summarize those comments, get commissioner feedback, regulatory
    feedback, Congressional feedback. And I think it will take us
    well through the summer and fall to finalize the rules.
        In terms of implementation, we had 2 days of public
    roundtables. We have a public file on how to implement and
    phase in the implementation. It will significantly lower the
    cost to the American public if we phase in the implementation.
    A big bang at one date doesn't work.
        But I think a delay is being considered elsewhere in the
    Congress. A delay of the effective date to the end of 2012, I
    think, would be a delay that would put the American public at
    risk--at risk of markets that are still dark by and large, at
    risk of a market that's unregulated by and large. The reforms
    only come into being if we actually get these rules finalized.

                   CFTC deg.INSPECTOR GENERAL REPORT

        In terms of the IG report, we welcomed it. We seriously
    considered, as we moved to final rules, to incorporate
    recommendations that the IG has made to us. We do have a very
    fine Office of the Chief Economist with a staff of about 14
    economists. We are wishing in this budget request to grow it to
    20. But there are also a lot of economists in the rule-writing
    teams that aren't in the Office of Chief Economist.

               CFTC deg.COST OF UNREGULATED DERIVATIVES

        Senator Durbin. So, I agree with your premise--that the
    recession that we're still living through can be traced to many
    sources, and one of those was an unregulated derivatives
    market.
        Can you give me any examples of what you saw in that market
    that showed that the lack of regulation, the lack of oversight,
    led to decisions which were ultimately negative for our
    economy, and for many families and investors?
        Mr. Gensler. Well, at the core was a lightly regulated,
    ineffectively regulated insurance company called AIG that had
    about a $2 trillion derivatives book. And that book had a lot
    of product called credit default swaps. And then the American
    public ended up bailing out AIG with $180 billion.
        That wasn't the only piece of the crisis, because, also,
    derivatives make these large financial institutions very
    interconnected. I believe there should be a freedom to fail--
    that large financial institutions should be allowed to fail--
    but the derivatives marketplace so ties them, like in a
    spider's web, that it's hard for a government, whether it's the
    Federal Reserve or the Treasury, to allow that. And so, the
    solution that the Congress passed was--bring transparency to
    the marketplace, ensure that what can be brought to
    clearinghouses--a mechanism that's worked more than 100 years--
    is done, and also to make sure that dealers are well-
    capitalized and well-regulated.
        Senator Durbin. So who would benefit, if we would either
    repeal the Dodd-Frank Act when it came to this derivatives
    market, or if we would delay indefinitely the oversight and
    regulation which the Dodd-Frank Act calls for?
        Mr. Gensler. I think the American public would be put at
    great risk. I think that a $300 trillion marketplace--$20 for
    every $1 in our economy--would still be a dark market. So I
    don't think many people benefit. There may be some who would
    benefit and rationally would like a darker market, where
    they're in the financial community. But the tens of thousands
    of end-users of these products need to have confidence in a
    marketplace where they can rely on that marketplace, see the
    pricing in the market place. Whether it's a farmer, rancher, a
    corporation hedging an interest rate risk--they'll benefit from
    this being well-regulated.
        Senator Durbin. If I can ask you one last question more
    specific, and one of the criticisms is that, instead of
    investing in the technology which the CFTC needs, you're in
    fact adding employees. Would you comment on that? I know you
    testified that you're requesting more money for technology.

                          CFTC deg.TECHNOLOGY

        Mr. Gensler. The request for 2012 is about doubling
    technology, and about 35 percent more staff. So, we believe
    technology is the only way for us to really do this. But since
    we're taking on a market that's about seven or eight times the
    size, asking for 35 percent more staff we think is relevant.
        Again on technology, at $66 million we'll be a fraction of
    Wall Street. It's estimated by the TABB Group, investment banks
    spent $20 billion to $25 billion per year on technology. So
    we're, you know, we're kind of coming with a pea shooter here,
    frankly, to a sophisticated market that has a lot more than pea
    shooters.
        Senator Durbin. When you talk in most general terms about
    what we're trying to achieve here with the Dodd-Frank Act, if
    we're going to have regulatory oversight in a market place that
    was clearly unregulated and led, at least partially led to the
    decline of the American economy and the loss of so many jobs,
    the way to stop that reform is to fail to fund an agency like
    your own, to make sure there are no cops on the beat. And I
    think that's a serious mistake.
        I think what we've got to do is to push forward on this
    law, to give you the time you need to promulgate these rules,
    and to give you the resources to enforce them. Otherwise we
    invite a similar disaster to the one we went through just a few
    years ago in our economy.
        Senator Moran.
        Senator Moran. Mr. Chairman, thank you.
        First of all, I'd follow up on your question, because I
    wasn't certain that I understood Chairman Gensler's answer
    about--I guess criticism perhaps is a too strong a word, but a
    belief that the CFTC has focused on hiring individuals to the
    workforce as compared to investing in technology.
        And I think what Chairman Durbin asked you to do was to
    explain your rationale and to respond to that criticism.
        Mr. Gensler. Well, I think we need both. I think that we
    can't oversee markets just with computers. You can't send a
    computer into a judge to plead a case. I'm not aware of any
    court that allows that. So we really do need humans, as well.
    On a market that's seven times the size of the markets we
    currently oversee, we need humans, as well, to answer the
    questions. We think there may be as many as 200 swap dealers
    that will look to us for regulatory guidance, interpretations,
    and so forth. So, in terms of staffing we're just about back to
    where we were in the 1990s. We had been shrunk, actually by 23
    percent. And then with this subcommittee's help, we grew back.
        But on this base of about 680 people that we had at the end
    of 2010, we believe that to oversee the markets we need to grow
    at the budget request to 983. But technology is absolutely
    critical. And technology spending is the larger increase
    percentage-wise.
        Senator Moran. Mr. Chairman, you and I had a conversation
    in the Banking Committee about the mosaic. I think there's been
    a call for a road map. How do you see the difference between
    those two terms? Your mosaic and perhaps my, or, an industry
    request for a road map, so that we know what the sequencing is
    of the rules?
        That the mosaic, as I understand the word, would be a set
    of puzzle pieces that, we're not certain how they all fit
    together, as compared to, this is the sequence in which we will
    implement rules under the Dodd-Frank Act at the CFTC.

                           CFTC deg.PHASE IN

        Mr. Gensler. I think they're both important. We've now
    substantially completed the proposal phase, though we have to
    address ourselves to the Volcker Rule. What we've asked is the
    public to give us comments on how to implement the, or phase,
    the effective dates. And we put out last Friday--and I'm glad
    to meet with you and go through it--the staff put out 13
    concepts in a 4-page document as to how to phase in the
    implementation. Some people might call it a road map. Some
    might not.
        But those concepts, for instance, say that the
    clearinghouses, the execution platforms, the dealers have to be
    open for business, so to speak, have their rulebooks in place
    at a certain time. The first, the most important thing is that
    they are compliant with the Dodd-Frank Act and they're open for
    business. And then market participants would be phased later,
    like a clearing mandate, later. And we actually laid out in
    this concept piece how to bucket that into sort of three or
    four different buckets and how to phase that.
        But we're hoping to get more public comment. We have a
    public comment file through June 10 on this. And then based
    upon that, the CFTC, working with the SEC, would think about
    how to phase the implementation, which I think will go well
    into 2012, the phasing of this.
        Senator Moran. Does the concept that you're talking about
    speak to each individual rule as to what the sequence is for
    its implementation, or just within that rule the phase in of
    that rule?
        Mr. Gensler. The concepts take the entire rule set. So, it
    speaks to some of them individually, but it was trying to give
    the public a sense for the entire rule set, so that
    clearinghouses, execution facilities, and dealers would have to
    be, sort of, open for business. The concept even said, if we
    finish for rules, they have to be open for business by December
    31 of this year, for instance. But then the transaction
    compliance would follow later. It laid out six different
    chapter headings with regard to that. So it was, it wasn't all
    the way into the granular level, but it was pretty detailed.
        Senator Moran. Would there be information in that concept
    that would be valuable to us as a subcommittee to determine
    priorities in funding, so that we could make decisions about
    the level of funding necessary to implement this series of
    rules over the period of time that you're contemplating?
        Mr. Gensler. I think it would be helpful to have that
    dialogue, though I would say our request is anticipating that
    we would complete our rules during the course of the calendar
    2011 and that we'd be able to be hiring people to actually
    oversee these markets over fiscal 2012.
        There's a commitment that our President made back in
    September 2009--the G20 commitment--that all of this would be
    completed and implemented by the end of 2012. We think the
    Congress, when they said to finish the rules by July 2011, had
    in mind that this was a very real crisis, and second, that the
    market needs to lower uncertainty. Our rule-writing creates
    some uncertainty. To the extent we can finish that, it helps
    lower uncertainty, and people get on with their work to
    implement it.
        Senator Moran. Chairman, I appreciate that statement. I
    think that has great significance. I think one of the real
    challenges we have for economic recovery is all the uncertainty
    that's out there in regard to new rules and regulations. And
    certainty would be a good thing, although we need to make
    certain that we're doing it in the appropriate manner. So, I
    share that, in my view there's a balance between getting an
    answer to the industry, but also making sure it's the right
    answer.
        Finally, let me ask about position limits and core
    principles. It's a conversation that we've had at every
    opportunity, both in my days in the House and on the Banking
    Committee, and now here in the Appropriations Subcommittee.
    Those are not required rules and regulations. Is there a
    different priority placed at the CFTC on rulemaking that is not
    mandatory but discretionary?

             CFTC deg.POSITION LIMITS AND CORE PRINCIPLES

        Mr. Gensler. What we're doing is trying to bring together
    the whole package. On position limits, the Congress says
    specifically that we shall. The word S-H-A-L-L, shall, is in
    there. Some of the comment letters have come back in and people
    debate what was the Congress's intent. But there were numerous
    Congressional hearings. So we put out a proposed rule on
    position limits, we believe, following Congressional mandate.
        In terms of core principles for clearinghouses and for
    exchanges, we think that we really need to move forward on this
    because it's the only way that the clearinghouses will be safe.
    There's a mandate that hundreds of trillions of dollars of
    swaps have to come into these clearinghouses. And so, our rule-
    writing in that regard is to make sure the clearinghouses are
    up to international standards, and that the Europeans will
    recognize United States clearinghouses.
        So I think that, though we can debate whether the Congress
    said ``shall'' or ``may'' in that regard, I think if we didn't
    write the rules on the clearinghouses, that we wouldn't be up
    to international standards.
        Senator Moran. My understanding is that the law does say
    ``shall, as appropriate.'' And so the question about what's
    appropriate, and, as I understand the law, when you read ``as
    appropriate'' in context of the Commodity Exchange Authority,
    it requires the CFTC to make a finding that excessive
    speculation caused an unwarranted or unreasonable price
    fluctuation in particular commodity markets.
        And I, we've had this conversation before. I keep waiting
    for the finding by the CFTC. You have an old staff report that
    somewhat addresses this issue, but I've yet to see the finding
    by the CFTC that excessive speculation was found in the
    markets.
        Mr. Gensler. Well, we are not a price-setting agency. But
    what the agency has used since the 1930s is position limits, as
    the Congress has mandated since the 1930s, to ensure that the
    markets have a diversity of actors. Basically that, bona fide
    hedgers don't come under this, but speculators don't get so
    concentrated.
        We actually had position limits in the energy markets
    working with exchanges in the 1980s and 1990s. In 2001, the
    exchanges backed away from that to something called
    accountability levels, which, on a very regular basis market
    participants go over the accountability levels. They're no
    longer stop signs. They're not even yield signs, really.
    They're just, maybe, honk if you go by it.
        And so we've re-proposed, in essence, position limits.
    We're going to hear from the public. We've gotten 11,000
    comments on this. Of our total 16,000, this is where the
    largest number of comments are. And I think that's partly
    because of high energy prices and high agricultural prices
    right now. But it's something the public very much wants us to
    get right, as you do. And we're going to sort through those
    11,000 comments.
        Senator Moran. Thank you, Mr. Chairman.
        Senator Durbin. Senator Lautenberg.
        Senator Lautenberg. Thanks, Mr. Chairman.
        Again, I welcome each of you here to change the game that
    has been played in the past, and ultimately responsible for the
    financial disaster, in my view, that we've seen.

                   SEC deg.IMPACT OF REDUCED FUNDING

        Now, Chairman Schapiro, the House recently passed a budget
    that would reduce funding to 2008 levels. You discuss it in
    your comments. That would put the SEC funding at $0.5 billion,
    below the President's request. And yet the SEC expenses, as you
    mentioned, fully offset by industry fees, and therefore don't
    add anything to the budget deficit. If the budget was, wound up
    that way, with that cut to 2008 level, what, in summary, what
    might that do to prevent you from fully doing the job that
    you're assigned to do?
        Ms. Schapiro. Senator, going back to the 2008 level would
    have a very profound impact on the agency. It would take our
    appropriation back to about $906 million. And even after major
    cuts and factoring in attrition, we would probably have to
    reduce our staff by more than 740 full-time equivalents to meet
    the $906 million number. And if the cuts didn't happen until
    perhaps January 2012, the reduction in staff would exceed 1,000
    people on a base of about 3,800. So it would be enormous.
        We would have to also eliminate all of our new information
    technology investment, which is really critical to getting this
    agency in a position to do the kind of market surveillance and
    market monitoring that I think we should be doing.
        We would do fewer examinations. We would detect fewer
    violations of the law. We would bring fewer enforcement cases.
    And our enforcement program brings lots of money back to harmed
    investors. Last year, we returned--on a $1 billion budget--$2.2
    billion to harmed investors directly, as well as hundreds of
    millions of dollars to the United States Treasury.
        We would have to suspend development of new systems, like
    the Tips, Complaints and Referrals system, which is allowing us
    to bring together the massive numbers of tips and complaints
    the agency receives, track those, triage them and handle them
    in a more professional and diligent way than has been done
    historically.
        And then, with respect to some of our internal operations--
    for example, the movement of our financial management systems,
    which have been flawed over the last several years, to a
    Federal shared service provider--efforts like that would have
    to be put on hold.
        So, I think it would have a devastating impact on the
    agency's ability to protect the public from financial fraud.
        Senator Lautenberg. This, to me it looks like we might wind
    up back in the 2008 situation if we had to restrict ourselves
    to the things that you're now planning to do and improve the
    supervision and the reliability of the marketplace. So it, by
    no means, in my view, can help to cut the budget or, as I said
    earlier, to cut staffing when so much is needed.

              SEC deg.MADOFF SCAM AND OTHER PONZI SCHEMES

        If we look back at 2008 and even earlier, a whistleblower
    brought information to the SEC about the evidence, with
    evidence of the ultimate public swindle, the Madoff scam, stole
    billions of dollars from investors. And the SEC apparently did
    very little or almost nothing to pay attention to that
    opportunity, to learn and to adjust. And I wonder whether any
    of that was caused by a limited number of people on the staff,
    or a smaller agency.
        Is there a view, Ms. Schapiro, about what might have put
    the SEC in that kind of a static position, where nothing was
    done?
        Ms. Schapiro. Senator, I think resources, perhaps, was a
    contributing factor. But I really can't blame the SEC's failure
    to catch Madoff much earlier on in his fraud and shut it down,
    solely on a lack of resources. There were a lot of
    institutional issues within the agency over a long period of
    time--a lack of cooperation and coordination between
    enforcement and examinations; a lack of expertise and
    understanding of the information, perhaps, that the
    whistleblower brought to the SEC; the lack of tools and
    supervision of the front-line examiners in getting the job
    done.
        We've done, as you know, an enormous amount of work to try
    to ensure that we can prevent anything like that from ever
    happening again, including the new Tips, Complaints and
    Referrals system, which didn't exist then, but----
        Senator Lautenberg. But which might--forgive me, but which,
    all of which can be considerably improved if we put through the
    budget as the President requested.
        Ms. Schapiro. Absolutely. Not just the technology, but also
    the ability to bring in people with deeper expertise; the
    ability to train our employees in deeper and more cutting-edge
    ways; our ability to have more people bring more cases and shut
    down more Ponzi schemes faster. Over the last 2 years we've
    brought twice as many Ponzi scheme cases as we did the prior 2
    years before I arrived at the agency. So resources, absolutely,
    would help.
        But I just, I don't want to say that the Madoff failures at
    the SEC are solely the result of inadequate resources.

                             CORPORATE COMPENSATION

        Senator Lautenberg. Yes. I note the effort that would be
    put forth to make sure that transparency really is there in all
    kinds of situations.
        One of them that's disturbed me--and, again, I come with a
    corporate background. I spent 30 years with a giant, a company
    that turned out to be a giant company. And the shareholders
    very often are not kept up to date with what's taking place.
        And one of the most significant, in my view, is the
    variation in the relationship between the CEO compensation and
    the average worker in these companies. In 1980, it was a ratio
    of about 40 to 1. And now we're well more than 300 at times.
    And the difference in wages is incredible. I mean, the CEO, if
    the average wage was $40,000 in 1980, the CEO might earn, then,
    $1.6 million. And now, if that same situation took place, it's
    well more than $13 million. And that maladjustment, in my
    view--and I speak to, as a long-time executive, a long-time
    member of the board of directors, and still a member of the
    board of directors at the Columbia Business School--that one of
    the things that's so problematic is that our society is getting
    lopsided here. And any way that we can produce evidence of
    what's, the changes that are taking place, is incredibly
    valuable.
        And I thank you, Mr. Chairman, and we have, I have other
    questions, which I'd like to submit for the record.
        Senator Durbin. Thanks, Senator Lautenberg. Of course,
    those questions will be submitted in writing.

                       CFTC deg.GASOLINE PRICES

        There are, Chairman Gensler, there are a variety of rites
    of spring in America--the opening of the baseball season; Seder
    dinners, which I shared this year with Senator Lautenberg; the
    Easter bunny; and an obscene run-up in gasoline prices, which
    seems to come about every spring. And Members of Congress--
    Senate and the House--get into a high state of excitement and
    anxiety as they hear from their constituents about what these
    gasoline prices are doing to families and businesses.
        Now, over the years I've developed a very careful watchdog
    of gasoline prices--my wife. And I called her this morning, and
    she says, ``It's up to $4.20 a gallon in Springfield. What are
    you doing about it?''
        And I said, ``Luckily, Chairman Gensler is going to be
    testifying today, and I'm going to ask him a question about
    it.''
        And the question comes down to this: I understand, when we
    talk about the futures markets and the oil prices, that
    speculation is not illegal, and it serves as a necessary
    ingredient to add liquidity to the market. But oil prices have
    risen to $113 a barrel over the last few months--a one-third
    increase in price, right before the summer driving season,
    surprise, surprise. And unrest in the Middle East and North
    Africa has been blamed, though the countries involved represent
    a very tiny fraction of the sources of oil in America.
        The President has called for this integrated look at
    whether or not there are problems related to speculation and
    fraud and the like. Your CFTC Commissioner, Bart Chilton,
    indicated that hedge funds and other speculators have increased
    their positions in energy markets by 64 percent since June
    2008, to the highest level on record. When it comes to
    speculation, can the CFTC differentiate between normal
    speculation, excessive speculation, and manipulation?
        Mr. Gensler. Let me say I share with your wife's view. Last
    night, I filled up on Connecticut Avenue for $84 for the tank.
    So I, it's on my mind, too.
        We're not a price-setting agency. But, as an agency, we're
    to make sure that these markets, that hedgers and speculators
    meet in a marketplace that's transparent, it's open, it's
    competitive, free of manipulation and fraud, and also using
    position limits, that there's some diversity, a lack of
    concentration in these speculators. That's why I think it's so
    important that we continue to move forward on the rules. The
    Congress gave us new anti-fraud and anti-manipulation
    authority. We've proposed rules to implement that. We're yet to
    finalize the rules, but that broader authority is very
    important. We do use our current authority, but the broader
    authority is important. And----
        Senator Durbin. So, the Dodd-Frank Act gives you more tools
    to deal with----
        Mr. Gensler. Absolutely.
        Senator Durbin [continuing]. Market speculation and
    manipulation, as it relates to oil prices. And, looking at this
    from the other side of the coin, efforts to slow down or stop
    your agency's implementation of the Dodd-Frank legislation will
    limit the availability of those tools when it comes to things
    like oil prices speculation.

                           CFTC deg.MARGINS

        Mr. Gensler. Mr. Chairman, that is absolutely correct.
        Senator Durbin. I'm glad you said that.
        Now let me ask about margins. I understand that oil
    speculators provide 6 percent of the value of a futures
    contract up front when they buy a stock. And some have argued
    that increasing the margin requirement will reduce the
    volatility, but still allow for some speculation in the
    industry. What is your thought?
        Mr. Gensler. The Dodd-Frank Act also addressed margin. Our
    authorities are limited. They're just to set margin with regard
    to cleared swaps, as it relates to the safety and soundness of
    the clearinghouse, and for uncleared swaps, the safety and
    soundness of the dealers, the financial system as the dealers.
    And we've put proposed rules out with regard to that.
        So it doesn't necessarily address Mr. Chairman's question,
    but the Dodd-Frank Act's pretty clear that it's about the
    safety and soundness of the clearinghouses or the dealers
    themselves when we set these margins.
        Senator Durbin. Thank you, Chairman Gensler. I have to
    leave and be in a meeting in the House. But Senator Lautenberg
    has said he'll preside through the close of questions from
    Senator Moran and himself.
        And I thank you both for coming today. We'll submit some
    questions in writing for you, and I hope you get a chance to
    respond to them in a timely fashion.
        Senator Moran.
        Senator Moran. Mr. Chairman, thank you.
        I, too, will submit a number of questions in writing.
        I just have one follow-up question, and then a general
    question for both chairpersons.
        I want to go back to our position limit conversation. You
    said that you put the position limit rule out for comment--in
    my view, what you were telling me is for, to determine its
    appropriateness. I was suggesting that position limits are to
    be determined, are to be under rulemaking where appropriate.
    And I would just make the point that whether or not it's
    appropriate is a determination to be made by the economists.
    And this goes back to the IG report--that determination about
    the appropriateness should be done by economists, not by
    lawyers.
        And to date, to my knowledge, the only report you have from
    economists is the 2008 staff report that found no connection
    between excessive speculation and unwarranted price
    fluctuations. So, I'd be glad to have this ongoing conversation
    with you in, in that regard.

                           CFTC deg.SAVINGS

        And then, just generally, for both of you, are there any
    examples of where you and your agency are finding savings--
    reduced spending--for purposes of helping us offset the
    increased costs that you're requesting?
        Chairman Schapiro.
        Ms. Schapiro. I'd be happy to do that, yes. We have a new
    leadership team in our technology group and a new chief
    operating officer of the SEC, and one of the charges I've given
    them is to look for those opportunities to save--particularly
    when we were under the continuing resolution for such a long
    period of time.
        And so, particularly in the technology space, we've been
    able to retire some old equipment and utilize more efficient,
    more cost-effective technologies. That's an opportunity. We are
    moving to more risk-based approaches with respect to our
    examination program, so that we are using less of a broad sweep
    and check the box mentality, and a more focused, deeper dive
    into those regulatees that might actually present the greatest
    risk to the investing public.
        We are trying to deploy knowledge management systems and e-
    discovery tools that will allow us again to leverage
    technology, rather than necessarily having to bring on a lot of
    human resources to do certain functions that technology does
    very well.
        And if I can give you one sort of quirky example, we
    learned that at our alternative data center, we could save
    $375,000 a year on an investment of $120,000, simply by
    changing our power configuration. So, it gives you a very micro
    idea of what we're looking at.
        But we are trying to go through the SEC very carefully and
    look for every opportunity to find savings that we can then re-
    deploy to higher value uses that we think will do more to
    protect the investing public and to ensure that the markets are
    operating with efficiency.
        That also includes leveraging other entities like self-
    regulatory organizations as we develop the consolidated audit
    trail. There will be costs for the SEC in that, but the great
    majority of the costs will be borne by the exchanges and FINRA,
    that will have to develop the plan for the consolidated audit
    trail, set up the repository for the data, and then we'll
    develop our own tools to access that data. We're leveraging the
    Public Company Accounting Oversight Board, we're leveraging
    private accounting firms--anywhere we can leverage third
    parties with rigorous oversight by the SEC, we look at those as
    opportunities to both do a better job, and to find some savings
    that we can then re-deploy.
        Senator Moran. If you can quantify that, I'd welcome the
    piece of paper that demonstrates those savings within the SEC.
        Ms. Schapiro. We'd be happy to do that.
        Senator Moran. Thank you.
        [The information follows:]

                                                COST-SAVINGS INITIATIVES
    ----------------------------------------------------------------------------------------------------------------
                                                                                                            Total
                                                                                                        upfront cost
             Opportunity description              Savings opportunity         Potential cost savings     (spend  to
                                                                                                          save) \1\
    ----------------------------------------------------------------------------------------------------------------
    Data storage system and retirement and    Reduce data storage          $1.4 million over 3 years..      $470,000
     replacement.                              maintenance costs by
                                               purchasing new equipment.
    Server virtualization and storage.......  Eliminate number of          $18.6 million over 3 years.    $9,100,000
                                               physical severs.
    Operational monitoring and metrics        Eliminate 30 contractor      $5.3 million over 6 years..    $3,900,000
     management.                               FTEs.
    Power savings at SEC alternative data     Eliminate dedicated power    $380,000 each year after          $10,000
     center.                                   circuits through             first year.
                                               consolidation at Equinix.
    HQ building and 11 regional buildings     Replace contract for         $6 million over 5 years....       ( \2\ )
     facilities access control contract.       electronic facilities
                                               access control system and
                                               surveillance systems with
                                               less expensive contract.
    Delegate section 31 fee verification....  Opportunity as noted in BCG  Current process uses 10 FTE       ( \3\ )
                                               study: rather than           for 4 months.
                                               utilizing OCIE examination
                                               resources, redirect to
                                               SROs compliance costs for
                                               ensuring SROs are paying
                                               SEC the correct amount in
                                               section 31 transaction
                                               fees.
    ----------------------------------------------------------------------------------------------------------------
    \1\ Cost projections are estimates and thus are subject to change.
    \2\ Not applicable.
    \3\ To be determined.

        Senator Moran. Chairman Gensler.
        Mr. Gensler. Similar to Chair Schapiro's answer, through
    the continuing resolution, we did. We're only just people and
    technology, by and large with, of course, some real estate. So,
    there were a number of savings. Unfortunately, in technology we
    cut so much that I think that, you know, we need to really, as
    we earlier talked about, go the other way, to leverage
    technology to be more efficient.
        One of the significant things we've been looking at is,
    what duties, can we ask the self-regulatory organization, the
    NFA to do, particularly in terms of registering the new swap
    dealers, examining the new swap dealers, and we've worked very
    closely with them as to how they can stand up. They're probably
    going to have to stand up between 100 and 200 new people to do
    that, rather than us doing it. But we're working very closely
    with them.
        In terms of technology, it's really, how can we leverage
    off of what's in the Dodd-Frank Act and these new data
    repositories so that as much as possible can be picked up by
    the data repositories? They will charge fees for that, by the
    way. But it won't be through the taxpayers. And that, we then
    get direct data access. And we've already had our chief of
    technology be, in direct dialogue with each of the data
    repository aspirants--they're not yet registered--as to how we
    can link up the systems and leverage off of their data.
        Senator Moran. Well, Chairman Gensler you, too, if there's
    a piece of paper that you could present to me, or to the
    subcommittee, that outlines the cost savings that are
    occurring. What I'm looking for is that you would be asking for
    more money from us, but for these savings within your agency
    that you've developed for fiscal year 2012.
        [The information follows:]
        Checklist of Commodity Futures Trading Commission Cost-cutting
                                  Initiatives
        The Commodity Futures Trading Commission (CFTC) is committed to
    reducing its operating costs. Over the last 2 fiscal years, more than
    $65 million over the next 15 years in cost reductions were achieved
    using proactive contracting practices. The results are presented below.
                   cftc deg.renegotiate space leases
        The estimated negotiated savings cited below totals approximately
    $48.4 million:
      --The CFTC expanded and extended its existing D.C. lease to produce
            an estimated saving of $42 million over 15 years when compared
            to the estimated cost to relocate.
      --The CFTC expanded and extended its existing Chicago lease resulting
            in an estimated savings estimated of $6.4 million over 12 years
            versus the estimated cost to relocate.
        cftc deg.negotiate cost reductions on active contracts
        The estimated negotiated savings cited below totals approximately
    $17.6 million over 5 years.
        A brief summary focusing on negotiated cost savings:
          IT Support Services.--Estimated savings associated with the award
            of five contracts totals approximately $15 million over 5
            years.
          IT Hardware.--Estimated savings associated with the award of two
            contracts totals approximately $700,000.
          Software.--Estimated savings associated with the award of one
            contract totals approximately $106,000.
          HR Benefits and Support Services.--Estimated savings associated
            with the award of two contracts totals approximately $1.5
            million over 5 years.
       cftc deg.renegotiate on-line legal research service rates
        Negotiated rate reductions for online services in the amount of
    $259,000. Future savings are expected to exceed this amount on an
    annual basis.
      cftc deg.leverage nasa government-wide acquisition contract
        The estimated negotiated savings cited below totals approximately
    $688,000.
          Administrative Support Services.--Estimated savings associated
            with the award of two contracts totals approximately $400,000.
          Saved $235,000 in the purchase of routers by converting a
            proposed GSA schedule purchase to a competitive buy.
          Saved $53,000 in the purchase of blade servers by converting a
            GSA schedule purchase to a competitive buy.
      cftc deg.convert software licenses to enterprise agreements
        Negotiated an enterprise license for law office services that saved
    the CFTC $145,000 compared to the price of individual licenses.
        The CFTC is committed to reducing its operating costs. Over the
    last 2 fiscal years CFTC estimates it saved at least $500,000 in cost
    reductions were achieved by changing its operating practices.
      --Reduce travel costs;
        --Use more teleconferencing and web technology;
        --Modernize travel policies to use restricted fares where
                appropriate;
        --Centralize employee registration and negotiate larger discounts
                with conference vendors; and
        --Recover State lodging taxes inadvertently paid by CFTC travelers;
                and
      --Consolidate purchases for common goods and services;
      --Implemented 4-digit dialing eliminating the long distance charges
            on calls made between CFTC offices;
      --Put more documents online to cut back on FOIA requests; and
      --Set shared printer default settings for ``two-sided printing''.

        Senator Moran. I thank you for your testimony today and
    look forward to our ongoing conversation. Thank you.
        Mr. Lautenberg.

                          CFTC deg.USER FEES

        Senator Lautenberg. Thanks.
        And just a couple of things that I'd like to get answers
    to. Mr. Gensler, the CFTC, the only financial regulator that
    does not offset a portion of the cost through industry user
    fees. Now, if the derivatives traders don't pay fees to defray
    the costs of the market oversight, then the taxpayers are the
    ones who pay the bill. Should the traders continue to--it's
    always in the way--should the traders continue to get a free
    ride while the taxpayers foot the bill?
        Mr. Gensler. We think to fulfill our mission, we look
    forward to working with the Congress in any way that the
    Congress sees fit to help fulfill the mission and secure the
    funding. The President's request did put forward a concept of
    user fees with regard to the swaps marketplace, and if that's
    beneficial to this subcommittee for us to work with you on
    that, we'd look forward to doing that, whatever the Congress
    thinks is the best way to secure the funding.
        Senator Lautenberg. What would you recommend?
        Mr. Gensler. I'd recommend that we work with you in any way
    that helps secure the funding.
        Senator Lautenberg. Thank you.
        Ms. Schapiro, credit rating agencies play an influential
    role in helping investors to make decisions. Part of the SEC's
    budget request is devoted to closely regulating and examining
    these agencies. But credit rating agencies continue to be paid
    by the very people whose products the agencies are evaluating.
        What might the SEC do to address this, what I see as a
    fundamental conflict of interest?
        Ms. Schapiro. Senator, there is a conflict of interest
    there, and so the Dodd-Frank Act did a couple of things to help
    us address that. One is that we're required to examine credit
    rating agencies on an annual basis, regardless of the risk a
    particular agency presents. And so part of our budget request
    is staffing for the credit rating agency examination team.
    We're also required to set up an independent office of credit
    rating agencies, reporting directly to me.
        In addition, we have about 10 different rules that we're
    required to do under the Dodd-Frank Act to address conflicts of
    interest, governance, enhanced public disclosure about the
    performance of ratings, and so forth. And we're working on
    those rules right now.
        I think to get directly to your question, though, there is
    a requirement for three different studies on credit rating
    agencies, one of which is to study the feasibility of a wholly
    different model for credit rating agencies when they're rating
    structured assets. So that there would be a model potentially
    where the rating agency would be assigned, by the SEC or by a
    self-regulatory organization, to the issuer of the structured
    product, rather than the issuer of the structured product
    picking the rating agency and perhaps creating a very real
    conflict of interest.
        That study is not due until July 2012. But we're just about
    to go out with our request for comment to get that study
    launched. And that will, I think, give us some other ideas
    about alternative compensation structures that might get at
    this very important conflict of interest issue.
        Senator Lautenberg [presiding]. Thank you.
        In New Jersey we have a nationally known philosopher whose
    name is Yogi Berra. And Yogi has an expression that I think is
    appropriate at the moment. Because if we continue to look at
    the cost side without the benefit side of putting additional
    staff to work, of investing in additional technology, it's
    going to be, as Yogi would say, deja vu all over again. So, I'd
    recommend care, thought, and investments that can really pay
    off handsomely for the future.
        With that, I thank, in the words of our chairman, all of
    you who've participated in preparing for the hearing. I
    appreciate hearing from the top officials of these two pivotal
    agencies about their implementation activities and funding
    needs. And it's fair to say that today's discussion has
    provided helpful insights into these agency operations, which
    will be instructive as we further consider the budget proposals
    and develop our fiscal year 2012 bill over the coming months.

                         ADDITIONAL COMMITTEE QUESTIONS

        The hearing record, as Senator Durbin said, will be, remain
    open until next Wednesday, May 11, at 12 noon for subcommittee
    members to submit statements and/or questions to be submitted
    to the witnesses for the record.
        And with that, I thank Senator Moran for his contribution.
        [The following questions were not asked at the hearing, but
    were submitted to the Department for response subsequent to the
    hearing:]
                      Questions Submitted to Gary Gensler
                Questions Submitted by Senator Richard J. Durbin
       cftc deg.adapting operations to expanded responsibilities
        Question. The Commodity Futures Commission (CFTC) regulates a
    futures and options industry that increased from 580 million contracts
    in 2000 to more than 3.1 billion contracts in 2010--a change of more
    than 434 percent. During that same decade, customer funds held in
    Futures Commission Merchants accounts increased from $56.7 billion to
    more than $170.1 billion, and the value of these contracts is
    notionally estimated at $40 trillion. With the Dodd-Frank Act signed
    into law last July, the CFTC is tasked with regulating the swaps
    markets with an estimated notional value of approximately $300
    trillion--roughly 7 to 8 times the size of the regulated futures
    markets.
        How will your staffing and organization need to adapt to keep pace
    with this growth surge?
        Answer. The CFTC must be adequately resourced to police the markets
    and protect the public. The CFTC is taking on a significantly expanded
    scope and mission. By way of analogy, it is as if the agency previously
    had the role to oversee the markets in the State of Louisiana and was
    just mandated by the Congress to extend oversight to Alabama, Kentucky,
    Mississippi, Missouri, Oklahoma, South Carolina, and Tennessee.
        With seven times the population to police, far greater resources
    are needed for the public to be protected. Without sufficient funding
    for the agency, our Nation cannot be assured of effective enforcement
    of new rules in the swaps market to promote transparency, lower risk
    and protect against another crisis. It would hamper our ability to seek
    out fraud, manipulation, and other abuses at a time when commodity
    prices are rising and volatile.
        Until the CFTC completes its rule-writing process and implements
    and enforces those new rules, the public remains unprotected.
        Question. Does CFTC's current organizational structure allow you to
    meet the challenge?
        Answer. The CFTC has been meeting the challenge of writing rules to
    implement Dodd-Frank though its existing structure supplemented by rule
    writing teams whose members cut across divisions. As the agency moves
    out of the rule-writing phase to ongoing oversight of the futures and
    swaps markets, some changes to the existing organizational structure
    will be needed to meet the need to oversee new entities such as swaps
    dealers and better utilize technology.
        Question. Are you contemplating restructuring your operations? How?
    By when do you expect to realign the organization?
        Answer. Yes, the agency is undertaking a staff reorganization to
    effectively implement the Dodd-Frank Act, oversee an increasingly
    electronic marketplace and manage and utilize agency resources. The
    agency plans to create two new groups reporting to the chairman's
    office: a Division of Swaps and Intermediary Oversight and an Office of
    Data and Technology. Some realignment will occur within existing
    Divisions and Offices. Further changes are noted in the attached
    memoranda. The CFTC is planning for the realignment to become effective
    October 9, 2011. Notice of this planned staff reorganization was
    provided to the Congress by letter on May 6, 2011, presented below.

                          Commodity Futures Trading Commission,
                                           Washington, DC, May 6, 2011.
    Hon. Daniel K. Inouye,
    Chairman, Senate Committee on Appropriations, Washington, DC.
    Hon. Thad Cochran,
    Vice Chairman, Senate Committee on Appropriations, Washington, DC.
    Hon. Harold Rogers,
    Chairman, House of Representatives Committee on Appropriations,
            Washington, DC.
    Hon. Norm Dicks
    Ranking Member, House of Representatives Committee on Appropriations,
            Washington, DC.
        Dear Senators Inouye and Cochran and Representatives Rogers and
    Dicks: The Commodity Futures Trading Commission is undertaking a staff
    reorganization to effectively implement the Dodd-Frank Wall Street
    Refoun and Consumer Protection Act, oversee an increasingly electronic
    marketplace, and manage and utilize agency resources. We are providing
    this notice pursuant to the Department of Defense and Full-Year
    Continuing Appropriations Act, 2011.
        The enclosed document describes the details of the reorganization.
    Please do not hesitate to contact me if you have any questions.
                Sincerely yours,
                                                  Gary Gensler,
                                                              Chairman.
        Enclosure
                              CFTC Reorganization
        AUTHORITY:
        Title 5, United States Code (USC)
        Commodity Exchange Act
        Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-
    Frank)
        CFTC FY 2011-2015 Strategic Plan
        GPRA Modernization Act of 2010 (OMB Memorandum M-I1-17, April 14,
    2011)
    Recommended CFTC Reorganization
        The Commodity Futures Trading Commission (CFTC) is undertaking
    reorganizing, effective October 9, 2011, to structure its stall for
    implementation oldie Dodd-Frank Wall Street Reform and Consumer
    Protection Act (Dodd-Frank Act); oversee an increasingly electronic
    marketplace; and plan for, manage and utilize agency resources. The
    changes are consistent with the CFTC FY 2011-2015 Strategic Plan
    approved February 28, 2011.
    Create New Groups Reporting to the Chairman's Office
        Create a Division of Swap Dealer and Intermediary Oversight (DS10).
        Create a new Office of Data and Technology (ODT).
    Realign Within Existing Divisions and Offices
        Division of Market Oversight (DMO).
        Division of Clearing and Intermediary Oversight (DCIO) into the
    Division of Clearing and Risk (DCR).
        Office of the Executive Director (OED).
    Other
        Rename the Office of Equal Employment Opportunity the Office of
    Diversity and Inclusion.
        Set up a process fir determining the organizational assignment of
    whistleblower and consumer outreach functions.
    Functions
                Division of Swap Dealer and Intermediary Oversight (DSIO)
        With an expanded mission due to the Dodd-Frank Act mandate to
    regulate the swaps markets, the CFTC will take on new responsibilities,
    including the registration and oversight of new categories of
    registrants such as swap dealers and major swap participants. Staff
    will be needed to regulate them for robust business conduct standards,
    record-keeping and reporting requirements and capital and margin
    requirements. To effectively oversee swap dealers and major swap
    participants, the CFTC will create a new oversight program for these
    and other registrants.
        The primary focus of this new Division will be to oversee the
    regulation of swap dealers, future commission merchants and other
    intermediaries to ensure they have adequate financial resources and
    standards of conduct. This new Division initially Will be staffed
    through reassignment of employees currently responsible for
    intermediary oversight in DCIO.
    Office of Data and Technology (ODT)
        Effective oversight of the highly electronic derivatives
    marketplace requires a technology organization at the program level
    directly accountable to the Chairman. Increased mission scope over a
    broader and more complex data-centric marketplace requires an
    enterprise-wide, integrated data and technology strategy. Elevating the
    CFTC technology program to the office level reporting directly to the
    Chairman recognizes its importance in achieving agency strategic and
    operational goals and brings focus and transparency to program
    priorities as addressed in the FY 2011-2015 Strategic Plan. This
    reprioritization of functions will align the ODT Director, as Chief
    Information Officer, with the CFTC division and program leadership to
    foster a shared strategic CFTC technology portfolio, assets and budget.
    The ODT will have two branches:
          Data Management Branch (DMB).--This branch is crucial to
            effective oversight of an increasingly electronic marketplace.
            All CFTC mission programs are fundamentally dependent on the
            timely capture and management of and access to quality and
            meaningful data. The DMB will ensure a CFTC information
            architecture based on data integration, integrity and quality.
            Working across all divisions, DMB will establish agency-wide
            data needs and an effective CFTC data strategy.
          Technology Services Branch (TSB).--The existing functions
            performed by the Office of Information and Technology Services
            (OITS), currently located in the Office of the Executive
            Director (OED), will be reassigned to ODT to partner with DMB
            and the program divisions/offices to implement technology
            solutions within a secure and stable IT environment. The
            Technology Services Branch will maintain the CFTC hardware and
            software platforms and deliver storage, security and redundancy
            capacity and capabilities.
    Division of Market Oversight (DMO)
        With the evolution of the markets and the fundamental changes made
    to the U.S. financial regulatory system, including new obligations with
    respect to the oversight of the swaps markets, the CFTC will have
    increased market monitoring responsibilities over new entities, such as
    swap execution facilities (SEFs) and swap data repositories (SDRs).
    Furthermore, the Dodd-Frank Act adds to the CFTC's authorities with
    regard to real time reporting of swaps transactions, review of new
    products, aggregate position limits and appropriate block trade levels.
    Restructuring DMO will enable the CFTC to implement oversight
    requirements of these new entities and authorities to ensure that the
    markets operate with a robust surveillance and compliance review
    system.
    Division of Clearing and Risk (DCR)
        The Dodd-Frank Act mandates that standardized swaps be cleared
    through CFTC-registered derivatives clearing organizations (DCOs.) It
    also requires that the CFTC review and examine systemically important
    DCOs for compliance with CFTC regulations on a yearly basis, which the
    CFTC does not currently do. Based on information received from
    interested parties, a 50 percent increase in the number of DCOs is
    anticipated. The Division of Clearing and Risk will consist of staff
    currently assigned to DCIO. It will conduct risk surveillance and
    examination of DCOs for swaps and futures as well as assess compliance
    with statutory Core Principles. In addition, it will create an
    organizational focus on the review and assessment of over-the-counter
    swaps and other derivatives instruments to determine their suitability
    for clearing.
    Office of the Executive Director (OED)
        OED reorganization will facilitate improved agency management and
    rationalize the structure of new functions that it absorbs, including
    planning, business management, physical security, Privacy Act
    compliance, intranet content management and the Office of the
    Secretariat. Changes also will accommodate increased compliance
    standards, including records management, personnel security and
    contingency planning, as well as the transfer of the technology
    program. This includes standardizing and formalizing business processes
    and decision-making to support the operational and management
    activities of the Commission.
        Ensuring that the agency has the capacity and capability to
    effectively manage an expanded mission requires the establishment of
    one new functional program and the consolidation of a number of
    functions. These changes will reduce the number of Executive Director
    direct reports from eight to five. The direct reports will now consist
    of Business Management and Planning; Financial Management; Human
    Resources; Records Management; and Diversity and Inclusion.
    Office of Diversity and Inclusion
        The Office of Equal Employment Opportunity will be renamed the
    Office of Diversity and Inclusion to accurately reflect the
    programmatic responsibilities of the Office. In addition to handling
    complaints filed pursuant to 29 CFR 1614, the current EEO Office
    ensures that the CFTC has a positive and progressive affirmative
    employment program that will assist the agency in attracting a diverse
    workforce. The Office will continue to assess and evaluate the CFTC
    environment and identify any potential barriers to inclusion, including
    reviewing practices and policies. The proposed name change is
    consistent with the names of other Federal agencies (e.g., Federal
    Reserve Board, Department of Treasury and Office of Personnel
    Management).
    Consumer Outreach Program
        The Dodd-Frank Act establishes the CFTC Customer Protection Fund
    (Fund). The Fund is to be available for payments to whistleblowers who
    provide information in connection with violations of the Commodity
    Exchange Act (the Act) and to finance education initiatives designed to
    help customers protect themselves against fraud and other violations of
    the Act. A Consumer Outreach Program Working Group of Commission staff
    will make recommendations by May 31, 2011, for the appropriate
    organizational structure of the outreach effort.

        Question. What resources will this require?
        Answer. The President's budget proposes $308 million for the CFTC
    for fiscal year 2012 to remain available until expended through fiscal
    year 2013. This funding level would enable the Commission to perform
    its responsibilities both in the oversight of commodity futures markets
    and in beginning to oversee the swaps markets.
        The fiscal year 2012 budget request would provide funding for 983
    employees. Though increased funding will support approximately 37
    percent more staff, it is in light of a congressional mandate that
    expands the CFTC's scope by more than seven times. The request also
    includes $66 million for technology, of which $41 million would be used
    to fulfill pre-Dodd-Frank Act information technology requirements. This
    increase would allow the CFTC to invest in technology in an effort to
    keep pace with the futures marketplace that is increasingly populated
    by algorithmic and high-frequency traders.
        Question. Chairman Gensler, in your prepared remarks, you mentioned
    the proposal for setting up a new group for the collection, management,
    and analysis of data for improved oversight and enforcement in the
    derivatives markets and as the primary interface for market
    participants in adapting to the new data standards and reporting
    requirements for market data required under the Dodd-Frank Act.
        When do you anticipate this being launched?
        Answer. It is anticipated that the Office of Data and Technology
    and its Data Management Branch will be launched as part of the staff
    reorganization discussed above on October 9, 2011.
             cftc deg.technology modernization investments
        Question. As emphasized in the CFTC's 2011-2015 strategic plan,
    ``effective oversight can only be accomplished if the regulator has
    access to all revelant activity in the markets.''
        The volume of information and data is vast. Promptly collecting,
    synthesizing, managing, and analyzing all of it is paramount in your
    surveillance work and real-time public reporting. Without question,
    enhanced cutting-edge technology is essential to the CFTC's capacity to
    leverage financial and human resources to execute not only your core
    mission, but for fulfilling the expanded responsibilities under Dodd-
    Frank reforms.
        During the period of successive short-term continuing resolutions
    (October 1-April 15), the budget for the Office of Information
    Technology Services was reduced 36 percent in order to preserve
    existing CFTC staffing levels.
        What is your vision for the critical role of technology and
    automation in policing the futures and swaps marketplaces?
        Answer. The CFTC's fiscal year 2012 budget request includes $66
    million for technology. This will allow us to pursue automated
    surveillance to oversee the markets and to make our oversight more
    efficient.
        Despite rapid advances in technology and the increased size of
    regulated derivatives markets, funding for the CFTC has lagged behind
    the growth of the markets. While market participants have the
    technology to automate their trading, we do not yet have the resources
    to employ modern technology to automate our surveillance.
        In fiscal year 2010, we used about 18 percent of our budget--$31
    million--on technology initiatives. The continuing resolution requires
    that we allocate $37.2 million toward technology in fiscal year 2011.
    The CFTC needs to make further investment in technology to efficiently
    oversee both the futures and swaps markets. Only through investment in
    the CFTC will we be able to adequately oversee the commodity futures
    and swaps markets and protect the American public. The President's
    fiscal year 2012 budget provides for $66 million to be used on
    technology, which would increase the proportion of our budget used on
    technology to more than 21 percent.
        Question. How would you characterize the CFTC's current state as
    compared to the industry you regulate?
        Answer. The CFTC's fiscal year 2010 year-end staff of 682 compares
    to approximately 800,000 people employed by U.S. brokerage firms,
    according to the Department of Labor's Bureau of Labor Statistics. That
    is out of a financial industry that employs 5.6 million people.
    Furthermore, the CFTC's funding request of $308 million compares to
    approximately $814 million in annual revenues of the top 25 bank
    holding companies according to industry filings with the Federal
    Reserve. The CFTC's technology budget of approximately $31 million
    during fiscal year 2010 compares to about $20-25 billion spent by U.S.
    broker/dealers on technology initiatives per year, according to a
    presentation recently given to the CFTC's Technology Advisory Committee
    by the TABB Group.
        Question. What new investments are called for?
        Answer. Technology will play a critical role in leveraging
    financial and human resources as the CFTC executes its expanded
    oversight and surveillance responsibilities pursuant to the Dodd-Frank
    Act. Accordingly, the CFTC will establish a new group for the
    collection, management, and analysis of data. This group will
    facilitate improved oversight and enforcement in the derivatives
    markets through the use of technology and data. It also will serve as
    the primary interface for market participants in adapting to the new
    data standards and reporting requirements for market data required
    under the Dodd-Frank Act.
        The CFTC's fiscal year 2010 budget request includes $25 million for
    technology needed to implement the Dodd-Frank Act. The resources
    requested are necessary for the CFTC to invest in direct data links to
    swap data repositories that are being established in the United States
    are internationally. The CFTC also must have the technology to
    aggregate and summarize the data for purposes of oversight and
    surveillance.
        Question. What is your timetable for enhancing the CFTC's automated
    capabilities?
        Answer. The President's budget request for fiscal year 2012 would
    support $66 million in information technology spending for the CFTC. Of
    that amount $25 million will be required to begin the implementation of
    Dodd-Frank Act rules. The CFTC will begin developing a number of
    technology solutions in fiscal year 2011 and 2012. This includes:
    automated surveillance of commodity futures, options and swap markets;
    ensuring that the CFTC data is compatible with industry data;
    identifying fields that describe transactions and transacting entities;
    associating swaps market data with futures market data; and
    implementing a number of other technology priorities. The technology
    implementation timetable will be driven by the sequence and phasing of
    the effective dates of final rulemakings. In fiscal year 2011 and 2012,
    the focus will be support for registration and compliance filings,
    providing connectivity for direct access to SDRs, addressing margin
    requirements and assimilating data needed for determining and enforcing
    position limits. The CFTC plans to update automated surveillance
    systems and integrate swaps and futures data and systems.
        Question. What can reasonably be accomplished this year?
        Answer. The fiscal year 2011 information technology (IT) program
    budget is $37.2 million. The largest percentage of the CFTC IT budget
    supports the ongoing operations of mission-essential systems and
    infrastructure for all divisions. With this funding, the CFTC can meet
    emerging business requirements, determine business requirements for new
    technology solutions, implement new technology solutions, and provide
    operations support.
        Question. When you testified before the subcommittee a year ago,
    you stressed that ``timely reporting of quality and meaningful market
    information is not possible with current legacy systems (one with
    position data and one with trade data)''. Has anything changed on that
    front?
        Answer. The CFTC has continued to improve the quality of the trade
    data that it receives by migrating additional exchanges to a standards-
    based data feed. We expect to complete the migration for exchanges with
    relatively low volume by the end of fiscal year 2011. Overall, the
    quality of futures trade and position data is improved. Challenges
    remain regarding a consistent ability to correlate trade and position
    data, but we have begun work on the high-level design of the IT
    architecture needed to solve them.
        Question. What impediments does the CFTC currently face in
    becoming--and remaining--as sophisticated and savvy as possible when it
    comes to technological support for your work?
        Answer. The swaps marketplace is seven times the size of the
    futures marketplace, and technology is necessary to manage our
    regulatory responsibilities. The CFTC will require significantly more
    resources to undertake regulation of the swaps market, to assimilate
    and analyze data from SDRs and to respond in a timely fashion to
    inquiries from market participants.
                          cftc deg.rulemaking
        Question. Before the ink was dry on the Dodd-Frank Act last July,
    the CFTC hit the ground running to comport with explicit statutory
    timetables for issuance of proposed rules and studies for the
    governance of the swaps marketplace and other components of the
    comprehensive reform.
        Under your leadership, Chairman Gensler, the CFTC established 31
    discrete staff teams concentrated on specific aspects of the array of
    rules. As of today, the CFTC has issued more than 40 proposed rules for
    public comment and has demonstrated laudable transparency in making
    available on its Web site the public comments it has received as well
    as information about meetings held with external stakeholders and
    interested persons.
        The staff of the CFTC has assumed an unprecedented workload and
    uninterrupted schedule to develop the rule proposals.
        What are the lessons learned since July as you have pursued the
    rulemaking challenge?
        Answer. Since July, the CFTC has issued more than 50 notices of
    proposed rulemaking to implement the Dodd-Frank Act. During that time,
    Commissioners and CFTC staff have held hundreds of meetings with the
    public and market participants and have received more than 20,000
    comments. From these meetings and comments, the CFTC has learned a
    great deal about existing market structures, including how swaps are
    transacted and how market participants structure their clearing and
    credit arrangements. This information has been extremely valuable in
    crafting proposed rules and will be important in finalizing those
    rules.
        Question. What benefits do you expect to derive from extending and
    reopening the comment period on the proposed rules?
        Answer. In late April, the CFTC voted to reopen the comment period
    on most of the Dodd-Frank proposed rules for an additional 30 days to
    give market participants another opportunity to comment on the entire
    mosaic of the rulemakings. The additional comment period allowed the
    CFTC to gain further insights from market participants and the public
    regarding proposed rules and their interaction.
        Question. What guidance has emerged from the 2-day session the CFTC
    and the Securities and Exchange Commission (SEC) jointly held this week
    for how the final rules will be phased-in?
        Answer. On May 2 and 3, the CFTC and SEC jointly held a staff
    roundtable to obtain the views of the public and market participants
    concerning the implementation of title VII of the Dodd-Frank Act.
    During those sessions, participants described what steps they would
    need to take to implement proposed Dodd-Frank rules. Participants also
    provided information about the interdependencies of various parts of
    title VII, including clearing, trading and reporting, and advised the
    CFTC about how implementation might be logically phased.
        Question. What's next on your agenda?
        Answer. The CFTC will consider final rules through the summer and
    fall months. To that end, the CFTC has scheduled five Commission
    meetings thus far: two in July, one in August and two in September.
        Question. When do you project that the full mosaic of rules will be
    finalized?
        Answer. The CFTC is beginning to take up final rules this summer
    and expects to continue finalizing rules through the fall.
        Question. Is there a nexus between your timetable for finalizing
    the rules and having the trained staff on board and supportive
    technology in place to ensure that transactions are monitored and rules
    enforced?
        Answer. We anticipate issuing final rules to implement the Dodd-
    Frank Act through the summer and fall and bringing on necessary staff
    and technology improvements throughout fiscal year 2012 and fiscal year
    2013. We have begun the process to fill many important positions.
    cftc deg.position limit requirements and oil speculation task
                                     force
        Question. In 2008, as energy and grain prices set new records,
    speculators in derivatives were blamed by some for price volatility and
    for price levels that many observers believed were not justified simply
    by the underlying economic fundamentals of supply and demand. The CFTC
    maintained that markets were functioning normally and that the price
    discovery process was not being distorted.
        The enactment of Dodd-Frank included several provisions designed to
    insulate commodity prices from the impact of excessive speculation and
    manipulation. For example, under section 737, the CFTC is directed to
    establish position limits--a cap on the size of the bets--for both
    swaps and futures.
        January 22, 2011, was the statutory deadline for the new position
    limit rules. It is my understanding that the CFTC has delayed the rules
    issuance in order to collect more data.
        With oil and gas prices soaring daily, there's mounting concern
    about the role of speculators in driving the price surge, and questions
    being raised about what needs to be done to curb it.
        A few weeks ago, President Obama announced the formation of a new
    inter-agency working group led by Attorney General Holder to examine
    the gas price situation. Representatives of both the CFTC and SEC are
    among the membership of this task force. Among the topics to be
    explored are fraud in the oil markets, developments in the commodity
    markets, investor practices, supply and demand factors, and the role of
    speculators and index traders in the futures markets.
        A similar interagency task force was formed back in 2008. The CFTC
    also conducted its own study of swap dealers and index traders to
    determine if their activity was affecting prices in crude oil and
    agricultural markets. In neither of these studies was a connection made
    between speculative trading and rising prices.
        If speculation is not illegal and serves as a necessary ingredient
    that adds liquidity to the markets, are there not other mechanisms,
    such as position limits, margin requirements, and other expectations
    that could--or should--be invoked to address this situation?
        Answer. The CFTC fulfills its mission to oversee the futures
    markets through market surveillance, industry oversight, and
    enforcement. The CFTC pursues fraud and market manipulation and
    oversees futures exchanges and clearinghouses. The CFTC is a cop on the
    beat that protects markets in commodity derivatives from fraud,
    manipulation, and other abuses.
        A critical reform of the Dodd-Frank Act relates to position limits.
    Position limits have served since the Commodity Exchange Act (CEA)
    passed in 1936 as a tool to curb or prevent excessive speculation that
    may burden interstate commerce.
        Importantly, the Dodd-Frank Act directs the CFTC to establish
    position limits for both futures and swaps in a very specific manner.
    First, the act directs the CFTC to establish position limits, as
    appropriate, for futures contracts for agricultural commodities and
    exempt commodities (including crude oil, gasoline, and other energy
    commodities). Second, the act directs that the CFTC concurrently
    establish position limits on swaps that are economically equivalent to
    those futures contracts. Third, the act requires the CFTC to establish
    aggregate limits across the futures and swaps markets. On January 26,
    the CFTC published a proposed rule to implement these statutory
    directives. The comment period closed on March 28. The CFTC will
    evaluate the comments received before proceeding to a final rulemaking.
    It is essential to complete the task of implementing the aggregate
    position limits regime, congressionally mandated to guard against the
    burdens of excessive speculation.
        Question. Chairman Gensler, when do you expect the CFTC to act on
    the requirement for strict position limits on the amount of oil
    speculators could trade in the energy futures?
        Answer. On January 26, the CFTC published a proposed rule to set
    position limits for crude oil contracts and other physical commodities.
    The comment period closed on March 28, and the CFTC received more than
    12,000 comments. The CFTC will thoroughly review these comments and
    proceed to developing a final rule.
        cftc deg.enforcement: preserving market integrity and
                            protecting market users
        Question. Detecting and deterring against illegitimate market
    forces requires CFTC's steady vigilance and swift response. In fiscal
    year 2010, the CFTC filed 57 enforcement actions -14 percent more than
    in fiscal year 2009 and 43 percent more than in fiscal year 2008. The
    enforcement filings involve allegations of manipulation, fraud, abuse,
    and other violations of the CEA.
        Furthermore, the CFTC opened 419 investigations of potential
    violations of the CEA and CFTC regulations. That's an all-time high,
    far exceeded the target, and is a 66 percent increase more than the 251
    investigations opened in fiscal year 2009. In addition, in fiscal year
    2010, The CFTC obtained $200 million in restitution, disgorgement, and
    civil monetary penalties in previously filed or existing cases.
        Let me preface my questions by saying that these statistics are
    impressive. You and your staff are to be commended. However, does this
    mean there is more illicit activity going on or that the CFTC is
    becoming more adept at rooting it out?
        Answer. A combination of factors contributed to increased
    enforcement activity by the CFTC. For example, during the past 2 fiscal
    years the Division of Enforcement hired additional staff attorneys and
    investigators to keep up with the demands of the docket; the Division
    has received a larger number of referrals over the past 2 fiscal years
    from a variety of lead sources (ranging from customer complaints to
    referrals from other financial regulators), which increased the number
    of investigations opened; and the CFTC has been granted new oversight
    authority (for example, the CFTC filed 13 cases in January 2011 based
    upon new FOREX registration obligations imposed earlier this fiscal
    year).
        Question. What's projected for fiscal year 2011? Are you on track
    to build on last year's successes?
        Answer. Yes. With less than two-thirds of fiscal year 2011
    complete, the CFTC has filed 70 enforcement actions--already more than
    the number of cases for fiscal year 2010. Approximately 300 new
    investigations have been opened during this fiscal year.
        Question. How well is the CFTC able to measure the deterrent effect
    of these enforcement actions? Is there a message to fraudsters?
        Answer. In response to violations of the CEA and CFTC regulations,
    the Commission has the authority to seek restitution, disgorgement,
    imposition of civil monetary penalties, trading restrictions, and
    registration bans. These remedies are designed to ensure that
    wrongdoers are punished, and they also serve a deterrent effect. In
    appropriate cases, the CFTC refers matters to the Department of Justice
    (DOJ) for criminal prosecution. The CFTC publicly discloses all
    enforcement actions by posting each case filing on the Commission's Web
    site and issuing press releases in connection with every action filed
    and judgment obtained. The message to wrongdoers is clear: actions that
    harm customers or markets will be prosecuted.
        Question. How rapidly are you able to collect restitution,
    disgorgement of ill-gotten gains, and civil monetary penalties imposed
    against violations of the Federal commodities laws? What is the
    recovery rate?
        Answer. Since fiscal year 2002 more than $1.6 billion has been
    imposed in restitution and disgorgement orders. Judgments entered in
    CFTC enforcement actions for restitution and disgorgement have been
    imposed to compensate victims for their losses and direct violators to
    pay the victims. As a result, restitution and disgorgement are not
    collected by the Government.
        From fiscal year 2002 to March 2011, more than $1.7 billion in
    civil monetary penalties (CMP) have been imposed. Of that amount, more
    than $500 million has been collected and deposited in the U.S.
    Treasury. All CMP debts are handled by the Department of the Treasury
    for collection actions and resolution. If the Department of the
    Treasury is unsuccessful in expeditiously collecting the CMP debt and
    there is sufficient reason to conclude that full or partial recovery of
    the debt can best be achieved through litigation, the CFTC refers the
    debt to the DOJ for enforced collection and resolution as appropriate.
        Question. What has been the impact of more sophisticated
    information technology to monitor and detect fraud more readily given
    the complexity of transactions? How well is the eLaw Program working?
        Answer. The Divisions of Market Oversight and Enforcement employ a
    variety of nonpublic investigative methods to monitor and evaluate
    trading activity. The Division of Enforcement's eLaw Program has proven
    effective as a comprehensive litigation management program, which is
    currently being upgraded. The eLaw Program has facilitated information
    sharing across the Division of Enforcement and increased the efficiency
    of document and audio search and review, as well as data analysis. eLaw
    also has increased the efficiency and organization of case development
    and management, including investigations and litigation, reduced the
    duplication of research and analysis, enhanced coordination with other
    agencies and provided the Division with expanded capacity to retain
    significant historical data.
        The eLaw Program's addition of a computer forensics capability has
    increased the efficiency of electronic evidence preservation,
    collection and analysis. With the addition of in-house computer
    forensics, the Enforcement Division no longer has to incur high-vendor
    costs or delays from outsourcing the work. This includes the addition
    of a forensics lab that facilitates proper storage and control of
    electronic evidence for chain of custody purposes. The forensics
    program has provided a foundational framework for ensuring that
    electronic evidence to be used in enforcement matters is admissible in
    court.
        The workload for the eLaw Program has grown exponentially since its
    inception. Additional staffing and resources will facilitate the timely
    and effective services provided by the systems and personnel upon which
    the program relies. In addition, as derivatives markets expand and
    become more sophisticated, and as the CFTC's authority to regulate
    those markets expands, the updated eLaw Program will ensure that
    personnel can undertake the sophisticated analyses necessary for
    efficient enforcement investigations.
        Question. Are there any statutory or administrative impediments
    that prevent the CFTC from doing more to combat fraud? What tools do
    you lack?
        Answer. In the coming months, the CFTC will begin integrating a
    broad range of enforcement tools, such as increased fraud,
    manipulation, and disruptive trading practices authority authorized by
    the Dodd-Frank Act. The CFTC's proposed anti-manipulation rule would
    set in place a broad new ability to effectively combat fraud and
    manipulation. The proposed rulemaking promotes fair and efficient
    markets, for the first time allowing the CFTC to explicitly act against
    fraud-based manipulation. The Congress also gave the CFTC authority to
    prohibit trading practices that are disruptive of fair and equitable
    trading. With adequate resources, these and other authorities will be
    used by the CFTC to promote and ensure fair and orderly trading, free
    from fraud, manipulation, and other abuses.
                       cftc deg.audit frequency
        Question. The CFTC regulates the activities of 64,700 registrants
    who handle customer funds, solicit or accept orders, or give trained
    advice. Among these registrants are commodity pool operators, futures
    commission merchants, floor brokers, floor traders, and associated
    persons (salespersons). The CFTC delegates oversight authority to the
    National Futures Association, a self-regulatory organization (SRO).
        The CFTC is limited to conducting reviews of Commission
    registrants, on average, just once every 3 years, thereby diluting the
    ability to check compliance. The CFTC also would prefer to perform
    regular and direct reviews of all exchanges and intermediaries and to
    assess their compliance with the CEA rather than relying on designated
    SROs for these reviews.
        What would be the advantages of performing more frequent reviews,
    (e.g., annual ones)?
        Answer. Direct examination of market intermediaries is a key
    component of the oversight program for SROs and registrants. Direct
    examinations are essential to assessing the effectiveness and
    thoroughness if an SRO's financial surveillance program. They also
    provide independent verification of audit work completed by SRO's
    staffs. Direct examinations also allow the CFTC to take immediate
    action when necessary to assess compliance with the CFTC's financial
    requirements to protect customers and ensure orderly markets. As
    registration and other requirements for swap dealers and major swap
    participants come into effect, these examinations will provide CFTC
    staff with critical information about the operation of these entities
    and their compliance with CFTC requirements.
        Question. Would more frequent reviews require adding staff with
    expertise in trading and build CFTC's knowledge base of how exchanges'
    various electronic trading platforms operate and how violations may
    occur on and across electronically traded markets?
        Answer. More frequent reviews would require adding staff with
    trading expertise. Having staff with expertise regarding how exchanges'
    electronic trading platforms operate is key to assessing exchanges'
    self-regulatory programs and compliance with core principles, as well
    as understanding how violations can occur across markets. In the past,
    exchanges typically did not trade the same products. However, in the
    past few years, exchanges have been listing and trading similar
    products. For example, some metals trade at both NYSE Liffe and COMEX
    and ELX trades; Eurodollar futures and Treasury Note futures--products
    that trade on CME and CBT, respectively. Protecting the public interest
    requires that the CFTC understand how all of the exchanges' electronic
    trading platforms work and how a trade on one exchange can be executed
    to facilitate a trading violation at another exchange.
        Question. To what extent do you believe there is a risk that an
    ineffective self-regulatory program may go undetected or a systemic
    risk may not be identified if frequency of reviews remains triennial?
        Answer. More frequent reviews will allow the CFTC to have current
    information on the effectiveness of surveillance programs and to
    identify and address potential issues on a timelier basis. The number
    of entities that must be assessed is expected to increase considerably
    as a result of the Dodd-Frank Act. Swap dealers and major swap
    participants will be required to register and to comply with applicable
    requirements regarding business conduct, reporting and record-keeping,
    capital, and margin. These entities will be subject to review by the
    CFTC or an SRO with respect to their compliance with the applicable
    requirements. Resources will be necessary to establish and implement
    programs for direct review by CFTC staff of these new registrants and
    for oversight of SROs that may have primary responsibility for review
    of these entities.
                 cftc deg.cost-benefit analysis issue
        Question. In the CFTC's draft 2011-2015 Strategic Plan, the agency
    declares that the Commission will adopt as policy President Obama's
    Executive order signed January 18, 2011, entitled ``Improving
    Regulation and Regulatory Review'' and apply that standard to all
    future and ending rulemakings under Dodd-Frank and seek to streamline
    existing rules and regulations as well.
        There's been criticism of late that suggests that the CFTC is not
    adhering to this Executive order. I suspect some of that hype may be a
    stalling tactic to put the brakes on Dodd-Frank reforms.
        I think CFTC has made it abundantly clear that as an independent
    agency, the CFTC is exempted from the Executive order, and that the
    CFTC follows its statutory mandate that require the consideration of
    the costs and benefits of the actions before issuing a rulemaking.
        Section 15(a) of the CEA enumerates five broad areas of market and
    public concern that shall be taken into account in evaluating costs and
    benefits. These are:
      --protection of market participants and the public;
      --efficiency, competitiveness, and financial integrity of markets;
      --price discovery;
      --sound risk management practices; and
      --other public interest considerations.
        The CFTC has discretion to give greater weight to any one of these
    criteria, and could determine that, notwithstanding the costs, a
    particular rule is necessary or appropriate to protect the public
    interest or accomplish any of the purposes of the law.
        Can you explain your approach to rulemaking and help dispel the
    myth that you are deviating from the spirit of the Executive order when
    it comes to conducting regulatory cost-benefit analysis as you roll-out
    the implementation of the Dodd-Frank regulations?
        Answer. The CFTC's practices are consistent with the Executive
    order's principles. The CFTC conducts cost-benefit analyses in its
    rulemakings as prescribed by the Congress in section 15(a) of the CEA.
    The statute includes particularized factors to inform cost-benefit
    analyses that are specific to the markets regulated by the CFTC. Thus,
    we will continue to fulfill the CEA's statutory requirements.
        The CFTC has benefited from public comments relating to the costs
    and benefits of proposed rules. To further facilitate this process, the
    CFTC approved reopening or extending the comment periods for most of
    our Dodd-Frank proposed rules for an additional 30 days through June 3,
    2011. Commissioners and staff have met extensively with market
    participants and other interested members of the public about our
    rulemakings. CFTC staff hosted a number of public roundtables so that
    rules could be proposed in line with industry practices, minimizing
    compliance costs while fulfilling the Dodd-Frank Act's statutory
    requirements. Information about each of these meetings, as well as full
    transcripts of the roundtables, is available on the CFTC's Web site.
      cftc deg.promoting market transparency thorough publicized
                                  information
        Question. Each week, the CFTC publishes its ``Commitments of
    Traders'' (COT) report. This provides a breakdown of each Tuesday's
    open interest for markets in which 20 or more traders hold positions
    equal to or above the reporting levels established by the CFTC. Since
    September 2009, the reported data has been disaggregated to break out
    managed money and swap dealer activity in the futures and option
    markets. The CFTC also produces an index investment data report, which
    summarizes index investment activity in commodity markets, a bank
    participation in futures and option markets report, and a Cotton On-
    Call report.
        All of these efforts to make information available to the public
    are important.
        What are your plans to continue similar efforts to promote
    transparency in the swaps market through the development and
    publication of reports for that market?
        Answer. The CFTC currently publishes COT reports that include
    aggregate data from futures and options exchanges. Pending the outcome
    of Dodd-Frank rulemakings and the availability of adequate resources,
    similar transparency efforts will be undertaken with respect to the
    swaps market. The CFTC's proposed rule requiring the reporting of
    positions in certain swaps will provide crucial data that will be
    incorporated in COT reports.
        Question. What other efforts are underway--or planned--at the CFTC
    to heighten access to information and thus promote more open
    government?
        Answer. The CFTC is committed to promoting transparency of both the
    markets and the agency. We have posted on our Web site a list of all
    meetings held with outside organizations related to Dodd-Frank
    rulemakings. This allows the public to see what information is provided
    to the agency during the rulemaking process.
        Further, we plan to implement new transparency initiatives in the
    coming weeks. Specifically, we will release data sets that provide
    information on the daily volume of trading that represents changes in
    daily net market exposure. The CFTC also seeks to make COT data more
    user-friendly. At present, users are presented with a fixed list of
    reports. Proposed changes will present options from which users can
    choose to generate the reports and formats that come closest to serving
    their needs.
        Question. The amount and detail of trade data collected and
    analyzed at the CFTC is unprecedented among regulatory financial
    agencies. The backbone of the CFTC's market surveillance program is the
    large trader reporting system. I understand that the SEC is exploring a
    similar system. Based on your experience at the CFTC, what best
    practices or lessons learned might benefit what Chairman Schapiro is
    contemplating?
        Answer. Trader identification that permits aggregation according to
    common ownership and control, and that allows for meaningful
    classification of traders would ease analysis and formatting of
    published reports. We are working closely with the SEC to share our
    experience with large trader reporting.
         cftc deg.working with swap execution facilities (sef)
        Question. Currently the CFTC oversees 17 Designated Contract
    Markets (DCMs) for trading in futures. It is my understanding that the
    CFTC anticipates that some 30-40 entities will apply to become SEF,
    potentially tripling the CFTC's oversight requirements. New
    responsibilities include routine monitoring and surveillance to screen
    for potential market manipulation, disruptive trading practices, and
    violations, as well as changing market conditions and developments.
        Is the range of 30-40 still your projected estimate on the growing
    universe over which the CFTC will need to exercise vigilance?
        Answer. The range of 30-40 possible SEFs was an estimate based on
    the number of entities that expressed interest in establishing SEFs.
    The CFTC staff continue to receive inquiries from entities that may
    register as SEFs. The actual number of entities that ultimately will
    file applications is uncertain.
        Question. What additional resources will be required for CFTC to
    even minimally satisfy its new oversight in the swaps arena?
        Answer. The CFTC will need additional staff to implement many new
    provisions related to the oversight of swaps trading activity. These
    include procedures for the review and oversight of an entirely new
    regulated market category: SEFs. Staff in the Market and Product Review
    and Market Compliance units must establish and implement procedures for
    the review of new SEF applications and for the annual examination of
    the operations of SEFs. The CFTC has requested a total of 62 FTE to
    fulfill its pre-Dodd-Frank responsibilities. A total of 56 FTE are
    requested to implement new Dodd-Frank Authorities. This includes an
    additional 38 FTE for fiscal year 2012 and an additional 18 FTE for
    fiscal year 2013.
        Question. What does the CFTC consider to be the optimum frequency
    for conducting ``rule enforcement reviews'' (RERs) of DCMs and
    eventually SEFs as well?
        Answer. Annually.
        Question. What resource needs does that necessitate?
        Answer. The President's budget request for fiscal year 2012 would
    support the expenditure of $16.6 million for market oversight. This
    would provide the resources necessary to increase the frequency of
    reviews.
                                     ______

                   Questions Submitted by Senator Ben Nelson
        Question. With the ongoing volatility in the marketplace, I think
    we can all agree on the necessity of implementing the Dodd-Frank Act in
    a sound and reasonable timeframe to avoiding reckless speculation.
        However, I also want us to be mindful that we achieve regulation
    without strangulation.
        Dodd-Frank contained critical protections to ensure that
    nonfinancial end-users who use future contracts in a legitimate matter
    to hedge against higher prices are not hampered by unnecessary
    regulations.
        Specifically when it comes to the Commodity Futures Trade
    Commission's (CFTC) implementation of rules relating to the definition
    of a swap dealer, the end user exception, and position limits.
        Chairman Dodd and Chairwoman Lincoln drafted a letter to the CFTC
    urging the Commission to be mindful of these specific protections in
    its implementation of the law, which I would like to introduce for the
    record.
        Is the CFTC following congressional intent when it comes to
    protecting commercial end users so they are not adversely impacted by
    the Dodd-Frank's regulatory framework?
        Answer. To ensure the financial integrity of swap dealers and
    security-based swap dealers, the Congress directed that prudential
    regulators, the Security and Exchange Commission (SEC) and the CFTC
    establish capital and margin requirements. The Dodd-Frank Act also
    requires that standardized swaps be cleared by central counterparties
    to lower risk. The CFTC's proposed rules would not require clearing or
    margin for uncleared swaps to be paid or collected on transactions
    involving nonfinancial end-users hedging or mitigating commercial risk.
        Question. As I mentioned in my opening statement, the run up in
    commodity prices, in particular oil and gas prices are having a major
    impact on Nebraska families, farmers, and businesses that rely on
    affordable fuel for personal commuting, farming, and conducting day-to-
    day commerce.
        In 2008, the CFTC found that the oil record was partly driven by
    speculators driving up prices. Does the CFTC believe this to be the
    case again with the run up in commodity prices? How much has this
    speculation inflated oil and gas prices?
        What steps is the CFTC taking to address this?
        Answer. The CFTC fulfills its mission to oversee the futures
    markets through market surveillance, industry oversight, and
    enforcement. The CFTC pursues fraud and market manipulation and
    oversees futures exchanges and clearinghouses. The CFTC is a cop on the
    beat that protects markets in commodity derivatives from fraud,
    manipulation and other abuses.
        A critical reform of the Dodd-Frank Act relates to position limits.
    Position limits have served since the Commodity Exchange Act passed in
    1936 as a tool to curb or prevent excessive speculation that may burden
    interstate commerce.
        Importantly, the Dodd-Frank Act directs the CFTC to establish
    position limits for both futures and swaps in a very specific manner.
    First, the act directs the CFTC to establish position limits, as
    appropriate, for futures contracts for agricultural commodities and
    exempt commodities (including crude oil, gasoline, and other energy
    commodities). Second, the act directs that the CFTC concurrently
    establish position limits on swaps that are economically equivalent to
    those futures contracts. Third, the act requires the CFTC to establish
    aggregate limits across the futures and swaps markets. On January 26,
    the CFTC published a proposed rule to implement these statutory
    directives. The comment period closed on March 28. The CFTC will
    evaluate the comments received before proceeding to a final rulemaking.
    It is essential to complete the task of implementing the aggregate
    position limits regime, congressionally mandated to guard against the
    burdens of excessive speculation.
        Question. In the current fiscal climate we are faced with many
    difficult questions when it comes to funding.
        While were able to boost the CFTC budget by $34 million more than
    fiscal year 2010 levels for the remainder of fiscal year 2011, it
    appears we face an even more difficult situation for funding fiscal
    year 2012.
        Can you speak to the limitations the CFTC would have in regulating
    contracts and providing oversight and transparency to the over-the-
    counter derivatives swaps trading market if we are merely able to
    maintain fiscal year 2011 levels in fiscal year 2012?
        What would the impact be if were faced with the prospect of being
    able to only provide fiscal year 2008 levels or the level the House
    recently passed in their fiscal year 2012 budget proposal?
        Answer. A return to the CFTC's fiscal year 2008 funding level would
    represent a 45 percent reduction from current levels. Had such a level
    been enacted for the CFTC mid-way through fiscal year 2011, CFTC
    staffing would have had to be reduced by 442 FTE--a 65 percent
    reduction.
        If the CFTC's funding returned to the fiscal year 2008 level, the
    Commission would be unable to fulfill its statutory mission. Every
    program would be affected, including market surveillance, industry
    oversight and enforcement. We would be unable to pursue fraud, such as
    Ponzi schemes, and market manipulation. We would inevitably develop a
    backlog of registration applications, rule reviews and appellate
    filings. This would leave significant uncertainty in the marketplace.
        Question. Over the Easter recess, President Obama directed Attorney
    General Eric Holder to create an Oil and Gas Price Fraud Working Group
    to ``monitor oil and gas markets for potential violations of criminal
    or civil laws to safeguard against unlawful consumer harm.''
        It is my understanding that in addition to the Department of
    Justice the group is composed of representatives from the Federal Trade
    Commission (FTC), the Department of the Treasury, and the CFTC.
        I was hoping you could speak to the role CFTC is play in this
    working group and what we hope to accomplish with this new working
    group.
        Answer. The CFTC serves as a co-chair of the Oil and Gas Fraud
    Working Group, whose membership also includes State Attorneys General,
    the FTC, the Departments of Energy, Agriculture and the Treasury, the
    SEC, the Board of Governors of the Federal Reserve System and the
    Federal Bureau of Investigations. On May 6, 2011 Attorney General
    Holder, as chairman of the group, informed the members that the
    ``[w]orking Group will enable us to formalize our collaborative effort,
    share current oversight activities, avoid duplication, and combine our
    resources and expertise.'' Members are actively working toward these
    goals, covering topics such as confidential information sharing between
    agencies, evaluating lessons learned from prior fraud enforcement
    involving multiple regulator collaboration and coordination, and
    continued discussions regarding market fundamentals, trends and
    oversight.
                                     ______

                   Questions Submitted by Senator Jerry Moran
        Question. The recently enacted continuing resolution states that of
    the funding provided, ``not less than $37.2 million shall be for the
    highest-priority information technology (IT) activities in the
    Commission'' to address important IT needs such as automated
    surveillance, collecting order and trade data, integrating technology
    across swaps and futures markets, improving data transparency and
    linking the Commodities Futures Trading Commission (CFTC) with Swap
    Data Repositories (SDR). Please identify the highest-priority IT
    activities that will be funded from within this amount.
        The highest priority of the CFTC IT budget is to support the
    ongoing operations of mission-essential systems and infrastructure for
    all divisions. With this funding, the CFTC can meet existing business
    requirements, provide operations support, collect business requirements
    for new technology solutions and implement new technology solutions.
    The major services provided in this area include:
      --Establishment of a technology roadmap with the capability and
            capacity to integrate futures and swaps data and market
            oversight;
      --Market and financial surveillance;
      --Enforcement litigation support, data discovery and forensics;
      --Automated surveillance modeling; and
      --Large trader data, financial data and trade data receipt, loading
            and mining.
        Question. As the full-year continuing resolution has been enacted,
    please provide details to the subcommittee as to how the CFTC plans to
    spend remaining fiscal year 2011 funding. According to the Chairman's
    prepared testimony, the CFTC is prepared to hire approximately 40
    additional staff in fiscal year 2011. Please provide the subcommittee
    with specific information on the basis of the Chairman's hiring figure
    and the CFTC's intended deployment of the additional personnel. In
    addition to information about hiring plans, please also provide
    specific information as to the impact those hiring decisions will have
    on the staffing increases requested by the CFTC for fiscal year 2012.
        Answer. The fiscal year 2011 spending plan allocates $202,269,650
    across 2 fiscal years, the majority of which will be obligated before
    September 30, 2011.
        The CFTC expects to have about 720 staff on-board by September 30
    and to utilize 667 full-time equivalent staff-years. Twelve of the new
    positions will implement the CFTC's reorganization. The remaining hires
    will be used to fill critical staffing needs across the CFTC. The
    display below identifies the expected distribution of CFTC staff at the
    end of fiscal year 2011.

                           DISTRIBUTION OF CFTC STAFF
    ------------------------------------------------------------------------
                                                  2011
                                              distribution    Percentage of
                Division/office              by division at       staff
                                              720 FTE level
    ------------------------------------------------------------------------
    Division of Enforcement................             172             23.9
    Division of Market Oversight...........             126             17.5
    Division of Clearing and Risk..........              59              8.2
    Division of Swaps Oversight............              79             11.0
    Office of Data and Technology..........              88             12.2
    Office of the Executive Director Office              69              9.6
     of General Counsel....................
    Office of Chairman and Commissioners...              50              6.9
    Office of the Chief Economist Office of              42              5.8
     Proceedings...........................
    Office of International Affairs Office               15              2.1
     of Consumer Outreach..................
                                            --------------------------------
          Total............................             720            100.0
    ------------------------------------------------------------------------

        Question. Please provide more details regarding the CFTC's fiscal
    year 2012 request for its technology budget, including specific
    information as to breakdown of the budget request for the newly
    proposed of Office of Technology.
        Answer. The following table breaks down the request.

                            [In millions of dollars]
    ------------------------------------------------------------------------
                           Description                            Amount
    ------------------------------------------------------------------------
    Investments in CFTC SDR data aggregation, order Data                  10
     Collection and Standardization, Implement Advanced
     Computing Platforms for High-Frequency, Algorithmic
     Trading Surveillance, and Enforcement..................
    Systems integration of existing large trader and trade                 9
     systems with swaps data, for systems enhancement such
     as aggregated position limit surveillance, and
     significant upgrades to the FILAC systems for SEFs and
     SDRs...................................................
    Capital equipment and software purchases................              14
    Telecommunication services..............................               5
    Support services such as financial and legal information              24
     services, operations and maintenance, systems analysis
     for ISS, TSS, eLaw, as well as other smaller mission-
     supporting systems and general operational support.....
    IT supplies, operations, and maintenance including intra-              4
     governmental payments or cross-services agreements with
     other government agencies for Internet access and Web
     site maintenance, personnel payroll system, GSA
     telephone services and COOP facilities.................
    ------------------------------------------------------------------------

        Answer. The CFTC's fiscal year 2012 budget request includes $66
    million for technology. Of that amount $25 million will be required to
    begin the implementation of Dodd-Frank Act rules. The CFTC will begin
    developing a number of technology solutions in fiscal year 2011 and
    2012. This includes: automated surveillance of commodity futures,
    options and swap markets; ensuring that CFTC data is compatible with
    industry data; identifying fields that describe transactions and
    transacting entities; associating swaps market data with futures market
    data; and implementing a number of other technology priorities. The
    technology implementation timetable will be driven by the sequence and
    phasing of the effective dates of final rulemakings. In fiscal year
    2011 and 2012, the focus will be support for registration and
    compliance filings, providing connectivity for direct access to SDRs,
    addressing margin requirements and assimilating data needed for
    determining and enforcing position limits. The CFTC plans to update
    automated surveillance systems and integrate swaps and futures data and
    systems.
        Despite rapid advances in technology and the increased size of
    regulated derivatives markets, funding for the CFTC has lagged behind
    the growth of the markets. While market participants have the
    technology to automate their trading, we do not yet have the resources
    to employ modern technology to automate our surveillance.
        In fiscal year 2010, we used about 18 percent of our budget--$31
    million--on technology initiatives. The continuing resolution requires
    that we allocate $37.2 million toward technology in fiscal year 2011.
    The CFTC needs to make further investment in technology to efficiently
    oversee both the futures and swaps markets. Only through investment in
    the CFTC will we be able to adequately oversee the commodity futures
    and swaps markets and protect the American public. With an
    appropriation to support $66 million to be used on technology, the CFTC
    would increase the proportion of its budget used on technology to more
    than 21 percent.
        Question. The CFTC has recently notified the subcommittee of its
    intent to undertake a reorganization, effective October 9, 2011, to
    restructure its staff, creating a new Division of Swap Dealer and
    Intermediary Oversight, a new Office of Data and Technology, and
    realigning other divisions and offices including the Division of Market
    Oversight, the Division of Clearing and Intermediary Oversight and the
    Office of the Executive Director. The CFTC's fiscal year 2012 budget
    request did not reflect this reorganization. Please provide the
    subcommittee with details on the new spending plan the CFTC is
    proposing for fiscal year 2012, including the impact of the
    reorganization on staffing.
        Answer. The reorganization will require the same FTE level as
    previously requested. The attached document details the breakdown of
    FTE utilization under both the fiscal year 2012 budget request and
    under the planned reorganization.

    ------------------------------------------------------------------------
                           Department                            Employees
    ------------------------------------------------------------------------
    Fiscal year 2010 budget current organizational
     structure:
        DOE.................................................             235
        DMO.................................................             250
        DCIO................................................             182
        OITS................................................              92
        OED.................................................              73
        OGC.................................................              70
        CH/COMM.............................................              38
        OCE.................................................              20
        PRO.................................................              10
        OIA.................................................              13
        CP/WB...............................................  ..............
                                                             ---------------
          Total.............................................             983
                                                             ===============
    Fiscal year 2012 budget proposed (February)
     organizational structure:
        DOE.................................................             235
                                                             ===============
        OSEF&STDCM \1\......................................             100
        MTPS&DMA \2\........................................             147
        FBOT \3\............................................               3
                                                             ---------------
          Subtotal..........................................             250
                                                             ===============
        SDIO \4\............................................             112
        CORS \5\............................................          \5\ 70
                                                             ---------------
          Subtotal..........................................             182
                                                             ===============
        OITS................................................              92
        OED.................................................              73
        OGC.................................................              70
        CH/COMM.............................................              38
        OCE.................................................              20
        PRO.................................................              10
        OIA.................................................              13
        CP/WB...............................................  ..............
                                                             ---------------
          Total.............................................             983
                                                             ===============
    fiscal year 2012 budget proposed (May) organizational
     structure (effective October 2011):
        DOE.................................................             235
        DMO.................................................         \1\ 229
        DCR.................................................              74
        DSIO................................................             108
        ODT.................................................         \1\ 113
        OED.................................................              73
        OGC.................................................              70
        CH/COMM.............................................              38
        OCE.................................................              20
        PRO.................................................              10
        OIA.................................................              13
        CP/WB...............................................         ( \2\ )
                                                             ---------------
          Total.............................................             983
    ------------------------------------------------------------------------
    \1\ Oversight of Swap Execution Facilities and Swaps Trading on DCMS
      located on page 8 of the electronic version of the CFTC fiscal year
      2012 President's budget.
    \2\ Market and Trade Practice Surveillance; Data Management and Analysis
      located on page 8 of the electronic version of the CFTC fiscal year
      2012 President's budget.
    \3\ Foreign Boards of Trade located on page 9 of the electronic version
      of the CFTC fiscal year 2012 President's budget.
    \4\ Swap Dealer and Intermediary Oversight located on page 7 of the
      electronic version of the CFTC fiscal year 2012 President's budget.
    \5\ Clearing Oversight and Risk Surveillance located on Page 7 of the
      electronic version of the CFTC fiscal year 2012 President's budget.
    \6\ ODT Total FTE is comprised of 92 OITS FTE and 21 FTE transferred
      from DMO's Information Group.
    \7\ Appropriate organization structure to be determined.

        Question. During the question and answer portion of our hearing,
    you referenced that you have economists working on each of the rule-
    writing teams. Specifically, you said: ``We do have a very fine staff
    of economists. It's about 14. We are wishing in this budget request to
    grow to 20, but there are also a lot of economists in the rule writing
    teams that aren't in the Office of Chief Economist.'' Beyond the 14
    economists working in the Office of Chief Economist, could you please
    list the names of each of the economists dedicated to the rule-writing
    teams and list the rules they have worked on?
        Answer. When the Dodd-Frank Act was enacted, we established 30
    rulemaking teams made up of staff from across divisions. An additional
    team was added to deal with necessary conforming changes to existing
    CFTC regulations. Below is a list of these teams and lead divisions
    with the subject of their rule writing responsibility. For each team
    the names of economists who are not part of the Office of Chief
    Economist are listed, along with their job titles and divisions.

                                RULEMAKING TEAMS
    ------------------------------------------------------------------------
                       Team                                 Title
    ------------------------------------------------------------------------
    Team 1--Registration (SD and MSPs)........  ( \1\ )
    Team 2--Entity definitions:
        Kuserk, Gregg.........................  Senior Economist
        Seong, Somi...........................  Economist
        Troia, Rosario........................  Financial Economist
    Team 3--Business Conduct Standards--        ( \1\ )
     Counterparties.
    Team 4--Business Conduct Standards--
     Internal:
        Rothenberg, John Paul.................  Economist
    Team 5--Capital and margin for non-banks:
        Rothenberg, John Paul.................  Economist
    Team 6--Segregation and bankruptcy          ( \1\ )
     cleared--DCIO.
    Team 7--DCO Core Principles--DCIO.........  ( \1\ )
    Team 8--Process of Review, Mandatory        ( \1\ )
     Clearing--DCIO.
    Team 9--Governance--DCIO..................  ( \1\ )
    Team 10--System Important DCO Rules, Title  ( \1\ )
     VIII--DCIO.
    Team 11--End-User Exemptions--OGC:
        Horn, Marshall........................  Director, Market
                                                 Surveillance Branch
    Team 12--DCM Core Principles--DMO:
        Forkkio, John.........................  Supervisory Industry
                                                 Economist
        Kass, David...........................  Industry Economist
        Leonova, Irina........................  Financial Economist
        Price, Gregory........................  Industry Economist
        Benton, Steven........................  Industry Economist
        Murray, Martin........................  Supervisory Economist
    Team 13--SEF Registration Requirements--
     DMO:
        Benton, Steven........................  Industry Economist
        Kass, David...........................  Industry Economist
        Leonova, Irina........................  Financial Economist
        Price, Gregory........................  Industry Economist
    Team 14--FBOT Registration Requirements--
     DMO:
        Colling, Phillip......................  Industry Economist
    Team 15--Rule Certification and Approval--
     DMO:
        Babula, Ronald........................  Economist
        Murray, Martin........................  Supervisory Economist
    Team 16--SDR Registration Standards--OGC:
        Schubert, Anne........................  Economist
    Team 17--Swap Data Recordkeeping and
     Reporting--DMO:
        Irina Leonova.........................  Economist
        Kuserk, Gregory.......................  Senior Economist
        Pullen, George........................  Economist
        Rothenberg, John Paul.................  Economist
        Schubert, Anne........................  Economist
        Larry Grannan.........................  Economist
    Team 18--Real Time Reporting--DMO:
        Leahy, Thomas.........................  Chief, Product Review Branch
        Pullen, George........................  Economist
    Team 19--Agricultural Swaps and Commodity
     Options--DMO:
        Lachenmayr, Christa...................  Economist
        Murray, Martin........................  Supervisory Economist
    Team 20--Retail Forex--DCIO...............  ( \1\ )
    Team 21--Product Definitions--OGC:
        Kuserk, Gregory.......................  Senior Economist
        Seong, Somi...........................  Economist
        Troia, Rosario........................  Financial Economist
    Team 22--Portfolio Margining Procedures--   ( \1\ )
     DCIO.
    Team 23--Anti-Manipulation--ENF:
        Cusimano, Jeremy......................  Economic Advisor to the
                                                 Director
        Kass, David...........................  Industry Economist
    Team 24--Disruptive Trading Practices--
     ENF:
        Cusimano, Jeremy......................  Economic Advisor to the
                                                 Director
        Kass, David...........................  Industry Economist
    Team 25--Whistleblowers--ENF..............  ( \1\ )
    Team 26--Position Limits--DMO:
        Danger, Kenneth.......................  Industry Economist
        Kass, David...........................  Industry Economist
        Littlefield, Thomas...................  Economist
        Sherrod, Stephen......................  Acting Director of Market
                                                 Surveillance
        Outen, James..........................  Industry Economist
    Team 27--Investment Advisor Reporting--     ( \1\ )
     DCIO.
    Team 28--Volker Rule--DCIO................  ( \1\ )
    Team 29--Alternatives to Relying on Credit  ( \1\ )
     Ratings--OGC.
    Team 30--Fair Credit Reporting Act and      ( \1\ )
     GLB--OGC.
    Team 31--Conforming Rules--DCIO:
        Choo Lee-Ken..........................  Industry Economist
    ------------------------------------------------------------------------
    \1\ Any Economists on these teams are from the Office of the Chief
      Economist.

        In addition, DMO is the lead staff division for eight of the
    rulemaking teams. The division director is Richard Shilts, who is an
    economist.
                                     ______

                    Questions Submitted to Mary L. Schapiro
                Questions Submitted by Senator Richard J. Durbin
                    sec deg.credit rating agencies
        Question. Under the Dodd-Frank regulatory reform law enacted last
    July, Federal agencies are required to scrub their rule books of
    references to credit ratings, forcing them to find alternative measures
    for creditworthiness.
        During the credit boom, banks and other investors put great stock
    in the prime ratings given to mortgage bonds that later soured. The
    Congress was concerned that, by referencing ratings in its rules, the
    Federal Government may have been putting its imprimatur on the ratings.
        Recently, the Securities and Exchange Commission (SEC) issued a
    proposed rule to eliminate references to credit ratings from the so-
    called ``net capital rule'' that requires a brokerage firm to maintain
    sufficient liquid assets against its proprietary securities in order to
    protect customers in case it fails. Currently, this rule allows
    brokerages to hold less capital against certain securities that hold
    high ratings from at least two registered credit-rating firms.
        The SEC proposal would replace the former credit rating with a
    brokerage's own internal assessment of the securities'
    creditworthiness. This change would affect about 480 brokerages that
    hold proprietary securities, some of which will have to incur costs to
    come up with an in-house process that serves as a replacement for
    outside ratings.
        One of your fellow Commissioners contends that this change would
    harm investors and force the SEC to spend more resources on its broker
    examinations to ensure brokerages are complying with the rules.
        What mechanisms does the SEC plan to put into place to ensure that
    the substitute credentialing by brokerages are sound and reliable?
        If the rating determination is left up to each brokerage won't that
    spawn an array of varied and inconsistent standards?
        Wouldn't it be more prudent and efficient for the SEC to design an
    objective standard?
        Answer. On April 27, 2010, the SEC proposed to remove references to
    credit ratings of Nationally Recognized Statistical Rating
    Organizations (NRSROs) in certain rules under the Securities Exchange
    Act of 1934, including the Commission's net capital rule for broker-
    dealers.
        Under the proposal, the SEC sets forth a list of factors that a
    broker-dealer could consider when determining the net capital treatment
    of preferred stock, nonconvertible debt, and commercial paper. The
    factors are intended to facilitate a determination by a broker-dealer
    as to whether a security is subject to a ``minimal amount of credit
    risk.'' If it is, the security could qualify for more favorable net
    capital treatment than securities of lesser credit quality. The range
    and type of specific factors considered would vary depending on the
    type of securities subject to review. A broker-dealer's process for
    establishing creditworthiness and its written policies and procedures
    documenting that process would be subject to review in regulatory
    examinations by the SEC and self-regulatory organizations (SROs). A
    broker-dealer that does not establish, maintain, and enforce written
    policies and procedures reasonably designed to assess creditworthiness
    would be subject to disciplinary action for noncompliance with the rule
    and could be required to recalculate its net capital.
        This is not the first time the SEC has proposed to remove
    references to credit ratings in Commission rules. The SEC issued a
    concept release in 1994 on the general idea of removing references to
    NRSROs in its rules. In 2003, the SEC again sought comment on whether
    it should eliminate the NRSRO designation from Commission rules, and,
    if so, what alternatives could be adopted to meet the Commission's
    regulatory objectives. Most recently, in July 2008, the SEC made
    specific proposals to remove rule references to ratings by NRSROs. In
    response, the SEC received many comments that raised serious concerns
    about removing the credit rating references. In October 2009, the SEC
    adopted several of the proposed reference removals and re-opened for
    comment the remaining proposals. In each of these concept releases and
    rule proposals, commenters generally did not support the removal of
    references to NRSRO ratings from SEC rules and provided few possible
    regulatory alternatives.
        The SEC recognizes the concerns raised by commenters that replacing
    credit ratings--which provide an objective benchmark--with more
    subjective approaches could increase costs to broker-dealers and the
    Commission. Accordingly, in the current proposal, the SEC seeks comment
    on the potential impact of moving from an objective standard to a more
    subjective standard and whether alternate and more reliable means of
    establishing creditworthiness exist.
        Question. Do you think that it is possible to restore the
    reputation of credit rating agencies? What enhanced role does SEC play
    in regulating credit rating agencies?
        Answer. The Dodd-Frank Act augmented the SEC's oversight authority
    for credit rating agencies registered as NRSROs and mandated that the
    Commission adopt rules in a number of areas with respect to NRSROs. The
    SEC began the process of implementing these mandates with the adoption
    of a new rule in January 2011 requiring NRSROs to provide a description
    of the representations, warranties, and enforcement mechanisms
    available to investors in an offering of asset-backed securities--as
    well as how those representations, warranties, and enforcement
    mechanisms differ from those of similar offerings. On May 18, 2011, the
    SEC proposed new rules and amendments to existing rules that would
    implement the balance of the Dodd-Frank Act's NRSRO rulemaking
    mandates. The proposals would enhance the SEC 's existing rules
    governing ratings and rating agencies by, among other things, requiring
    NRSROs to:
      --report on internal controls;
      --protect against conflicts of interest;
      --establish professional standards for credit analysts;
      --provide public disclosure about the credit rating and methodology
            used to determine the credit rating, when publishing a rating;
            and
      --enhance their public disclosures about the performance of their
            credit ratings.
        In addition, as required by the Dodd-Frank Act, the SEC has begun
    conducting annual exams of NRSROs.
              sec deg.sec organizational structure study
        Question. In response to a directive in section 967 of the Dodd-
    Frank Act, the SEC retained the services of an independent consultant
    to analyze the Commission's structure and operation, and to suggest
    reforms. The Boston Consulting Group (BCG) was hired. Among the
    recommendations outlined in the March 10 report are that the SEC should
    ``hire staff with high-priority skills,'' ``invest in technology
    systems,'' and ``improve oversight over self-regulatory
    organizations.''
        Has the SEC evaluated the BCG findings and recommendations?
        What has been the internal response to the report?
        Is the SEC unified in its reaction?
        What steps are being taken to address the recommendations?
        What is the estimated cost of implementing the reforms the BCG
    recommended?
        To what extent will resources made available for fiscal year 2011
    be utilized to move forward with any of the changes recommended?
        Although the President's fiscal year 2012 budget was submitted
    about 6 weeks before the BCG report, to what extent does the spending
    proposed for next year incorporate any aspects that would address the
    BCG findings?
        Answer. The BCG report has provided the SEC with valuable insights
    into how the SEC might continue its efforts to ensure a vigilant,
    agile, and responsive organization. Because the scope of the BCG
    report's recommendations touch on virtually every aspect of the SEC's
    operations and offices, determining the appropriate course of action to
    take in response and implementing those actions will require careful
    internal coordination and a significant commitment of staff and other
    resources.
        Both during the period of study by the BCG and now with regard to
    the final report, the SEC has been committed to the concept of this
    independent assessment. We welcome the opportunity to review our
    structure, processes, and the full range of our business operations
    with the goal of improving their efficiency and effectiveness to meet
    our mission objectives. Accordingly, I believe that the overall
    response within the SEC to the BCG report has been a positive one, and
    Commission management is unified in its commitment to excellence.
        Since the report's issuance the SEC has been moving rapidly to
    evaluate, prioritize, and implement many of the BCG findings and
    recommendations. I have designated our Chief Operating Officer, Jeff
    Heslop, to manage the logistics of the follow-up process. We've divided
    the BCG recommendations into two dozen discrete work-streams, each of
    which has been assigned to a division or office director or other
    senior executive tasked to lead the follow-up work. Initially, we are
    analyzing the recommendations to determine whether we agree with them
    and, if so, to develop an implementation plan and schedule. We have
    also established an Executive Steering Committee to provide critical
    oversight, to review implementation plans, and decide how best to
    prioritize, sequence, and coordinate the significant follow-up work
    resulting from the two dozen work-streams. Further, we have established
    a dedicated Program Management Office that is responsible for tracking
    and reporting on the SEC's implementation efforts. These efforts are
    being funded to the extent permitted by the SEC's overall fiscal year
    2011 appropriation.
        In a number of cases, we are already taking follow-up actions. For
    instance, we have agreed with the recommendation to consolidate the
    functions of the Office of the Executive Director and the Office of the
    Chief Operating Officer and received reprogramming approval from our
    House and Senate Appropriations Subcommittees to take this action.
        The BCG has estimated that approximately $42 million to $55 million
    in up-front costs will be required to implement the recommendations, in
    addition to the costs associated with the significant commitment of SEC
    management and staff time. A significant portion of these
    implementation costs ($21 to $28 million) would be for additional
    investments in information technology systems. The SEC did not have the
    opportunity to consider the costs of implementing the BCG
    recommendations in developing its fiscal year 2012 budget request,
    which as you note was submitted to the Congress more than a month
    before the SEC received the BCG's final report.
        One of the key findings from the BCG report is that the SEC does
    not have sufficient human resources to complete the requirements of
    Dodd-Frank while maintaining its activities as currently performed. We
    would note that the BCG's estimate of the size of this staffing
    ``capacity gap'' is generally consistent with the SEC's own estimate as
    reflected in our fiscal year 2012 budget request. Specifically, the BCG
    estimates that, in fiscal year 2012, the SEC's five major divisions and
    examinations program collectively will experience a capacity gap of at
    least 400 to 450 full-time equivalent (FTE). This is consistent with
    our budget request for these programs for fiscal year 2012, which seeks
    an increase of 424 FTE for these programs compared to fiscal year
    2011.\1\
    ---------------------------------------------------------------------------
        \1\ The SEC's fiscal year 2012 budget seeks 424 additional FTE for
    the enforcement program (130); the examinations program (148);
    Corporation Finance (38); Trading and Markets (58), Investment
    Management (24); and RiskFin (26).
    ---------------------------------------------------------------------------
      sec deg.responsiveness to tips, complaints, and referrals
                                     (tcrs)
        Question. What has the SEC accomplished in the past year to address
    concerns that the Commission was historically woefully unresponsive to
    TCRs submitted to the Commission citing potential violations of the
    rules and securities laws?
        Answer. In January 2010, the Division of Enforcement established
    the Office of Market Intelligence (OMI) to be the central intake point
    of all TCRs sent to the SEC by the public. The OMI has established
    policies, procedures, and workflow processes to analyze and research
    TCRs and assign out those TCRs that merit further assessment by
    investigative or exam staff.
        Question. Are all of the incoming TCRs presently channeled to one
    centralized destination within the SEC for review regardless of the
    mode of transmission (e.g., e-mail, letter, hotline, etc.) or
    substantive nature of the issue?
        Answer. All tips and complaints, regardless of the mode of
    transmission or the substantive nature of the issue, are entered into
    the TCR Intake and Resolution System. The system centralizes TCRs and
    provides work flow and audit capabilities such that all tips and
    complaints can be tracked from entry to disposition. With respect to
    referrals, we have a legacy system that we are in the process of
    incorporating into the TCR Intake and Resolution System. As a result,
    referrals are not yet centralized in the TCR Intake and Resolution
    System.
        Question. Which office within the SEC is primarily responsible for
    managing TCRs?
        Answer. The OMI in the Division of Enforcement and the Office of
    Compliance Inspections and Examinations (OCIE) are the two offices
    within the SEC that review all TCRs. These two offices coordinate
    review processes to ensure that tips and complaints receive similar
    analysis. Investor complaints that do not concern violations of the
    Federal securities laws are handled by the Office of Investor Education
    and Assistance.
        Question. Do you have an automated intake system in place at this
    time?
        Answer. Yes. Tips and complaints can be entered by the public into
    the SEC's online electronic questionnaire located at www.sec.gov. The
    information entered automatically populates an internal database of
    tips and complaints--the TCR Intake and Resolution System. The public
    may also send tips and complaints via email, letter, or fax. Tips and
    complaints received by email, letter, or fax are entered by SEC staff
    into the same internal database of tips and complaints.
        Question. Does the system track and monitor the tips?
        Answer. Yes. The TCR Intake and Resolution System has the
    capability to track all tips and complaints from entry to disposition.
        Question. Does it provide a means to link and search for multiple
    similar complaints against a single entity?
        Answer. Yes. The TCR Intake and Resolution System has search
    capabilities that enable staff to link and search for similar
    complaints against a single entity.
        Question. Does the system generate an acknowledgment to the
    individual or firm that submitted the TCR?
        Answer. If the tip or complaint is entered through the SEC's Web
    site using the online questionnaire, the submitter will receive an
    acknowledgment of receipt as well as a reference number associated with
    his or her submission. If the tip or complaint is mailed or emailed,
    the staff will send a letter or email acknowledging receipt of the tip
    or complaint.
        Question. That additional resources are required to further
    strengthen the SEC's capacity to acquire and manage an effective and
    functional automated TCR?
        Answer. The TCR Intake and Resolution System was designed with the
    ability to add additional functionality such as an automated triage
    engine and other analytical tools. We are currently pursuing triage
    functionality to enhance our capabilities.
        Question. To what extent does SEC management interface with your
    Inspector General (OIG) to cross-match complaints and tips and
    referrals that may be routed to each of you to identify redundancy and
    duplication? If that is not occurring, would doing so pose any issues?
        Answer. All tips and complaints received by the SEC are required to
    be entered into the TCR system. Staff in the OIG will forward tips and
    complaints that they receive to the OMI for entry into the system.
    Prior to entry, the staff's protocol requires a search of the system to
    determine whether the tip or complaint has already been entered.
       sec deg.strengthening exams and oversight--frequency of
                                    reviews
        Question. A vigorous exam program serves as a vital early warning
    system and weakness detector.
        I understand that the SEC employs a ``risk-based'' strategy for
    conducting exams of investment advisers. Under this approach, resources
    are concentrated on those firms and practices that have the greatest
    potential risk of securities law violations that can harm investors.
        Your fiscal year 2012 budget justification materials indicate that
    the SEC examined only about 9 percent of the investment advisers in
    fiscal year 2010 down from 14 percent in 2008.
        Is that level sufficient or acceptable, in your judgment?
        What are the drawbacks of sporadic inspections of a limited
    universe?
        What would it take to increase the number and frequency of reviews?
        Does the percentage decline from fiscal year 2008 to fiscal year
    2010 suggest that the SEC is reviewing fewer entities or have the
    number of advisers grown such that you are actually conducting more
    exams? (e.g., 14 percent of 1,000 = 140; 9 percent of 1,600 = 144).
        Are you at least conducting initial screenings of the entire
    universe to identify the highest-risk ones?
        Are you potentially missing some high-risk reviews because you are
    not able to examine 91 percent of them?
        Your data also reflect that SEC exams identify deficiencies in 72
    percent of the firms that are reviewed and that 42 percent of the ones
    with deficiencies are categorized as ``significant'' suggesting a high
    potential to cause harm or reflect recidivist conduct. It is also
    noteworthy that SEC intends to use more rigorous exam protocols this
    year and, coupled with growth in the number of regulated entities, SEC
    expects even lower percentages of registrants being examined.
        Isn't it conceivable with new entities coming under regulatory
    purview that more exams are in order rather than fewer?
        What resources would you need to expand exam staffing and support?
        Is it possible to require more detailed and rigorous self-exams and
    reporting requirements imposed?
        In response to the Madoff scandal and the revelation of the
    embarrassing ineptitude that delayed catching this criminal, what new
    mandates are now in place? Are SEC examiners now routinely verifying
    the existence of client assets in the custody of third parties,
    counterparties, and customers?
        Answer. Current examination resources can indeed only cover a small
    portion of the registered investment advisers (IAs) that we are
    responsible for examining. Moreover, several factors are increasing the
    strain on our examination resources:
      --increased development and use of new and complex products,
            including derivatives and exchange-traded funds;
      --growth of technology to facilitate such activities as high-
            frequency trading; and
      --growth of ``families'' of financial service firms with integrated
            operations that include both broker-dealer and IA affiliates.
        In addition to these industry factors, the examination program now
    routinely verifies with third parties the assets held by IAs, an
    important, but labor-intensive process. As a consequence of all of
    these factors, fewer IA examinations were conducted in fiscal year 2010
    than in fiscal year 2008, even as the population of IA registrants
    increased during that period.
        Although we expect that, under the Dodd-Frank Act, States will
    assume responsibility for examining most IAs with less than $100
    million in assets under management by early 2012, the act also expanded
    the SEC's examination-related responsibilities to include municipal
    advisors, new categories of securities-based swap registrants, advisers
    to private funds, and other new registrants. Overall, absent any
    increase in resources, the expected size of the SEC-regulated community
    in fiscal year 2012 will dwarf the size of the current examination
    program to an even greater extent than is the case today.
        In light of these resource constraints and in order to more
    effectively carry out our regulatory responsibilities, the OCIE is
    pursuing a more risk-based approach to the examination program. Key
    elements of this approach include:
      --An initial screening of IAs, through the review of all Form ADV
            filings. We have developed a wide range of metrics to help us
            identify high-risk firms and improve the chances that our
            examination resources are focused on the right firms.
      --Sharing the results of this initial risk assessment with regional
            offices, which add their localized knowledge of firms to
            develop a more refined list of high-risk firms.
      --Analysis of additional sources of information, including past
            examinations; SEC filings; third-party information; information
            from other regulators; and information gathered from other
            examinations.
      --Analysis of other risk-related information, including the size or
            interconnectedness of a firm; opportunities for fraud (e.g.,
            direct access to customer funds); financial concerns about the
            firm; other characteristics of a firm; and the date of last
            exam.
        Once we have selected a candidate for an examination, we will focus
    the scope of the examination based on a thorough understanding of the
    registrant's business, affiliations and potential conflicts of
    interest, and a high-level review of the firm's management controls and
    compliance systems.
        For each function included in the scope of the examination, we will
    conduct further review of key risk management, compliance and control
    functions, and test selected control processes the registrant has in
    place to manage compliance and fraud risk. This gives us a better sense
    of whether the registrant has an effective ``culture of compliance,''
    and may also encourage firms to have more rigorous compliance and self-
    examination programs.
        While we have been working diligently to improve our exam program,
    we need more examiners, expertise, and further technological resources.
    With the addition of approximately 200 FTE positions sought in the 2012
    budget, we will be able to conduct more examinations and improve our
    overall coverage of the industry, as well as better fulfill our new
    responsibilities under the Dodd-Frank Act. We also should be able to
    improve our risk analysis approach so that those examinations will be
    more likely to focus on the areas in greatest need of attention.
        The SEC recently released a staff report to the Congress on
    enhancing investment adviser examinations. The study, required by
    section 914 of the Dodd-Frank Act (914 Study), concludes that the SEC's
    investment adviser examination program requires a source of funding
    sufficiently stable to prevent examination resources from being
    outstripped by future growth in the number of registered advisers
    (i.e., that the resources are scalable to any future increase--or
    decrease--in the number of registered investment advisers). The 914
    Study identified three options for the Congress to consider:
      --Impose ``user fees'' on SEC-registered investment advisers that
            could be retained by the Commission to fund the investment
            adviser examination program;
      --Authorize one or more SROs to examine, subject to SEC oversight,
            all SEC-registered investment advisers; or
      --Authorize Financial Industry Regulatory Authority (FINRA) to
            examine dual registrants for compliance with the Advisers Act.
        The SEC expressed no view as to the advisability of any of these
    three options.\2\
    ---------------------------------------------------------------------------
        \2\ Commissioner Walters issued a separate statement in which she
    supported the second option--authorizing an SRO to oversee investment
    advisers. See http://www.sec.gov/news/speech/2011/spch011911ebw.pdf.
    ---------------------------------------------------------------------------
     sec deg.circuit breaker rules in response to may 2010 flash
                                     crash
        Question. One year ago this week, the now notorious May 6 ``flash
    crash'' sent the Dow Jones industrial average plunging some 700 points
    in minutes, exposing flaws in the electronic marketplace dominated by
    high-speed trading.
        In response, the SEC instituted new trading curbs last June as a
    pilot program. These single-stock circuit breakers apply to securities
    in the S&P 500 Index and Russell 1000 Index as well as certain
    exchange-traded funds.
        Under the existing circuit breaker pilot, trading in a stock pauses
    across the U.S. equity markets for a 5-minute period if the stock
    experiences a 10 percent change in price over the preceding 5 minutes.
    The pause gives the markets the opportunity to attract new trading
    interest in an affected stock, establish a reasonable market price, and
    resume trading in a fair and orderly fashion. I understand that the
    circuit breaker pilot is currently set to expire on August 11, 2011.
        A month ago (April 5, 2011), the SEC announced that national
    securities exchanges and the FINRA filed a proposal to establish a new
    ``limit up-limit down'' mechanism to address extraordinary market
    volatility in U.S. equity markets. If approved by the SEC, the new
    limit up-limit down mechanism would replace the existing single-stock
    circuit breakers
        This proposed ``limit up-limit down'' mechanism would prevent
    trades in listed equity securities from occurring outside of a
    specified price band, which would be set at a percentage level above
    and below the average price of the security over the immediately
    preceding 5-minute period. For stocks currently subject to the circuit
    breaker pilot, the percentage would be 5 percent, and for those not
    subject to the pilot, the percentage would be 10 percent.
        The percentage bands would be doubled during the opening and
    closing periods, and broader price bands would apply to stocks priced
    below $1. To accommodate more fundamental price moves, there would be a
    5-minute trading pause--similar to the pause triggered by the current
    circuit breakers--if trading is unable to occur within the price band
    for more than 15 seconds.
        Have the circuit breakers performed as intended? If not, why not?
        Answer. One of the key purposes of the trading pauses imposed under
    the circuit breaker pilot was to provide an opportunity for trading
    interest to normalize after a stock has been subject to substantial
    price moves in a short period of time. In a number of instances when
    the circuit breakers have been triggered, the ensuing trading pause has
    had this intended effect. However, there may be room for improvement in
    terms of the actual mechanism that is used to guard against excessive
    volatility. In particular, because the circuit breakers are triggered
    only after a trade occurs outside of the applicable percentage
    threshold, there has been a propensity for the circuit breakers to be
    triggered by erroneous trades.
        Question. What advantages or improvements do you expect to gain by
    replacing the circuit breakers with the limit up/limit down mechanism?
        Answer. In contrast to the single-stock circuit breaker, which may
    be triggered by an erroneous trade, a limit up-limit down mechanism,
    which would prevent trades in individual securities from occurring
    outside of a specified price band, would help to prevent erroneous
    trades from occurring in the first place.
        In addition, unlike the single-stock circuit breaker, the limit up-
    limit down mechanism will feature a 15-second ``limit state'' that is
    triggered before a trading pause may be initiated. Once triggered, the
    market for that security may exit the limit state in 1 of 2 ways. If
    the quotation that triggered the limit state (i.e., an offer at the
    lower price band, or a bid at the upper price band) is either cancelled
    or executed against in its entirety, the market for that security will
    exit the limit state and return to regular trading. If the quote is not
    cancelled or executed against in its entirety, then a trading pause is
    initiated for that stock once the 15-second period has run. In
    instances where the limit state was triggered by an erroneous quote or
    a momentary gap in liquidity, as opposed to a more fundamental price
    move, the ``limit state'' feature thus allows the market to quickly
    correct itself by cancelling or executing against the quotation that
    triggered the limit state, allowing regular trading to resume instead
    of automatically initiating a trading pause.
        Question. What's the timetable for action on the limit up/limit
    down proposal?
        Answer. The proposed limit up-limit down National Market System
    (NMS) Plan was published in the Federal Register on June 1, 2011, and
    the 120-day period for SEC approval ends on September 29, 2011
    (although the period for approval or disapproval may be extended to 180
    days). If the SEC approves the plan, the plan participants have
    proposed that the initial date of plan operations be 120 days following
    publication of the approval order in the Federal Register. In
    particular, plan participants proposed that once the plan is
    operational, it will be implemented in two phases. Phase I will be
    launched on the initial date of plan operations, and will cover stocks
    in the S&P 500, the Russell 1000, and a list of select exchange-traded
    products. Phase II of the plan, which will apply to all remaining NMS
    securities, will be implemented 6 months thereafter.
               sec deg.market maker quoting obligations
        Question. What other initiatives or market structure measures has
    the SEC pursued in response to the flash crash?
        Answer. One of the phenomena that occurred on May 6, 2010 was that
    trades were executed at irrational prices as low as one penny or as
    high as $100,000. These trades occurred as a result of so-called ``stub
    quotes'', which are quotes generated by market makers (or the exchanges
    on their behalf) at levels far away from the current market in order to
    fulfill continuous two-sided quoting obligations even when a market
    maker has withdrawn from active trading. In the following months, the
    SROs filed, and the SEC approved, proposals establishing minimum
    quoting obligations for market makers. Specifically, for stocks that
    are in the S&P 500, Russell 1000, and a select list of exchange-traded
    products, market makers must submit a quote for one round lot of shares
    at 8 percent away from the National Best Bid or Offer (NBBO) between
    the hours of 9:45 a.m. and 3:35 a.m. For quotes in these securities
    that are submitted between 9:30 and 9:45 a.m., and between 3:35 and 4
    p.m., this quoting obligation changes to 20 percent away from the NBBO.
    For securities that are not included in the S&P 500, Russell 1000, or
    the select list of exchange-traded products, market makers must submit
    a quote at 30 percent away from the NBBO.
        In connection with the recently filed proposals to extend the
    single-stock circuit breaker pilot to all remaining NMS securities,
    using either a 30 percent threshold (for securities in that group that
    are trading at or above $1) or a 50 percent threshold (for securities
    in that group that are trading below $1), the SROs proposed
    corresponding changes to the market maker quoting obligations. If those
    proposals are approved, market makers would be obligated to quote one
    round lot at 28 percent away from the NBBO for those securities trading
    at or above $1 (and thus subject to the 30 percent circuit breaker
    threshold), and 30 percent away from the NBBO for those securities
    trading below $1 (and thus subject to the 50 percent circuit breaker
    threshold).
        In each of these cases, a market maker's quote may ``drift'' an
    additional 1.5 percent away from the NBBO before a new quote within the
    applicable band must be entered.
                sec deg.clearly erroneous pilot program
        Another initiative following May 6 was the approval of a pilot
    program establishing uniform clearly erroneous standards. To provide
    market participants more certainty as to which trades will be broken
    and allow them to better manage their risks, the national securities
    exchanges and FINRA proposed new trade break procedures, which were
    approved by the SEC on a pilot basis in September 2010.
        These rules clarified the process for breaking erroneous trades.
    The rules will make it clearer when, and at what prices, trades will be
    broken by the exchanges and FINRA. Specifically, for stocks that are
    subject to the circuit breaker program, trades are broken at specified
    levels depending on the stock price:
      --For stocks priced $25 or less, trades are broken if the trades are
            at least 10 percent away from the circuit breaker trigger
            price.
      --For stocks priced more than $25 to $50, trades are broken if they
            are 5 percent away from the circuit breaker trigger price.
      --For stocks priced more than $50, trades are broken if they are 3
            percent away from the circuit breaker trigger price.
        Where circuit breakers are not applicable, the exchanges and FINRA
    will break trades at specified levels for events involving multiple
    stocks depending on how many stocks are involved:
      --For events involving between 5 and 20 stocks, trades are broken
            that are at least 10 percent away from the ``reference price,''
            typically the last sale before pricing was disrupted.
      --For events involving more than 20 stocks, trades are broken that
            are at least 30 percent away from the reference price.
        On May 6, the markets only broke trades that were more than 60
    percent away from the reference price in a process that was not
    transparent to market participants. By establishing clear and
    transparent standards for breaking erroneous trades, the new rules help
    to provide clarity in advance as to which trades will be broken, and
    allow market participants to better manage their risks.
    Other Initiatives
        Revision of the Market-wide Circuit Breakers.--The SEC is working
    with the Commodity Futures Trading Commission (CFTC), as well as with
    the securities and futures exchanges, to develop a framework for SRO
    rule proposals to implement changes to the current market-wide circuit
    breakers originally implemented in 1988 (and last revised in 1998). The
    goal is to modify these circuit breakers to better address the type of
    volatility experienced on May 6, 2010, and to better conform with
    today's market structures and trading dynamics.
        Expansion of the Circuit Breaker Pilot To Cover all NMS
    Securities.--On May 6, 2011, the SROs filed proposed rule changes to
    extend the single-stock circuit breaker pilot program to all remaining
    NMS securities. The triggering percentage would be 30 percent for
    securities in this group that are trading at or above $1, and 50
    percent for securities in this group that are trading below $1. Absent
    the SEC extending the timeframe, the deadline for approving or
    disapproving these filings is June 26, 2011.
        Market Access Rules.--The compliance date for Rule 15c3-5, which
    imposes restrictions on sponsored and direct market access, is July 14,
    2011, although some market participants have requested a short
    extension of the compliance date for some aspects of the rule. This
    rule contains regulatory risk management procedures that may assist in
    reducing erroneous trades.
        Other Initiatives.--The SEC continues to consider the
    recommendations made by the Joint CFTC-SEC Advisory Committee on
    Emerging Regulatory Issues in its Summary Report. The SEC also
    continues to work toward implementing a consolidated audit trail for
    the U.S. equity market.
        Question. What lessons were learned as a result of May 6, 2010?
        Answer. From the extreme price movements observed on May 6, a
    number of key lessons emerged. One key lesson is that under stressed
    market conditions, the automated execution of a large sell order can
    trigger extreme price movements, especially if the automated execution
    algorithm does not take prices into account. Moreover, the interaction
    between automated execution programs and algorithmic trading strategies
    can quickly erode liquidity and result in disorderly markets. As the
    events of May 6 demonstrate, especially in times of significant
    volatility, high-trading volume is not necessarily a reliable indicator
    of market liquidity.
        May 6 was also an important reminder of the inter-connectedness of
    our derivatives and securities markets, particularly with respect to
    index products. The nature of the cross-market trading activity was
    confirmed by extensive interviews with market participants, many of
    whom are active in both the futures and cash markets in the ordinary
    course, particularly with respect to ``price discovery'' products such
    as the E-Mini and SPY.
        Another key lesson from May 6 is that many market participants
    employ their own versions of a trading pause--either generally or in
    particular products--based on different combinations of market signals.
    While the withdrawal of a single participant may not significantly
    impact the entire market, a liquidity crisis can develop if many market
    participants withdraw at the same time. This, in turn, can lead to the
    breakdown of a fair and orderly price-discovery process, and in the
    extreme case trades can be executed at stub-quotes used by market
    makers to fulfill their continuous two-sided quoting obligations. As
    demonstrated by the CME's Stop Logic Functionality that triggered a
    halt in E-Mini trading, pausing a market can be an effective way of
    providing time for market participants to reassess their strategies,
    for algorithms to reset their parameters, and for an orderly market to
    be re-established.
        A further observation from May 6 is that market participants'
    uncertainty about when trades will be broken can affect their trading
    strategies and willingness to provide liquidity. In fact, in interviews
    with staff of the SEC, many participants expressed concern that, on May
    6, the exchanges and FINRA only broke trades that were more than 60
    percent away from the applicable reference price, and did so using a
    process that was not transparent.
        Finally, the events of May 6 clearly demonstrate the importance of
    data in today's world of fully-automated trading strategies and
    systems. This is further complicated by the many sources of data that
    must be aggregated in order to form a complete picture of the markets
    upon which decisions to trade can be based. Varied data conventions,
    differing methods of communication, the sheer volume of quotes, orders,
    and trades produced each second, and even inherent time lags based on
    the laws of physics add yet more complexity. Whether trading decisions
    are based on human judgment or a computer algorithm, and whether trades
    occur once a minute or thousands of times each second, fair and orderly
    markets require that the standard for robust, accessible, and timely
    market data be set quite high. Although the SEC and CFTC staff did not
    believe that significant market data delays were the primary factor in
    causing the events of May 6, the analyses of that day reveal the extent
    to which the actions of market participants can be influenced by
    uncertainty about, or delays in, market data.
                         sec deg.it weaknesses
        Question. Today, there is no standardized, automated system to
    collect data across the various trading venues, products, and market
    participants. Each market has its own individual and often incomplete
    data collection system, and as a result, regulators tracking suspicious
    activity or reconstructing an unusual event must obtain and merge an
    immense volume of disparate data from a number of different markets.
    And even then, the data does not always reveal who traded which
    security, and when.
        To obtain individual trader information, the SEC must make a series
    of manual requests that can take days or even weeks to fulfill. In
    brief, the SEC's tools for collecting data and surveilling our markets
    are wholly inadequate to the task of overseeing the largest equity
    markets in the world.
        How can we get a handle on this situation?
        What kind of system is needed?
        Have there been cost estimates of what it would take to create and
    deploy such a system?
        Answer. As you noted, there currently is no standardized, automated
    system to collect order and trading data across the various trading
    venues and market participants. To track suspicious activity or to
    reconstruct an unusual event in the marketplace such as last year's May
    6 market disruption, regulatory staff at the SEC , the exchanges and
    FINRA currently must merge an immense volume of disparate data from a
    number of different markets and often must make a series of manual
    requests, a process that can take days or even months to complete.
        In order to address this situation, in May 2010, the SEC proposed a
    rule to require the exchanges and FINRA to create and implement a
    consolidated audit trail that would electronically capture customer and
    order information for all orders for equities and options, across all
    markets, for the entire life of an order. Under the proposal, the SEC
    and the SROs would have access to consolidated audit trail data for
    surveillance and other regulatory purposes. I believe that this
    consolidated audit trail would enhance the ability of the SEC and the
    SROs to detect and assess potentially illegal activity.
        The estimated costs, as well as the estimated benefits, are
    discussed in the SEC release proposing the consolidated audit trail.
    Most of the costs for the creation and implementation of the
    consolidated audit trail would be borne by the industry. However, I
    anticipate that the SEC would need to incur costs in order to make full
    use of the consolidated audit trail. For example, SEC staff would need
    the technology infrastructure to access and run analyses on the
    consolidated audit trail data. If the SEC approves the consolidated
    audit trail proposal, I expect that a portion of our fiscal year 2012
    budget will be used to begin to develop the Commission's capacity to
    use the information to be collected by such an audit trail.
        Does your proposal to spend $78 million (about 5.5 percent) of the
    $1.407 billion budget you are seeking for fiscal year 2012 include
    initiatives to address these IT deficiencies?
        Answer. In addition to the Consolidated Audit Trail, the proposal
    to spend $78 million for fiscal year 2012 also includes some
    initiatives to address the SEC's IT deficiencies; however, most of the
    SEC's IT infrastructure and security deficiencies are planned to be
    addressed through initiatives from the fiscal year 2011 budget and
    process improvements.
        Question. I note that the CFTC is proposing to devote 21 percent of
    its proposed $307 million fiscal year 2012 budget to information
    technology enhancements? What is your view on whether devoting a mere 5
    percent to IT is sufficient given the circumstances?
        Answer. The budget request for the CFTC would dedicate 21 percent
    of its fiscal year 2012 budget to information technology, both for
    operations and maintenance and for enhancements. For the SEC, the
    equivalent figure for technology spending in fiscal year 2012 would be
    about 12 percent of its requested appropriation. When combined with
    expected technology spending out of the SEC's Reserve Fund, the total
    percentage is 14 percent. We believe this amount would be sufficient to
    continue modernizing the SEC's technology environment and advance key
    initiatives, such as the TCR system; the migration of our financial
    system to a Federal Shared Service Provider (SSP); the Consolidated
    Audit Trail system; EDGAR and SEC.gov modernization; and Dodd-Frank Act
    deployments.
       sec deg.tackling material weaknesses in internal controls
        Question. A Government Accountability Office (GAO) audit of the
    SEC's November 2010 Performance and Accountability Report identified
    two material weaknesses in internal controls over financial reporting:
    one in information systems, and a second in financial reporting and
    accounting processes.
        These are not new findings, but have been identified by the GAO in
    several previous audits. Chairman Schapiro, I note that you fully and
    freely acknowledge these material weaknesses are unacceptable.
        I understand that the SEC has decided to invest the time and
    resources to implement a long-term, comprehensive solution. Instead of
    creating new technology and systems, the SEC is switching to a SSP
    approach, migrating the SEC's financial system to the Department of
    Transportation (DOT).
        Other agencies, including the GAO, have migrated to the DOT, and
    they have experienced very positive results, with clean audits free of
    material weaknesses. This will be a significant undertaking, which,
    assuming adequate funding, will culminate in the cutover to the new
    system in April 2012.
        What do you estimate it will cost to migrate to a SSP?
        Will the plan involve annual payments to the DOT for providing the
    service?
        What will it save in the long run?
        Are you planning to take steps immediately using fiscal year 2011
    resources to prepare for the transition?
        Answer. In its fiscal year 2010 financial audit of the SEC, the GAO
    found that the SEC's financial statements were presented fairly, in all
    material respects, and in conformity with U.S. generally accepted
    accounting principles. The GAO noted two material weaknesses: one in
    information systems and a second in financial reporting and accounting
    processes. You correctly note that I find these material weaknesses to
    be unacceptable.
        The SEC is working this fiscal year on a number of fronts to
    correct the deficiencies noted by the GAO. In order to make its
    internal controls strong and sustainable over the long term, the SEC
    has decided to move its financial system and transaction processing to
    a Federal SSP, the DOT's Enterprise Services Center. After a planning
    phase was completed in January 2011, the implementation phase of the
    project began in February 2011 and will culminate in the cutover to the
    new system in April 2012.
        The total budget for the initial deployment, including for the
    design and setup of the system and the conversion of the SEC's data, is
    $25 million, of which the SEC will need about $12 million in fiscal
    year 2011 and $13 million in fiscal year 2012. Once the SEC cuts over
    to the DOT's financial system, the SEC will make annual payments for
    operations and maintenance, equal to about $5.5 million per year.
    Although the SEC did not undertake this initiative primarily for cost
    savings, the SEC does expect that its ongoing, annual costs will be
    lowered by about $1.4 million per year after the migration.
      sec deg.broker dealer and investment advisers standards of
                                    conduct
        Question. Brokers and dealers and investment advisers have been
    held to different standards of conduct in their dealings with
    investors. In very general terms, a broker-dealer is held to a
    suitability standard, and an investment adviser is held to a fiduciary
    duty standard.
        The ``suitability'' standard requires that brokers and dealers
    assess their customers' knowledge of securities and their financial
    situations and recommend securities that are suitable for their
    customers. Courts have imposed on a fiduciary an affirmative duty of
    ``utmost good faith, and full and fair disclosure of all material
    facts,'' as well as an affirmative obligation ``to employ reasonable
    care to avoid misleading'' one's clients.
        Section 913 of the Dodd-Frank Act entitled ``Study and Rulemaking
    regarding Obligations of Brokers, Dealers, and Investment Advisers,''
    is the major provision setting out a new approach for defining
    standards of conduct for these financial industry professionals. It
    requires the SEC to conduct a study to evaluate the effectiveness of
    the current legal or regulatory standards of care for brokers, dealers,
    and investment advisers and whether there are legal gaps, shortcomings,
    or overlaps in the standards, and enumerates 14 areas of consideration
    for this study.
        Has this study been conducted? If not, when do you expect it to
    commence and conclude?
        Answer. Yes, the study required under section 913 (``Study on
    Investment Advisers and Broker-Dealers'') was completed and submitted
    to the Congress in January 2011.
        Question. Chairman Schapiro, do you believe that when investors
    receive similar services from similar financial service providers that
    those providers--irrespective of their particular title--should be held
    to the same standard of conduct?
        Answer. Yes, I believe that when investors receive similar services
    from similar financial service providers, they should receive similar
    protections--regardless of the label applied to that financial service
    provider. As the staff's Study on Investment Advisers and Broker-
    Dealers notes, we know that the difference between an investment
    adviser and a broker-dealer is often lost on an investor. What remains
    difficult to justify is why there should be different rules and
    standards of conduct for the two roles--especially when the same or
    substantially similar services are being provided.
                                     ______

                   Questions Submitted by Senator Ben Nelson
        Question. I understand the financial crisis raised a number of
    concerns about municipal securities markets. However, I believe the
    Securities and Exchange Commission's (SEC) proposed rule to require
    municipal advisors to register with the SEC goes too far.
        While I do think that professional financial advisors should be
    registered, appointed members of municipal entities, like the ones I
    appointed in Nebraska as Governor, should not have to register as
    ``municipal advisors.''
        In Nebraska these citizens are appointed by elected officials and
    are held accountable by those officials. I don't believe the
    registration process is relevant to the activities of a public utility
    board or the members of a State educational finance authority's board.
        Do you anticipate modifications to the final rule that would
    clarify that appointed members of municipal entities, like elected
    members, are considered ``municipal employees'' and are therefore
    excluded from the definition of a municipal advisor?
        Answer. As you know, on December 20, 2010, the SEC proposed for
    public comment rules that would govern the registration of municipal
    advisors and, among other things, proposed guidance and solicited
    comments on the appropriate treatment of appointed members of a
    governing body. We have received approximately 1,000 comment letters on
    the proposal, including many that address this important issue, and we
    are reviewing them carefully.
        Section 15B(e)(4)(a) of the Securities Exchange Act, as added by
    the Dodd-Frank Act, provides that the term ``municipal advisor''
    includes a person (who is not a municipal entity or an employee of a
    municipal entity) that ``provides advice to or on behalf of a municipal
    entity or obligated person with respect to a municipal financial
    product or the issuance of municipal securities.'' Accordingly, our
    proposal would only require nonemployee-appointed officials, such as
    board members of local public entities, to register if they provide
    advice with respect to a municipal financial product or an issuance of
    municipal securities to or on behalf of a municipal entity or obligated
    person, or if they undertake a solicitation of a municipal entity.
        Public input is critically important to us in crafting rules. We
    will certainly give the comments we have received on this issue careful
    consideration before adopting a final rule.
        Question. In the current fiscal climate we are faced with many
    difficult decisions when it comes to the budget.
        While we were able to increase SEC funding by $74 million more than
    the fiscal year 2010 enacted level of $1.111 billion in the continuing
    resolution, I anticipate that providing additional funding in fiscal
    year 2012 will be even more difficult.
        Can you speak to the impact on the SEC's ability to regulate
    markets and enforce securities laws if we are only able to maintain
    fiscal year 2011 levels in fiscal year 2012?
        What would the impact be if the SEC were funded at fiscal year 2008
    levels or the level the House recently passed in their fiscal year 2012
    budget proposal?
        Answer. We greatly appreciate the subcommittee's strong support in
    recent years. The additional $74 million provided in fiscal year 2011
    will allow the SEC to fill vacancies to meet key strategic needs, begin
    to perform some of the agency's new responsibilities, and continue to
    improve agency operations.
        For fiscal year 2012, it is first important to note that the SEC's
    budget will be fully offset by matching collections of fees on
    securities transactions. Thus, the SEC's fiscal year 2012 appropriation
    at any level would have no direct impact on the deficit.
        In addition, as I stated in my testimony, it is important to note
    that over the last 20 years, the SEC's budget and workforce have fallen
    far behind the growth in the size and complexity of the securities
    markets. During that time, the average value of securities transactions
    per day has risen by about 2,500 percent and the value of investment
    adviser assets has grown by about 3,070 percent. Although the SEC's
    workforce grew over this period, it did not nearly keep pace. This
    mismatch between the changes in the markets and in the SEC has been
    exacerbated since 2005. Between 2005 and 2007, the SEC's workforce and
    technology investments had to be cut back, and they are only now
    returning to 2005 levels. In 2005, the SEC's funding was sufficient to
    provide 19 examiners for each $1 trillion in investment adviser assets
    under management. Now that figure stands at 12 examiners per $1
    trillion.
        Today, the SEC has responsibility for approximately 35,000
    entities, including direct oversight of 11,800 investment advisers,
    7,500 mutual funds, and more than 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. The SEC also
    oversees approximately 500 transfer agents, 15 national securities
    exchanges, 9 clearing agencies, 10 Nationally Recognized Statistical
    Rating Organizations, as well as the Public Company Accounting
    Oversight Board, Financial Industry Regulatory Authority, Municipal
    Securities Rulemaking Board, and the Securities Investor Protection
    Corporation. In addition, last year the SEC received vast new or
    enhanced responsibilities to oversee derivatives, hedge fund advisers,
    municipal advisors, and credit rating agencies.
        The Boston Consulting Group's (BCG) study, mandated by section 967
    of the act, concluded that although there are opportunities for
    redirecting resources to the agency's top priorities, the SEC still
    faces a ``capacity gap'' and needs significantly more staffing
    resources to effectively carry out its responsibilities. The BCG study
    estimated that this gap in fiscal year 2012 is equal to 400-450
    additional staff in the agency's five divisions and Office of
    Compliance Inspections and Examinations, in line with the President's
    fiscal year 2012 request.
        Keeping the SEC's fiscal year 2012 funding at the fiscal year 2011
    appropriated level of $1.185 billion would have serious consequences
    for the SEC. The agency would be unable to hire expertise in new areas
    such as derivatives, hedge fund advisers, credit rating agencies, and
    others. The agency also would be unable to fulfill strategic staffing
    needs in our long-standing core programs, such as for enforcement
    investigations, investment adviser examinations, and enhanced reviews
    of disclosure filings of large companies. In addition, the SEC would
    face reductions in the technology investments needed to strengthen
    operations and effectively oversee the markets, at a time when
    technology is more important to the markets than ever before, and when
    the firms the SEC regulates annually spend many times more on
    technology than the entire SEC budget.
        Cutting the agency's fiscal year 2012 funding to the levels of
    fiscal year 2008 would be devastating. If the SEC were to receive an
    fiscal year 2012 appropriation reflecting its fiscal year 2008 level,
    reflecting the overall approach taken in the House's fiscal year 2012
    budget proposal, the agency's funding would be $906 million, or $279
    million less than our fiscal year 2011 appropriation--a 24 percent
    reduction. A reduction of this magnitude would make significant cuts in
    staff and IT unavoidable and would undoubtedly dismantle most of the
    important achievements of the past 2 years to make the SEC more
    vigilant, agile, and responsive.
        Under this scenario, the SEC would need to take dramatic action to
    cut its workforce. Even after factoring in projected attrition, a 24
    percent cut in the Commission's budget would require a personnel
    reduction of approximately 1,120 additional FTE--nearly one-third of
    our workforce. To achieve this reduction through a RIF alone would
    require eliminating 1,760 positions outright. A furlough to achieve
    this reduction would have to cover the entire SEC workforce for
    approximately 85 workdays. The most dramatic impact would inevitably be
    on the largest programs--enforcement, examinations, and disclosure
    review.
        If the SEC were to cut IT investments to achieve a 24 percent
    reduction in the overall agency budget, the impact would be immediate
    and damaging. For example, the SEC would have to eliminate all new IT
    investments and suspend all ongoing development work on IT systems.
    Major technology initiatives would have to be halted, such as those to
    track tips, complaints, and referrals; strengthen the agency's
    financial controls; enhance enforcement and examination management
    systems; and bolster data analytics capabilities.
                                     ______

                  Questions Submitted by Senator Thad Cochran
        Question. You mention recent challenges the Securities and Exchange
    Commission (SEC) faced in maintaining staffing levels and budgets
    sufficient to carry out its core mission. Following its investigation
    of Stanford Financial, the Office of the Inspector General (OIG)
    identified several problems at the SEC. However, none of these problems
    involved inadequate funding or inadequate staffing. This year the
    agency reorganized its national examination program in part as a
    response to lessons learned from the Stanford fraud. What changes did
    you make in this reorganization to ensure the problems identified by
    the OIG are being corrected?
        Answer. While the Stanford IG Report did not include
    recommendations directed to the Office of Compliance Inspections and
    Examinations (OCIE), its findings show a clear need for improved
    coordination between enforcement and the OCIE on investigations of
    potential violations of the Federal securities laws, particularly those
    investigations initiated by a referral from the OCIE to the Enforcement
    Division. The OCIE has undertaken specific policy changes in its
    National Examination Program and instituted procedures to improve
    coordination and communication between the Enforcement Division and the
    OCIE.
        Through a number of structural and process reforms, the OCIE and
    the Enforcement Division are working to identify misconduct earlier and
    to move to shut it down more rapidly. The OCIE and enforcement staff
    and leadership have been directed to evaluate potential referrals from
    the OCIE exam staff against enforcement's programmatic priorities
    regularly and determine the disposition of referrals. If there is
    disagreement on a case at the regional level, exam staff has been
    instructed to escalate the matter to the attention of senior leadership
    in Washington. These processes ensure that concerns can be escalated in
    a timely manner to senior leadership of both the exam and enforcement
    programs for appropriate review and resolution.
        Exam and enforcement coordination with respect to particular
    matters is also the subject of periodic reviews. The OCIE policy now
    requires that the OCIE exam staff in each office hold quarterly Exam
    Reviews, in which the progress and status of every exam in the office
    is discussed and evaluated for several factors, including evaluating
    any significant issues with the firm that is the subject of the exam,
    determining whether more staff resources are needed on the exam and
    deciding if the exam is a potential referral to the Enforcement
    Division. These reviews are an opportunity to summarize and preview
    findings that appear likely to trigger possible Enforcement referrals,
    as well as to flag any potential differences in the assessment of
    urgency, potential harm to investors, or other issues that can then be
    raised at the joint regional meetings or to the OCIE senior management.
        Finally, the OCIE exam staff is working closely with Enforcement's
    specialized units to identify key risks presented by entities
    registered with the SEC and key risks to the markets. As previously
    described, this partnership with the specialized units has already
    resulted in new approaches to joint efforts to identify risky firms
    that may warrant examination or an enforcement investigation. In
    addition, the OCIE recently announced the creation of several
    specialized working groups that will focus on areas where the OCIE
    plans to increase its specialization and market knowledge.
        We have recently received encouraging news about these reforms. On
    March 30, 2011, the OIG issued the OCIE Regional Offices' Referrals to
    Enforcement, Report No. 493 (Referral IG Report). This audit report
    suggests that our efforts at improved coordination are meeting with
    success. The report notes that a survey of all the OCIE examiners
    throughout the SEC's regional offices concerning their view of
    Enforcement responses to examination-related referrals found that
    ``when combining the responses for `completely satisfied' and `somewhat
    satisfied' for respondents, the majority of SEC regional offices had a
    combined level of satisfaction ranging from 70 to 87 per cent.'' The IG
    Report further found that where there was dissatisfaction with the
    referral process, the level of concern dramatically dropped over time
    and particularly in fiscal year 2010, with some respondents identifying
    enforcement's newly created Asset Management Unit as having
    significantly assisted with the acceptance rate of the OCIE referrals.
        An additional issue raised by the OIG's Stanford report, albeit one
    for which there were no specific recommendations, was a relative lack
    of coordination between the investment adviser exam team and the
    broker-dealer exam team in the Fort Worth Regional Office's
    examinations of Stanford. Senior leadership of the National Examination
    Program recognizes that the past structure within the examination
    program has resulted in certain silo effects in the examination
    process. After giving this issue careful consideration, changes have
    been made to the structure of several regional offices. For example,
    some of the regional offices have restructured their examination
    program so that each subgroup contains both adviser examiners and
    broker-dealer examiners. These examiners report to the same immediate
    supervisor, which has strengthened collaboration in examining entities
    that are dually registered with the SEC as both an investment adviser
    and a broker-dealer such as Stanford.
        Question. I am very troubled by the OIG's report, released last
    year, on Stanford Financial. Many Mississippians and other Americans
    lost their life savings by investing in what were freely marketed as
    safe, Certificate-of-Deposit investments. Dating back to 1997, the
    SEC's Fort Worth Examination Group repeatedly requested that an
    enforcement action be brought against Stanford Financial. That was more
    than 12 years before the SEC actually brought an enforcement action.
    The OIG found serious managerial, cultural, and performance-based
    problems at the SEC, which led to this terrible failure. What are you
    doing to help compensate the victims of the Stanford Financial fraud?
        Answer. We are proceeding on several fronts. Most recently, on June
    15, 2011, the SEC asked the Securities Investor Protection Corporation
    (SIPC) to initiate a court proceeding under the Securities Investors
    Protection Act (SIPA) to liquidate the broker-dealer. This decision was
    based on the totality of facts and circumstances in the case. A SIPA
    liquidation proceeding would allow investors with accounts at Stanford
    Group Company to file claims with a trustee selected by the SIPC.
        On the litigation front, the SEC's focus is to hold wrongdoers
    accountable while providing maximum recovery available under the law to
    investors harmed by this egregious fraud. First, after filing its civil
    action in February 2009, the SEC filed a motion requesting that the
    district court appoint a receiver over the defendants' assets to
    prevent waste and dissipation of those assets to the detriment of
    investors. Second, to complement the receiver's efforts, the SEC, in
    coordination with the Department of Justice (DOJ), moved to freeze
    Securities and Investment Board assets held in international financial
    institutions. Freezing assets in international jurisdictions poses
    complex litigation challenges, but this step was crucial to ensure the
    protection of investor funds. Third, the SEC is working with the
    receiver, DOJ, and securities regulators and law enforcement agencies
    in the United Kingdom, Switzerland, Canada, Mexico, and in several
    countries throughout Central and South America, to identify, secure,
    and repatriate for the benefit of investors more than $300 million in
    cash and securities held in non-U.S. bank accounts.
        In a status report filed February 11, 2011, the receiver identified
    several categories of major assets for possible distribution to harmed
    investors:
      --$94.7 million in cash on hand;
      --$30.4 million in private equity investments already recovered and
            liquidated;
      --$1 million in coins and bullion inventory;
      --$6 million in real estate sale proceeds, with an additional $11.7
            million expected from sales of other identified properties; and
      --$594.9 million in pending fraudulent transfer and unjust enrichment
            claims.\1\
    ---------------------------------------------------------------------------
        \1\ This figure includes amounts claimed in lawsuits filed or
    intended to be filed by the receiver; actual recovery may vary
    depending on litigation outcome.
    ---------------------------------------------------------------------------
        In conjunction with the SEC, the receiver is focused on identifying
    and liquidating the largest possible pool of obtainable assets for
    distribution to harmed investors.
        The SEC is closely monitoring the receiver's costs to ensure
    optimal recovery for the victims of this massive fraud. We have
    strongly urged the receiver to stringently apply a cost-benefit
    analysis and pursue only those legal claims that could generate maximum
    proceeds for the benefit of investors while minimizing the receiver's
    legal fees and expenses. We also have cautioned the receiver that we
    are carefully scrutinizing all bills requesting payment for fees and
    expenses. In fact, on at least three occasions, the SEC has formally
    challenged the receiver's bills. We will continue to do so where
    appropriate.
                                     ______

              Questions Submitted by Senator Kay Bailey Hutchison
        Question. The Madoff and Stanford Ponzi schemes represent what many
    view as two of the largest failures of the Securities and Exchange
    Commission (SEC). Investigative reports published by your own Inspector
    General (OIG) highlighted several areas where the SEC failed in its
    mandate to protect investors. Can you please explain how the additional
    funds you are requesting for fiscal year 2012 would have helped the SEC
    to prevent or respond better to shut down the Madoff or Stanford Ponzi
    schemes before thousands of American investors saw their finances so
    devastated?
        Answer. The SEC commends the work of the OIG investigating this
    matter and drafting the reports, Investigation of the SEC's Response to
    Concerns Regarding Robert Allen Stanford's Alleged Ponzi Scheme, OIG-
    526 (Stanford IG Report) and Investigation of the SEC's Failure to
    Uncover Bernie Madoff's Ponzi Scheme, OIG-509 (Madoff IG Report). In
    the Stanford IG Report, the OIG conducted an extensive investigation
    that clearly identifies missed opportunities for protecting investors,
    and no one should evade responsibility for the SEC's handling of the
    Stanford matter. We deeply regret that the SEC failed to act more
    quickly to limit the tragic investor losses suffered by Stanford's
    victims. In the Madoff IG Report, the OIG identified numerous red flags
    that the SEC missed in its examinations and investigation of Bernie
    Madoff's hedge fund and trading practices.
        In particular, the Stanford IG Report, which was released last
    year, made important recommendations identifying areas for improvement
    throughout the SEC and both the Division of Enforcement and the Office
    of Compliance Inspections and Examinations (OCIE) have since instituted
    various measures to implement all of those recommendations.
        In addition to the OIG's recommendations in the Stanford IG Report,
    under their new leadership both the Division of Enforcement and the
    OCIE have engaged in a top to bottom review within the last 2 years and
    have implemented measures to reform organizational processes and
    improve our effectiveness. We have streamlined management; put seasoned
    investigative attorneys back on the front lines; improved our
    examiners' risk-assessment techniques; revised our enforcement and
    examination procedures to improve coordination and information-sharing;
    leveraged the knowledge of third parties; instituted new initiatives to
    identify fraud; expanded our training programs; hired staff with new
    skill sets; and revamped the way that we handle the tremendous volume
    of tips, complaints, and referrals that we receive annually.
        Although our reform efforts are ongoing, the OIG's recent report,
    the OCIE Regional Offices' Referrals to Enforcement, Report No. 493
    (Referral IG Report), issued on March 30, 2011, indicates that enhanced
    coordination between Enforcement and the OCIE is proving effective,
    particularly in the area of handling referrals from the OCIE to
    Enforcement. In addition, strengthened collaboration between the OCIE
    and Enforcement has resulted in a number of notable enforcement actions
    in the past 2 years.
        Despite the many changes, more work remains. This will require
    commitment and creativity. While we must always efficiently use
    existing resources, additional resources will help us continue to
    implement organizational reforms underway in the Division of
    Enforcement and the OCIE. For example, additional resources will allow
    us to enhance our IT capabilities to allow enhanced data analytics and
    data mining in our Enforcement investigations, enabling us to identify
    patterns across suspicious conduct and generate meaningful
    investigative leads. Although we deeply regret the losses suffered by
    Stanford and Madoff investors, we embrace the challenges that lie ahead
    and are confident that our ongoing efforts will enhance investor
    protection and the integrity of our financial markets.
        Question. The Securities Investors Protection Act (SIPA) Trustee
    appointed to the Madoff case has reportedly recovered almost all the
    investors' original principal to be distributed among the victims,
    while the SEC-appointed receiver in the Stanford case has so far
    recovered an estimated 2 cents per $1. Unlike the Securities Investor
    Protection Corporation (SIPC) appointed trustee who draws his fees from
    the SIPC, the SEC-appointed receiver draws his fees from the funds he
    has been able to recover. Ultimately, this lessens funds able to be
    distributed to Stanford investors. Does the SEC still maintain that
    receivership was the appropriate course of action for the Stanford
    case? If so, why?
        Answer. Upon filing its civil action in February 2009, the SEC
    filed a motion requesting that the district court appoint a receiver
    over the defendants' assets (including more than 100 Stanford-related
    entities operating around the world) to prevent waste and dissipation
    of those assets to the detriment of investors. While a receiver was a
    necessary tool in this case, the SEC has closely monitored the
    receivership to help maximize investor recovery. To complement the
    receiver's efforts, the SEC, in coordination with the Justice
    Department, moved to secure assets held in international financial
    institutions.
        Securing assets in international jurisdictions poses complex
    litigation challenges, and those challenges have been magnified in this
    case by, among other issues, the appointment in Antigua of a competing
    receiver that has not cooperated with the SEC and that, in fact, has
    challenged various steps taken by the receiver, the SEC and the Justice
    Department. But securing international assets was crucial to ensure the
    protection of investor funds and we continue to work closely with the
    receiver, Justice Department, and securities regulators and law
    enforcement agencies in the United Kingdom, Switzerland, Canada,
    Mexico, and in several countries throughout Central and South America,
    to identify, secure, and repatriate for the benefit of investors more
    than $300 million in cash and securities held in non-U.S. bank
    accounts.
        In conjunction with the SEC, the receiver is focused on identifying
    and liquidating the largest possible pools of assets to prepare for a
    future distribution to harmed investors. In addition, the SEC has
    recently worked with other involved parties in the creation of an
    investor committee to provide an additional mechanism for investor
    input as to the receivership operations.
        Throughout this case, the SEC has worked closely with a court-
    appointed examiner to monitor the receiver's costs and ensure maximum
    recovery to the victims of this massive fraud. These efforts have had
    tangible benefits. For example, the receiver and the professionals
    assisting him have reduced their customary fees by at least 20 percent
    and have capped the rates charged by senior lawyers. In addition, we
    carefully scrutinize the receiver's bills for fees and expenses. In
    fact, in response to our objections, the district court has held back,
    on an ongoing basis, an additional 20 percent from the receiver's fees
    and expenses. We have strongly urged the receiver to stringently apply
    a cost-benefit analysis and pursue only those legal claims that could
    generate maximum proceeds for the benefit of investors while minimizing
    the receiver's legal fees and expenses.
        As with our monitoring of the receiver's fees and expenses, the SEC
    has intervened when it believed the receiver was pursuing inappropriate
    claims. For example, the SEC challenged the receiver's lawsuits seeking
    net profits from innocent investors. Conversely, when the receiver
    properly pursues assets, we intervene in support of that effort where
    appropriate. For example, the SEC recently submitted an amicus brief in
    the Fifth Circuit supporting the receiver's efforts to maintain a
    freeze more than approximately $24 million in accounts held by former
    Stanford financial advisers. We will continue to be closely involved
    with the receiver's activities.
        Question. Currently, the Supreme Court forbids investors from going
    to court to compel SIPC to order a brokerage liquidation as it believes
    there are adequate safeguards in place to prevent a miscarriage of
    justice for investors. What options do investors have when they do not
    agree with the SEC's or the SIPC's interpretation of the SIPA?
        Answer. The SEC staff monitor situations in which SIPC member
    broker-dealers are in (or may be approaching) financial distress to
    determine whether a SIPA liquidation proceeding is appropriate for the
    protection of the firm's customers. In addition, customers of SIPC
    member firms and their representatives can and do communicate with SEC
    staff and Commissioners when they believe that a member firm should be
    liquidated under the SIPA. In the Stanford case, for example, investors
    asked the SEC to direct SIPC to begin a liquidation under the SIPA of
    Stanford Group Company, a registered broker-dealer and member of SIPC.
    On June 15, 2011, the SEC asked SIPC to initiate a court proceeding
    under the SIPA to liquidate Stanford Group Company. In every case in
    which the SEC has concluded that a SIPC member firm should be
    liquidated under the SIPA, SIPC has agreed to do so. If SIPC were not
    to agree, section 11(b) of SIPA gives the SEC the right to file an
    action to compel SIPC to begin a liquidation proceeding to ensure that
    the protections provided by SIPA are available to the customers of the
    SIPC member firm. The SEC has authorized its Division of Enforcement to
    bring an action to compel SIPC to begin a SIPA liquidation of Stanford
    Group Company if SIPC refuses to do so.
        In Securities Investor Protection Corporation v. Barbour, 421 U.S.
    412 (1975), the Supreme Court held that customers of a SIPC member firm
    do not have an implied private right under SIPA to ask a court to
    require SIPC to begin a liquidation proceeding. Without deciding
    whether customers may challenge the SEC's decision not to seek an order
    (under SIPA section 11(b)) compelling SIPC to begin a liquidation
    proceeding, the Court in Barbour noted that the SEC's brief in that
    case indicated that such a decision ``might be reviewable under the
    Administrative Procedure Act for an abuse of discretion.'' Id. at 425
    n.7. No customer has sought judicial review of an SEC decision not to
    request a court to order SIPC to begin a SIPA liquidation.
                                     ______

                    Question Submitted by Senator Mark Kirk
        Question. Last year, the Congress passed significant new sanctions
    on Iran and others, including the United Nations and the European
    Union, also imposed sanctions. The result is that companies continuing
    to do business in Iran now face significantly more risk--the risk of
    direct sanctions; the risk that sanctions will make any business in
    Iran more difficult and more expensive; and the representational risk
    that comes with doing business with a regime that brutally suppresses
    its own people. Why has the Securities and Exchange Commission (SEC)
    failed to issue a specific regulation requiring companies, which face
    potential sanction under U.S. law for their activity in Iran, to
    disclose that information?
        Answer. Currently, our rules do not include a line-item requirement
    to disclose a company's business activities in Iran. Instead, with
    regard to whether companies will be required to disclose information
    relating to activities in Iran, the general materiality analysis that
    governs disclosure obligations applies. Under our rules, a company
    would be required to provide some disclosure of its business activities
    in Iran if the company faces material risks, including material risks
    from possible sanctions violations, as a result of those activities.
    Generally speaking, information is considered material if there is a
    substantial likelihood that a reasonable investor would consider it
    important in deciding how to vote or make an investment decision, or,
    put another way, if the information would alter the total mix of
    available information. I recognize that this is a difficult judgment
    call, and may not result in disclosure in every case that some may
    think is appropriate.
        I note, however, that I have asked the Division of Corporation
    Finance to prepare a rule proposal for the SEC's consideration on
    disclosure of activities that may subject a company to sanctions under
    the Iran Sanctions Act. In addition, based on a study of divestment
    activities, the Government Accountability Office has recommended that
    the SEC consider issuing a rule requiring companies that trade on U.S.
    exchanges to disclose their business operations tied to Sudan, as well
    as possibly other state sponsors of terrorism. The division has
    outlined the terms for a possible rule proposal for specific disclosure
    requirements regarding business and investment activities in Iran and
    Sudan, and has circulated this outline for the SEC's consideration.

                              SUBCOMMITTEE RECESS

        Senator Lautenberg. The subcommittee hearing is hereby
    recessed.
        [Whereupon, at 11:22 a.m., Wednesday, May 4, the
    subcommittee was recessed, to reconvene subject to the call of
    the Chair.]

                  MATERIAL SUBMITTED SUBSEQUENT TO THE HEARING

        [Clerk's Note.--The following testimonies were received
    sebsequent to the hearing for inclusion in the record.]
           Prepared Statement of Enterprise Compliance International
        This writing follows our review of the Senate Appropriations
    Subcommittee on Financial Services and General Government hearing (May
    4) deliberating another increase for the Commodity Futures Trading
    Commission (CFTC) and the Securities and Exchange Commission (SEC).
    What we heard in this subcommittee hearing pretty much echoed the
    comments of House Capital Markets and Government Sponsored Enterprises
    Subcommittee members who challenged the increase because these agencies
    are ``bloated'' and ``over lawyered''. Instead of getting into the
    politics, we supplied a solution to all of these problems--and that
    solution called for no increases at all; in fact, with the proper
    attention paid to the ``culture'' \1\ within these agencies, we are
    able to make each and every one of these agencies self-sustaining.
        This is a synopsis and value proposition of benefits available to
    the SEC given use of Enterprise Compliance International's Renaissance
    Excalibur Cost-Containment Package (RECCP)--which has been forwarded to
    the respective chairs of the Financial Services Committee and its House
    Capital Markets and Government Sponsored Enterprises Subcommittee, plus
    Ways and Means ranking member Representative Charles B. Rangel.
        RECCP was developed exclusively for use by the SEC to remove
    wasteful, inefficient, and outdated regulatory programs, as espoused by
    Representative Spencer Bachus and his House Capital Markets and
    Government Sponsored Enterprises subcommittee chairman Representative
    Scott Garrett.
        Please take notice that this management package requires a one-time
    $25 million investment in return for which it will remove at least $100
    million per annum in program costs (paying for RECCP in 90 days or
    less). Continued use of RECCP will not only cut SEC program costs but
    will allow the agency to operate independent of taxpayer funded
    budgeting.
        At a very nominal monthly usage fee, the SEC (like the CFTC) will
    sustain itself.
        If we continue to delay remedies, the SEC will realize a $200
    million net operating loss by fiscal year 2015 which will essentially
    shut the agency down. All of this is avoidable by funding RECCP as soon
    as possible. The $222 million increase now sought by Chairman Schapiro
    will barely cover this shortfall; ergo, we cannot solve these problems
    with more money, the culture is flawed and must include what can be
    done from within each agency to make it self-sustaining without giving
    our taxpayers the bill for shortsighted agency management.
        At the time of this writing (5/4/2011, 11:15 a.m. CDT), our
    national debt is $14.349347 trillion and rising.
        We seek immediate dialogue with Chairman Dick Durbin and Ranking
    member Jerry Moran.
    ---------------------------------------------------------------------------
        \1\ Exerpted from a statement Congressman Brad Sherman.
    ---------------------------------------------------------------------------
                                     ______

             Prepared Statement of the Investment Company Institute
        The Investment Company Institute (ICI) \1\ appreciates this
    opportunity to submit testimony to the subcommittee relating to the
    administration's fiscal year 2012 appropriations request for the
    Securities and Exchange Commission (SEC). In the past, the subcommittee
    has consistently sought to provide adequate resources for the SEC. For
    the reasons expressed below, we urge it to do so again this year.
    ---------------------------------------------------------------------------
        \1\ The ICI is the national association of U.S. investment
    companies, including mutual funds, closed-end funds, exchange-traded
    funds (ETFs), and unit investment trusts (UITs). ICI seeks to encourage
    adherence to high ethical standards, promote public understanding, and
    otherwise advance the interests of funds, their shareholders,
    directors, and advisers. Members of ICI manage total assets of $13.1
    trillion and serve more than 90 million shareholders.
    ---------------------------------------------------------------------------
         importance of a well-funded and effective securities regulator
        Registered investment companies (RICs) \2\ and their shareholders
    have a strong stake in an effective SEC. RICs are one of America's
    primary savings and investment vehicles for middle-income Americans.
    All told, more than 91 million shareholders in more than 52 million
    U.S. households owned some type of registered fund in 2010.\3\ At year-
    end 2010, total RIC assets were approximately $13 trillion. These
    funds, and their millions of investors, benefit when the SEC conducts
    sound rulemaking and effective oversight.
    ---------------------------------------------------------------------------
        \2\ Fund sponsors offer four types of registered investment
    companies in the U.S.-open-end investment companies (commonly called
    ``mutual funds''), closed-end investment companies, exchange-traded
    funds (ETFs), and unit investment trusts (UITs).
        \3\ Michael Bogdan, John Sabelhaus & Daniel Schrass, Ownership of
    Mutual Funds, Shareholder Sentiment, and Use of the Internet, 2010,
    Investment Company Institute Fundamentals 19, no. 6 (September),
    available at http://www.ici.org/pdf/fm-v19n6.pdf.
    ---------------------------------------------------------------------------
        RICs are an integral part of our economy in another way, as well.
    In addition to their role as the investment vehicle of choice for
    millions of Americans, investment companies have been among the largest
    investors in the domestic financial markets for much of the past 15
    years and held a significant portion of the outstanding shares of U.S.-
    issued stocks, bonds, and money market securities at year-end 2010.\4\
    Indeed, investment companies as a whole were one of the largest groups
    of investors in U.S. companies, holding 27 percent of their outstanding
    stock at year-end 2010.\5\ As major participants in the stock, bond,
    and money markets, RICs and their shareholders benefit from strong
    regulatory oversight of these markets.
    ---------------------------------------------------------------------------
        \4\ Investment Company Institute, Investment Company Fact Book
    (51st ed. 2011). The Fact Book is available at http://
    www.icifactbook.org.
        \5\ Id.
    ---------------------------------------------------------------------------
                     staffing and dodd-frank implementation
        The Congress is rightly concerned about Government spending. It
    also must be concerned that the SEC not lack resources it needs to
    successfully pursue its investor protection and market oversight
    functions, including the new responsibilities assigned to the agency by
    the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-
    Frank).
        While we have no view on the specific levels of funding and
    staffing necessary for the SEC, we recognize that the new
    responsibilities assigned to the SEC by Dodd-Frank are substantial and
    will call for significant resources.\6\ These responsibilities include
    expanded regulatory authority over derivatives trading, hedge fund
    advisers, and municipal advisors. While expanding the SEC's authority
    in these areas is important to fill significant regulatory gaps, it
    should not come at the risk of impairing the SEC's pre-existing
    responsibilities with respect to mutual funds and other more
    ``traditional'' products, nor compromising the interests of their
    millions of mainstream investors.
    ---------------------------------------------------------------------------
        \6\ The SEC argues that it will need to add 468 positions to
    implement Dodd-Frank. See Congressional Justification fiscal year 2012
    in Brief, at p. 3, available at http://www.sec.gov/about/
    secfy12congbudgjust.pdf.
    ---------------------------------------------------------------------------
        In particular, we believe more can and should be done to develop
    the SEC's economic research and analytical capabilities. There is a
    compelling need for the SEC to better inform itself about its regulated
    industry and market, as well as the economic consequences of its
    regulations. This is imperative if the SEC is to avoid regulatory
    approaches that could have the effect of making financial firms or
    products less competitive, less innovative, less attractive to talented
    professionals, and less available to investors.
                 improvements in the use of available resources
        No matter what level of funding ultimately is authorized, it is
    vitally important that the SEC utilize the resources it has to their
    maximum effect. Chairman Schapiro is to be commended for taking
    significant steps over the past few years to improve the operational
    efficiency of the SEC, bringing in new leadership and senior management
    in many of the agency's divisions, restructuring some key divisions,
    seeking to improve the agency's risk assessment capabilities, and
    hiring more staff with specialized expertise and real world experience,
    among other things. Still, Chairman Schapiro herself admits that much
    work remains to improve the SEC's internal operations.\7\ We strongly
    agree. We therefore strongly support the continued focus on internal
    reforms that will allow the SEC to work more efficiently and improve
    its performance. This includes, for example, conducting empirical
    research that informs major rulemakings, providing regulatory guidance
    that reflects a better understanding of the relevant regulated
    industry, better integrating activities of different SEC divisions and
    branch offices, and implementing new inspection strategies.\8\ The SEC
    also will have a tremendous amount of new data as a result of recent
    rulemakings, such as data from Form N-MFP (relating to money market
    funds) and proposed Form PF (relating to private funds). It should have
    adequate funding to acquire and implement the technology necessary to
    understand, utilize, and secure all of this data.
    ---------------------------------------------------------------------------
        \7\ See Testimony on Implementation of the Dodd-Frank Wall Street
    Reform and Consumer Protection Act by the U.S. Securities and Exchange
    Commission Before the United States Senate Committee on Banking,
    Housing, and Urban Affairs, Thursday, February 17, 2011.
        \8\ We also note that section 967 of Dodd-Frank directed the SEC to
    engage the services of an independent consultant to study a number of
    specific areas of SEC internal operations. That organizational study,
    by the Boston Consulting Group, was delivered to Congress on March 10.
    It is available at http://www.sec.gov/news/studies/2011/967study.pdf.
    ---------------------------------------------------------------------------
                                   conclusion
        The Congress must assure that the SEC has resources sufficient to
    adequately fund its staffing and to take other steps to fulfill its
    mission of protecting the Nation's investors, including more than 91
    million investors who own mutual funds and other registered investment
    companies, and that it deploys those resources to the best possible
    effect. These investors deserve the benefits of an SEC that can
    soundly, effectively, and efficiently regulate securities offerings,
    market participants, and the markets themselves. American taxpayers
    deserve every assurance that the SEC, indeed all agencies and
    departments of Government, husband their resources appropriately.
        Accordingly, we urge the Congress to provide the appropriations
    necessary to allow the SEC to appropriately fulfill its mission.
        We appreciate your consideration of our views.

     FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR FISCAL
                                   YEAR 2012

                                  ----------

                            WEDNESDAY, MAY 25, 2011

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

                         SMALL BUSINESS ADMINISTRATION

    STATEMENT OF HON. KAREN G. MILLS, ADMINISTRATOR, SMALL
                BUSINESS ADMINISTRATION

                 OPENING STATEMENT OF SENATOR RICHARD J. DURBIN

        Senator Durbin. Good morning. I'm pleased to convene this
    hearing of the Appropriations Subcommittee on Financial
    Services and General Government. Today we're going to examine
    funding provided for small business and community development
    programs under our jurisdiction.
        I welcome my Ranking Member, Senator Jerry Moran of Kansas.
    And other colleagues may join us during the course of the
    hearing.
        Also, we welcome the Small Business Administrator, Karen G.
    Mills and the Director of the Department of the Treasury's
    Community Development Financial Institutions Fund (CDFI), Donna
    J. Gambrell. I'll welcome the second panel of witnesses in
    short order.
        In the face of recent pressure to reduce the deficit, we
    have tried to focus on those programs which make a difference
    and have an impact on communities. I have supported the Small
    Business Administration (SBA) and the CDFI Fund programs
    because I think they produce real outcomes. But, we continue to
    ask the hard questions and demand proof that is what is
    actually happening.
        For the SBA for fiscal year 2011, we were able to maintain
    funding at the 2010 level, despite the need to make some
    painful cuts in other parts of the budget. Put simply, small
    businesses, we believe, are the key to economic recovery. Small
    businesses create nearly 2 out of every 3 new jobs, employ one-
    half the Nation's private sector workforce, and generate 44
    percent of private payroll. The SBA has been on the front line
    of this economic crisis, working to help small business owners.
    Small businesses have faced some difficulty gaining access to
    capital, and turned to the SBA for help. The SBA overseas a
    loan portfolio of $85 billion and, in a typical year, makes or
    guarantees more than $20 billion in loans.
        On our second panel, Mr. Warner Cruz will tell us about how
    the SBA helped his small business not only stay afloat during
    the credit crisis, but also helped him to make a major
    expansion of the business, including a renovation of an
    abandoned building in Rolling Meadows, Illinois. Mr. Cruz's
    business, restoring damaged homes and businesses from flooding,
    fires, and storms--unfortunately, for the people who were
    owners, but fortunately for him--is now flourishing with 85
    full-time staff and many part-time staffers.
        SBA programs also supported counseling services for budding
    entrepreneurs and small business owners. I'm concerned about
    proposed cuts in those programs, which we'll talk about during
    the hearing.
        The budget request for 2012 for the SBA is $985 million.
    Now, that's a $256 million, or 35 percent, increase in the
    current level. I said to my staff when they said that to me,
    ``Can you be honestly realistic about that? A 35 percent
    increase in 1 year, in light of what we're going through?''
    Much of the funding has become necessary for the SBA Business
    Loan Program and disaster loan programs to stay operational.
    Some of it reflects accounting realities, which we'll get into
    here. We'll talk about those.
        The CDFI Fund for fiscal year 2011 is provided $227
    million. I placed a high priority on maintaining investment in
    this fund because of its unique ability to leverage private
    sector investment in community development, like affordable
    housing, retail development, and community centers, as well as
    lending to small businesses. Federal grants for the CDFI Fund
    have never been earmarked for specific projects. Instead, the
    Treasury makes competitive grants that can best demonstrate a
    capacity to help communities.
        With just a small amount of seed funding, the CDFI Fund can
    transform communities. Nationwide, the CDFI Fund leverages an
    average of $13 for every Federal $1 invested. In 2010, Federal
    grants helped to create or maintain more than 80,000 jobs. I've
    got quite a bit of information here about the impact of the
    CDFI Fund. I visited the King Legacy Apartments in a tough part
    of Chicago which used to be a vacant, pretty ugly lot--you get
    to see it here in before and after photos. I can tell you, from
    driving through the area surrounding it, that this really made
    a difference in terms of people's attitudes toward their
    community, toward their neighborhood. And let me show one other
    example of a CDFI Fund investment in Illinois--before-and-after
    pictures of Wilson Yard, a major project in Chicago's uptown
    area. It was built on the site of a former rail yard and is now
    a mixed-use development. And you'll see, off to the right, a
    huge Target store, which took over that vacant lot, along with
    other businesses. And of course, former Mayor Daley's pride and
    joy, rooftop greenery. We have a lot of that in Chicago. We're
    very proud of it. And the CDFI Fund helped to make that a
    reality.

                      King Legacy Apartments area--before.

                         King Legacy Apartments--after.

                              Wilson Yard--before.

                              Wilson Yard--after.

        Senator Durbin. On our second panel, we're going to hear,
    after we've listened to the testimony of our two first
    witnesses, from Warner Cruz, whom I mentioned earlier--he was
    the Illinois small business person of the year for 2010 and an
    SBA borrower; Calvin Holmes, president of the Chicago Community
    Loan Fund who will tell us about the impact of the CDFI Fund in
    Illinois; and Ray Moncrief, from Kentucky Highlands, an
    investment corporation based in London, Kentucky, will talk
    about participating in the CDFI Fund and the SBA microloan
    program.
        And at this point, I want to turn it over to my colleague
    Senator Moran, who told me he had three hearings at 9:30 a.m.
    and made this one a priority.
        Thank you.

                        STATEMENT OF SENATOR JERRY MORAN

        Senator Moran. Mr. Chairman, thank you very much.
        I've already instructed my staff that next year we're going
    to have visuals, as well. You have upped the ante. Although, I
    doubt any of ours will show greenery on the rooftops.
        I thank you for calling this hearing. And I welcome our
    witnesses. Nice to see both of you, and I look forward to your
    testimony.
        The American economy is facing many difficult challenges,
    and we need to get our country moving again. It seems to me, in
    two aspects of getting our financial house in order, moving
    toward balancing the budget, reducing our deficit spending is
    an important priority. At the same time, we need to grow our
    economy. And we need to make certain that the opportunities are
    there for small business and entrepreneurs to succeed.
        And so, while much of the discussion in the Congress today
    is about reduced spending--and I support that effort--there's
    also another, in fact, perhaps more enjoyable way of helping us
    reduce our deficit, and that's putting people to work. And so,
    I'm particularly interested in finding the right balance with
    your agencies to see that we don't spend money that we
    shouldn't be spending, that we don't--that we're not
    inefficient or waste money. But, I also want to make certain
    that the tools are there for business to grow to succeed and,
    in the process of pursuing that success, put lots of Americans
    to work and put food on families' tables.
        So, I look forward to hearing your testimony.
        One of the things, Ms. Mills, that I'm particularly
    interested in is the role in regard to disasters. I just
    returned from Kansas over the weekend--Reading, Kansas--saw the
    tornado damage there; a small town of about 270 folks with half
    the homes destroyed. As a Member of the House of
    Representatives, I represented Greensburg, Kansas, a town
    totally destroyed by an F5 tornado, in which the SBA played a
    significant role in helping for recovery. And of course,
    Kansans, and all Americans, extend their sympathies and
    concerns to the people of Joplin and places across our country
    that have experienced tremendous storm damage. And so, I am
    interested in hearing your thoughts about your appropriations
    request, particularly as they relate to weather-related
    disasters that we're currently experiencing.
        And again, Mr. Chairman, thank you for the opportunity. I
    look forward to hearing the testimony.
        Senator Durbin. Thank you, Senator.
        Both of our witnesses will have 5 minutes each for an
    opening statement. Administrator Mills, please start.

                      SUMMARY STATEMENT OF KAREN G. MILLS

        Ms. Mills. Thank you. Chairman Durbin, Ranking Member
    Moran, and members of the subcommittee, I'm very pleased to be
    testifying before the subcommittee.
        Small businesses, as the Senators have just described, are
    the backbone of our economy. They create 2 out of every 3 jobs,
    and more than one-half of working Americans own or work for a
    small business.
        The SBA is a small agency, but we have a big mission. We
    put the maximum possible resources directly into the hands of
    small businesses, focusing on access to capital, contracts,
    counseling, and disaster assistance. Last year, we helped more
    than 50,000 small businesses get capital to grow and hire. We
    put about $100 billion in Federal contracts get into the hands
    of small businesses. We counseled more than 1 million small
    businesses in every State across the country. And as we speak,
    as the Senator from Kansas mentioned, SBA employees are on the
    ground, in Missouri, Kansas, Alabama, and elsewhere, assisting
    victims of the disasters, including some deployment that we
    just did overnight, to Oklahoma, where there were additional
    tornados.
        This is the worst tornado season, as you know, in nearly
    six decades. We are there to help homeowners, renters, and
    business owners with long-term, low-interest loans. And even if
    a business wasn't damaged directly, but the customers are
    suffering and not coming into the business, the SBA can help
    with business interruption loans.
        We're doing this efficiently. The turnaround times for
    disaster applications are about 10 days. After Hurricane
    Katrina, they were about 70 days. So, we're down from 70 days
    to 10 days.
        We put these resources into the hands of small businesses
    while providing the taxpayers a big bang for their buck. For
    example, after credit froze in 2008, the American Recovery and
    Reinvestment Act (ARRA) and the Small Business Jobs Act allowed
    us to support more than $42 billion of SBA loan guarantees into
    the hands of small business, at a subsidy cost of $1.2 billion.
    Many small businesses suffered greatly from the recession, and
    our job is to support them as they grow and create jobs.
        This job is not done. The President's proposed fiscal year
    2012 budget for the SBA of $985 million will support up to $27
    billion in loan guarantees, as well as many other tools and
    resources to help small businesses across the country. At the
    same time, the budget reflects a commitment to tighten our
    belts, streamline our processes, and eliminate duplication.
    This includes ideas from the Congress. For example, we looked
    hard at our technical assistance programs to be sure that each
    one was unique and nonduplicative. As a result, we proposed
    eliminating the Program for Investment in Micro-Entrepreneurs
    program. With the work of our microlenders and new efforts to
    recruit community-based lenders, which you will hear more about
    today, we can continue to provide technical assistance in a
    more cost-effective way.
        The largest increase in our budget, that the Senator
    referred to, reflects the fact that we have reached the
    statutory limit for fees that we can assess. The budget
    reflects the need for additional subsidy because losses,
    including those from loans approved when collateral, such as
    real estate was inflated, have pushed up subsidy costs. We will
    also request a legislative fix to return to near zero subsidy.
    The budget also builds on our strong efforts over the past 2
    years to remove fraud, waste, and abuse in our contracting
    programs. And it supports the new women's contracting program.
    I know that both of these issues are a high priority for many
    Members of Congress.

                               PREPARED STATEMENT

        Overall, our priorities are twofold. We have placed a focus
    on the SBA programs that put money and support directly into
    the hands of small business owners in the places where they
    live. And we will continue to invest in oversight to preserve
    the integrity of these programs and to protect the interest of
    taxpayers.
        I look forward to working with you to ensure that small
    businesses can continue to grow, create jobs, and lead us to a
    full recovery.
        Thank you.
        [The statement follows:]
                      Prepared Statement of Karen G. Mills
        Chairman Durbin, Ranking Member Moran, and members of the
    subcommittee. I'm pleased to testify before the subcommittee.
        Small businesses are the backbone of our economy. They create
    nearly 2 of every 3 new jobs. And more than one-half of working
    Americans either own or work for a small business.
        The Small Business Administration (SBA) is a small agency, but we
    have a big mission. We put the maximum possible resources directly into
    the hands of small business, focusing on access to capital, contracts,
    counseling, and disaster assistance.
        Last year, we helped more than 50,000 small businesses get the
    capital to grow and hire. We helped put about $100 billion in Federal
    contracts in the hands of small businesses. And we counseled more than
    1 million small businesses in every State across the country.
        As we speak, SBA employees are on the ground in Missouri, Kansas,
    Alabama, and elsewhere, assisting the victims of disasters, including
    those suffering after the worst tornado season in nearly six decades.
    We are there to help homeowners, renters, and business owners with
    long-term, low-interest loans. Even if a business wasn't damaged
    directly, but customers are suffering and not coming in to the store,
    SBA can help with business interruption loans.
        And we're doing this efficiently. Turnaround times for disaster
    loan applications are about 10 days, down from about 70 days in the
    weeks after Hurricane Katrina.
        We put these resources in the hands of small business while
    providing taxpayers a big bang for their buck. For example, after
    credit froze in 2008, the American Recovery and Reinvestment Act and
    the Small Business Jobs Act supported more than $42 billion in SBA
    loans at a subsidy cost of $1.2 billion.
        Many small businesses suffered greatly from the recession. Our job
    is to support them as they grow and create jobs. This job is not done.
        The President's proposed fiscal year 2012 budget of for the SBA of
    $985 million will support up to $27 billion in loan guarantees as well
    as many other tools and resources to help our country's small
    businesses. At the same time, this budget reflects a commitment to
    tighten our belts, streamline our processes, and eliminate duplication.
    This includes ideas from the Congress.
        For example, we looked hard at our technical assistance programs to
    be sure each was unique and nonduplicative. As a result, we propose
    eliminating the Program for Investment in Micro-Entrepreneurs program.
    With the work of our microlenders and new efforts to recruit community-
    based lenders, we can continue to provide technical assistance in a
    more cost-effective way.
        The largest increase in this budget reflects that we have reached
    the statutory limit for fees that we can assess. This budget reflects
    the need for additional subsidy because losses--including those from
    loans approved when collateral such as real estate was inflated--have
    pushed up subsidy costs. We will also request a legislative fix to
    return to near zero-subsidy.
        The budget also builds on our strong efforts over the past 2 years
    to remove waste, fraud, and abuse in Federal contracting. And it
    supports the new women's contracting program. I know that both of these
    issues are a high priority for many Members of Congress.
        Overall, our priorities are twofold. We have placed a focus on SBA
    programs that put money and support directly into the hands of small
    business owners, in the places they live. And, we will continue to
    invest in oversight to preserve the integrity of these programs and to
    protect the interest of taxpayers.
        I look forward to working with all of you to ensure that small
    businesses can continue to grow, create jobs, and lead us into full
    recovery.

        Senator Durbin. Thank you, Administrator.
        Director Gambrell, your turn.

                           DEPARTMENT OF THE TREASURY

               Community Development Financial Institutions Fund

    STATEMENT OF DONNA J. GAMBRELL, DIRECTOR
        Ms. Gambrell. Good morning, Chairman Durbin, Ranking Member
    Moran, and distinguished members of the Senate Appropriations
    Subcommittee on Financial Services and General Government.
    Thank you for inviting me to speak today about the CDFI Fund's
    fiscal year 2012 budget request and the critical ways in which
    the CDFI Fund is creating jobs and transforming low-income
    communities across this country.
        I've been Director of the CDFI Fund for more than 3 years,
    during a time when our Nation has endured the most turbulent
    economy in generations. The financial crisis has had far-
    reaching consequences for our country, but nowhere has there
    been a more detrimental impact than on our low-income
    communities. My principal role as Director is to ensure that
    the CDFI Fund is doing everything possible to alleviate the
    economic burden on those at-risk communities, primarily through
    support of CDFIs.
        There are now almost 1,000 certified CDFIs across the
    Nation serving every State. These CDFIs take a variety of
    forms, including loan funds, credit unions, community banks,
    and venture capital funds. They serve local, regional, and even
    national markets to spur economic and community development in
    distressed areas, at the grassroots level.
        CDFIs have pioneered new financial education initiatives,
    encouraged the development of green industries in rural
    manufacturing, and invested in transit-oriented developments,
    charter schools, healthcare centers, and community facilities.
    And they've created thousands of jobs through the steady
    support of entrepreneurs and small businesses.
        As a vital component of the Treasury Department, the CDFI
    Fund closely aligns itself with the Treasury's core priority of
    strengthening economic growth through its support of CDFIs. The
    CDFI Fund's programs are designed to generate a maximum
    economic benefit to low-income communities with a minimum
    Federal cost.
        On average, a CDFI Fund awardee will take their initial
    grant and use it to attract private investment by a factor of
    13. This unique ability will enable CDFIs to generate more than
    $1 billion worth of investment stemming from the $105 million
    in CDFI Program awards that I announced last year.
        Through strategic and targeted private and local
    partnerships, CDFIs have achieved remarkable success with their
    CDFI Fund grants. In fiscal year 2010, CDFI Fund awardees
    created or maintained more than 80,000 jobs, almost 30,000 of
    which were a direct result of new loans and investments.
    Awardees reported financing more than 12,000 businesses and
    nearly 6,000 affordable housing units and provided financial
    literacy and other training to 140,000 individuals. The CDFI
    Fund is critical to maintaining the growth of a strong
    community development finance industry, an industry that will
    make long-lasting and continual impacts across the Nation.
        CDFI Fund programs are consistently oversubscribed. For
    example, in this current round of the CDFI Fund program, 393
    applicants requested almost $500 million when only $145 million
    is available. Due to this high demand, we've been forced to cap
    our rewards at lower levels in order to provide grants to as
    many highly qualified applicants as possible. The strong and
    continuous demand for CDFI Fund awards and the proven impact
    that these awards make and the capacity of CDFIs to increase
    loans, investments, and financial services in low-income and
    distressed communities, demonstrate that it's essential to
    fully appropriate the President's fiscal year 2012 budget
    request for the CDFI Fund.
        The President's request guarantees our ability to continue
    our valuable programs, including the CDFI Program's Financial
    and Technical Assistance Awards, the Healthy Food Financing
    Initiative, and our successful and much needed Native
    Initiatives. This request also includes funding for the new
    Bank on USA initiative and administrative requirements. Through
    the administration of these programs, the CDFI Fund will
    continue to serve our Nation's lowest-income communities.

                               PREPARED STATEMENT

        The CDFI Fund has seen considerable support from this
    subcommittee in recent years for program development and
    appropriations. My deepest thanks go to its members and to
    Chairman Durbin for your unwavering confidence in the CDFI Fund
    and our important mission.
        Thank you. And I look forward to taking your questions.
        [The statement follows:]
                    Prepared Statement of Donna J. Gambrell
                                  introduction
        Good morning Chairman Durbin, Ranking Member Moran, and the
    distinguished members of the Senate Appropriations Subcommittee on
    Financial Services and General Government. My name is Donna J. Gambrell
    and I am the Director of the Department of the Treasury's Community
    Development Financial Institutions (CDFI) Fund. Thank you for inviting
    me to speak today about the CDFI Fund's fiscal year 2012 budget request
    and the critical ways in which the CDFI Fund is promoting economic
    development efforts throughout the country.
        I would like to start by expressing my deep appreciation to this
    subcommittee and to the Congress for its long history of support. The
    CDFI Fund's programs stimulate the economy in communities often
    considered too risky for mainstream financial institutions. CDFIs are
    strategically positioned to help some of the most vulnerable
    populations in the Nation at a time when they are facing many
    financially challenging situations. CDFIs are often the only source of
    financing in underserved communities. CDFIs support productive small
    businesses, affordable housing for low-income Americans, high-quality
    community facilities, and provide retail banking services to the un-
    banked and others often targeted by predatory lenders.
        I have been Director of the CDFI Fund for more than 3 years, during
    a time when our Nation has endured the greatest recession in
    generations. The recession has had far-reaching consequences for our
    entire Nation, but nowhere has there been a more detrimental impact
    than on distressed and low-income communities. Many of these same
    communities were already suffering before the financial crisis, and
    their recovery will now take much longer than in other parts of the
    country.
        My principal role as Director is to ensure that the CDFI Fund is
    doing everything possible to alleviate the economic burden on low-
    income communities, primarily through support of CDFIs and other
    institutions that focus their efforts on serving these at-risk
    communities.
        CDFIs are financial institutions that take a variety of forms--they
    are loan funds, credit unions, community banks, and venture capital
    funds. They are local, regional, and even national organizations that
    spur economic and community development in distressed areas from a
    grassroots level. CDFIs, as a class of financial institutions, have
    years of experience providing financial products and credit counseling
    services that permit borrowers to enter into and participate
    successfully in the financial mainstream. CDFIs fill a critical gap in
    the financial industry--they serve target markets that are historically
    underserved and they provide economic development services for niche
    areas that require specialization. The CDFI Fund encourages the growth
    and capacity of this valuable industry through a strategic deployment
    of resources.
                     cdfi deg.the cdfi fund's role
        The United States Congress established the CDFI Fund as a
    bipartisan initiative under the Riegle Community Development and
    Regulatory Improvement Act of 1994 (Public Law 103-325). Recognizing
    the need to bolster a fledgling industry that was making significant
    inroads in economic development in low-income communities, the bill's
    authors designed the CDFI Fund to provide financial and technical
    support to CDFIs with the goal of improving economic conditions in low-
    income neighborhoods across the country. The mission of the CDFI Fund
    is to increase economic opportunity and promote community development
    investments for underserved populations and in distressed communities
    in the United States.
        As a vital component of the Department of the Treasury, the CDFI
    Fund closely aligns itself with the Treasury's core priority of
    strengthening economic growth. The CDFI Fund's programs are designed to
    generate a maximum economic benefit to low-income communities with a
    minimum Federal cost.
        It begins with CDFI certification. To be certified as a CDFI by the
    Treasury Department, organizations are required to meet a strict set of
    criteria, including having a primary mission of community development,
    as well as serving a target market that meets at least one of the CDFI
    Fund's definitions of a distressed or low-income community. One common
    type of target market is a Census tract that has a poverty rate of at
    least 20 percent, or an unemployment rate 1.5 times the national
    average, or a median family income at or below 80 percent of the
    statewide or metropolitan average.\1\ As organizations must be
    certified as CDFIs in order to be eligible for funding under many of
    the CDFI Fund's programs, the certification criteria allow the Treasury
    to verify that awards are going to the neighborhoods that need them the
    most. Almost 200 CDFIs were certified or recertified in fiscal year
    2010 alone, and as of April 2011 there are 949 certified CDFIs across
    the Nation and the United States territories.
    ---------------------------------------------------------------------------
        \1\ In order to become certified, an organization must submit a
    CDFI certification application to the CDFI Fund for review and
    approval. The application must demonstrate that it meets each of the
    following requirements:
          -- Be a legal entity at the time of certification application;
          -- Have a primary mission of promoting community development;
          -- Be a financing entity;
          -- Primarily serve one or more target markets;
          -- Provide development services in conjunction with its financing
    activities;
          -- Maintain accountability to its defined target market; and
          -- Be a nongovernment entity and not be under control of any
    government entity (tribal governments excluded).
        An eligible target market may consist of an:
          -- Investment Area.--A geographic unit or contiguous geographic
    units that have a poverty rate of at least 20 percent; or an
    unemployment rate 1.5 times the national average; or a median family
    income at or below 80 percent of the statewide/metropolitan average; or
    is wholly located within an Empowerment Zone or Enterprise Community;
    or
          -- Low-income Targeted Population.--A geographic unit comprised
    of individuals whose median family income is at or below 80 percent of
    the statewide/metropolitan average; or
          -- Other Targeted Population.--An identifiable group of
    individuals who lack adequate access to capital and have been
    historically denied credit.
    ---------------------------------------------------------------------------
        Once certified, the most common way for a CDFI to participate in
    the CDFI Fund's programs is through our core program, the CDFI Program.
    The CDFI Program provides Financial Assistance and Technical Assistance
    awards to qualified CDFIs. These awards are intended as seed money to
    attract more private capital into CDFIs and their investments in
    distressed communities. The awards also allow CDFIs to leverage
    resources to increase the size of their service area and to build their
    own internal capacity so that they can better serve their target
    markets.
        Demand for CDFI program awards has significantly increased over the
    years. For the fiscal year 2011 award round, the CDFI Fund received 393
    applications from CDFIs requesting a total of almost $465.9 million in
    assistance, nearly three times the $169.7 million available. Because of
    the continual high demand coupled with limited resources, the CDFI Fund
    capped the maximum award at $1 million in fiscal year 2009, and even
    lower at $750,000, in fiscal year 2010.
        Another CDFI Fund program, Native Initiatives, also continually
    faces demand well beyond its available resources. Native Initiatives
    provides Financial Assistance awards, Technical Assistance grants, and
    training to Native CDFIs and other Native entities proposing to become
    or create Native CDFIs. Through the Native American CDFI Assistance
    Program (NACA program) demand for financial and technical assistance
    continues to grow at a rate that eclipses available resources. In
    fiscal year 2011, the CDFI Fund received more applications than ever in
    the history of the NACA program, receiving 88 applications requesting
    $35 million--a 48 percent increase more than the $23.7 million
    requested in fiscal year 2010. Such an increase in demand demonstrates
    that Native Initiatives is successfully reaching and building the
    lending capacity in communities that have lacked such capabilities
    until now.
        The CDFI program and Native Initiatives are complemented by efforts
    to provide technical assistance and training to CDFIs. First, is Native
    Initiatives' ``Economic Developments in Indian Country'' workshops, co-
    sponsored by the Federal Reserve Bank of San Francisco, Seattle branch.
    The 2010 workshop series featured presentations by four other Federal
    development agencies, and allowed the participants to network and
    brainstorm solutions to economic development difficulties in Native
    communities.\2\ Forty percent of the fiscal year 2011 NACA program
    applicants attended at least one of the workshop sessions in 2010.
    ---------------------------------------------------------------------------
        \2\ The other Federal agency participants in the 2010 Economic
    Development in Indian country workshops were the Department of
    Commerce, the Department of the Interior's Office of Indian Energy and
    Economic Development, the Small Business Administration, and the
    Department of Agriculture,Rural Development.
    ---------------------------------------------------------------------------
        Second, the CDFI Fund's Capacity Building Initiative provides
    support to all forms of CDFIs in areas of key business practices or
    economic development interests. The Capacity Building Initiative was
    designed based upon input received from CDFIs nationwide to
    significantly boost the ability of CDFIs to deliver financial products
    and services to underserved communities. The initiative has already had
    a phenomenal response from the industry. CDFIs have demonstrated a
    demand for the initial four capacity-building training and technical
    assistance tracks, which will allow them to build their own internal
    capacity and expand their expertise in key areas currently affecting
    the communities they serve, such as affordable housing, business
    lending, and providing financing for healthy food activities. In
    addition to training, the CDFI Fund has also commissioned a research
    project to review CDFI coverage in distressed communities across the
    Nation, which will allow CDFIs to determine where low-income
    communities are lacking access to CDFI services.
        One of the key drivers of the Capacity Building Initiative is that
    innovation and a nimble response to changing economic conditions are
    stalwart traits of the CDFI industry. CDFIs have demonstrated these
    traits time and time again during the uncertain economy of recent
    years.
        The CDFI Fund also administers other programs in support of
    community and economic development. The Bank Enterprise Award Program
    (BEA program) rewards banks for completing community development
    investments in eligible census tracts. To date, the CDFI Fund has made
    more than $336 million in awards under this program, supporting
    increases in investments in CDFIs and low-income communities across the
    Nation. Beginning in the fiscal year 2009 funding round, the CDFI Fund
    required that all BEA awardees use their BEA awards for future CDFI
    support and community development activities, as defined under the BEA
    program regulations. Awardees that receive awards more than $50,000 are
    required to report to the CDFI Fund on how the award was deployed.
        No overview of the CDFI Fund's programs would be complete without
    the New Markets Tax Credit program (NMTC program), although it does not
    fall under the purview of this subcommittee. The NMTC program attracts
    investment capital to low-income communities by permitting individual
    and corporate investors to receive a tax credit against their Federal
    income tax return in exchange for making equity investments in
    Community Development Entities (CDEs). CDEs in turn make loans and
    investments in businesses and real estate projects in low-income
    communities. CDEs must apply for the authority to issue New Markets Tax
    Credits to their investors. In any given application round, requests
    are generally 7 to 8 times higher than the available allocation
    authority. To date, NMTC investors have invested more than $20 billion
    into low-income, urban, and rural communities throughout the United
    States, approximately two-thirds of which has been invested in
    communities characterized by severe economic distress-census tracts
    with a poverty rate of 30 percent or with a median income at or below
    60 percent of the area median family income.

                       CDFI deg.impact of cdfis

        CDFIs serve distressed and low-income communities through
    innovation, specialization, and targeted services. The customers of
    certified CDFIs, on average, are 70 percent low income, 60 percent
    minority, and 52 percent female. These traditionally underserved target
    markets benefit from services provided by CDFIs that they could not
    receive from mainstream financial institutions.
        For example, Boston Community Capital, a CDFI headquartered in
    Massachusetts, has developed a new Stabilizing Urban Neighborhoods
    Initiative, where the CDFI partners with other organizations to buy
    foreclosed properties and sell them back to the original owners with a
    reduced mortgage payment, preventing displacement. As a result, low-
    income urban neighborhoods in Boston are at less risk of population
    loss due to unaffordable housing costs.
        Another organization, Access to Capital for Entrepreneurs (ACE),
    which is a certified CDFI as well as an SBA Microloan Intermediary and
    USDA Intermediary Relender, has done excellent work encouraging the
    growth of small business ventures in the rural Southeast. For example,
    an ACE microloan to Melissa Bennett allowed her to expand her cosmetics
    store to a second retail location in Georgia and to hire more help. The
    Dazzle Cosmetic Company now has eight employees in a rural area with a
    high poverty rate.
        CDFIs have pioneered new youth financial education initiatives;
    encouraged the development of green industries and rural manufacturing;
    invested in transit-oriented development, charter schools, healthcare
    centers and other community facilities; and have created thousands of
    jobs through the steady support of small businesses. After both
    Hurricane Katrina and the gulf coast oil spill, CDFIs were at the
    forefront of re-building the gulf coast region and providing support
    for small business owners who saw their livelihoods threatened.
        The CDFI Fund supports the growth of a stable community development
    financial institution industry that will make long-lasting and
    continual impacts across the Nation.
       cdfi deg.the president's fiscal year 2012 budget request
        The CDFI Fund's programs offer critically needed funding and
    resources that result in sustainable growth for the nationwide network
    of CDFIs. Due to the phenomenal track record of CDFIs leveraging the
    CDFI Fund's awards with private investment, there is a clear benefit of
    a large local impact for a small Federal cost. In fact, CDFI Fund
    awardees leverage their awards with private investment by a factor of
    13:1 on average, so it is possible that we may ultimately see more than
    $1 billion worth of investment stemming from the $104.8 million in CDFI
    program Financial and Technical Assistance awards that were announced
    in fiscal year 2010. The broad impact that the CDFI Fund's awards make
    in low-income and distressed communities throughout the country is why
    the President's 2012 budget request included funding for the CDFI Fund.
        The President's 2012 budget request includes funding for Financial
    Assistance and Technical Assistance grants for the CDFI program. The
    stability inherent in a CDFI program Financial Assistance award
    provides the most patient capital available to CDFIs, which is one of
    the reasons why this program is in such demand. The continued
    oversubscription of this program guarantees that there will be a high
    demand for the full amount of funding requested in the President's
    budget. In a similar vein, the funding proposed for Native Initiatives
    will support a growing economic development industry in Native
    communities that consistently request more funding than the CDFI Fund
    has available.
        Included in the CDFI program is grant funding for the Healthy Food
    Financing Initiative (HFFI). The HFFI is a multi-year, multi-agency
    effort to increase the availability of affordable, healthy foods in
    underserved urban and rural communities. Through HFFI, the CDFI Fund
    will provide competitively awarded grants to CDFIs that are improving
    access to healthy food in low-income and underserved communities,
    particularly through the development or equipping of grocery stores,
    farmers' markets, and other healthy food retailers.
        The CDFI Fund also requests administrative funding for fiscal year
    2012. These funds will allow staff to meet the resource demands, and to
    address the significantly increased compliance monitoring requirements.
    The CDFI Fund anticipates increased information technology and research
    investment needs in order to continue serving and monitoring CDFIs
    effectively.
        The President's 2012 budget request also supports the Bank on USA
    Initiative. Designed to address the troubling fact that more than 1 out
    of every 4 American households is unbanked or under-banked, the Bank on
    USA Initiative will promote access to affordable and appropriate
    financial services and basic consumer credit products for households
    without access to such products and services. Bank on USA will support
    community-based efforts to identify strategies for serving unbanked and
    under-banked populations, including the development and delivery of
    innovative products and services.
        The CDFI Fund has seen considerable support from this subcommittee
    in recent years for program development and appropriations. My deepest
    thanks go to its members and to Chairman Durbin for your unwavering
    confidence in the CDFI Fund and our programs. As the economy continues
    to recover, the CDFI Fund will continue to effectively administer its
    programs, so that the hardest-hit communities in the country have every
    opportunity for success and growth.
        Thank you and I look forward to continuing to work with you in the
    future.

        Senator Durbin. Thank you very much.

                    SBA deg.BUDGETING FOR DISASTERS

        Administrator Mills, I visited a major insurance company in
    New York, and I've certainly visited a lot of them in Illinois.
    If they write property and casualty insurance, they focus more
    on weather than almost anything else. They make strategic
    decisions for their insurance companies as to whether they're
    going to continue to write insurance in given parts of the
    country, based on their ideas of weather patterns. A lot of
    companies moved out of Florida, saying they think there are
    going to be more hurricanes, that they're going to be
    increasingly expensive, and that, ``We don't want to run the
    risk.''
        So, what can we make of what we're going through now, in
    terms of the Government's role when it comes to disasters? I
    happen to think we're seeing some changing weather patterns.
    That turns out to be a pretty hot political debate in
    Washington. But, insurance companies agree with me, in terms of
    what they're doing, how they're investing, and where they're
    protecting homes and businesses. What should we be thinking, at
    the Federal level, as these changing weather patterns suggest
    that our vulnerability, our liability as a Government, may
    increase in the years to come?
        Ms. Mills. Well, we stand, at the SBA, ready to help
    homeowners and small businesses in every State across the
    country. And, in fact, we have a state of readiness to go
    anywhere where we are needed. We have more than 2,000 ready
    reservists who are not paid----
        Senator Durbin. No, I understand that. What I'm asking you
    to join me in thinking about is a little bit of long-term
    thinking, which is hard for us in Government, even in business.
    But, I'm asking you--okay, look ahead--are you looking ahead?
    Do you see weather patterns and damage emerging that are just
    episodic--it's going to come and go--or is this something that
    we need to be thinking about and planning for the future?
        Ms. Mills. So, we look ahead. And, with National Oceanic
    and Atmospheric Association, we have briefings on what the
    assessments are for the coming seasons. I think it's very
    difficult to say, you know, for future years. But, certainly
    for the near-term hurricane seasons, we do take an assessment
    of how that is.
        That said, no--there was no prior indication that we were
    going to have the worst tornado season. And we have very often,
    in the past, had other extraordinary events. We've had
    flooding, we've had terrible hurricanes. And, as I said, we
    have established, after Hurricane Katrina, a much elevated
    level of readiness. And one of the things we did is put out
    this ready reserve so that if there is a pocket of geographic
    difficulty, as there is right now, we fly in resources to that
    geography----
        Senator Durbin. I guess----
        Ms. Mills [continuing]. And that allows us to be where
    others might not be.
        Senator Durbin. I don't question what we do. I'm just
    questioning about whether or not we have thought about the next
    year and the year after, and what it means, in terms of our
    thinking ahead, preparing resources for the eventuality. And
    maybe that's just very difficult to predict.
        Ms. Mills. Well, that's a good question.

                SBA deg.COST OF SMALL BUSINESS LENDING

        Senator Durbin. Well, let me ask you this. When it comes to
    this 35 percent increase in funds requested for the SBA--I
    think what you talked about here are actually defaults on
    loans, and you track that back to real estate values. And I
    don't question that. I think everyone involved in the credit
    business in America knows that's a major problem. One of the
    reasons businesses can't borrow is that they can't pledge the
    warehouse and the real estate as collateral, because there's a
    question of the value. Now, that has not, at this point,
    bottomed out. We've been plumbing for the bottom here, on real
    estate values, and we're still looking. And sadly, we have many
    people underwater in their home mortgages, and more
    foreclosures coming. So, is what we're seeing this year in your
    budget request likely to be reflected in years to come as real
    estate values continue to be questionable and lead to more
    default?
        Ms. Mills. As you mentioned, we've asked for $250 million
    in additional subsidy in this budget, which is an increase of
    $132 million from the prior year. And the reason for that is
    that we try to cover our subsidy costs with our fees, but our
    fees are capped. And we plan to come back, in future years,
    with a request to allow us the fee flexibility to cover subsidy
    costs.
        Senator Durbin. Which means raising fees.
        Ms. Mills. Yes, which means raising fees. That said, we are
    seeing the default rates that are causing the credit subsidy to
    go up. Those are from the 2005, 2006, and 2007 cohorts. So,
    those were the times when people borrowed against very inflated
    real estate costs. That piece is working its way through the
    system, and we are seeing it being more resolved--on the trend
    to being resolved rather than on the trend to increasing.

                    SBA deg.BANK ON USA INITIATIVE

        Senator Durbin. I'm going to save, for the second round,
    some questions about counseling. But, Ms. Gambrell, I want to
    go to this Bank on USA Initiative, which means a lot to me. You
    cannot go into the poorer sections of my State, in Springfield
    or Chicago, you name it, without seeing evidence of title
    loans, pawn shops, currency exchanges, the kind of predatory-
    lending practices and charges which really take advantage of
    people in low-income categories. It is almost a shock to know
    that 1 out of 4 people in America are unbanked; they have no
    access to banking services. And they really just survive on the
    street, paying exorbitant fees to cash checks and pay bills and
    the like.
        So, Bank on USA is trying to step in and make a difference.
    Can you give me any kind of numbers about what we have done,
    what it has cost, and what the need is?
        Ms. Gambrell. Thank you for the question, Chairman Durbin.
    And to your point, certainly we recognize that, when it comes
    to the unbanked and the underbanked in this country, we're
    talking about, in many ways, an epidemic. We look at the impact
    that it's having on low-income communities, minority
    communities, and others, and you see that--with alternative
    check-cashers and predatory lenders--that oftentimes these
    populations are being preyed upon, and there's a devastating
    impact upon that community, and overall.
        The Bank on USA Initiative has multiple components to it.
    And what we want to do is really go beyond financial education.
        Senator Durbin. What's what I'm looking for is some kind of
    quantification--what we're spending, what we serve, what the
    universe of need is.
        Ms. Gambrell. Okay. Thus far, with the Bank on USA
    Initiative, that program is not funded for fiscal year 2011. We
    are requesting funding and the President's budget includes this
    request for 2012. So, thus far, we have not spent funding on
    the initiative itself. But, we certainly have worked with other
    partners, including bank regulatory agencies and others, to get
    a better handle of the program, to look at the research
    numbers, as well.
        Senator Durbin. Can you point out any bank, or banks, or
    credit unions, that you think are making an extra effort to
    address this problem?
        Ms. Gambrell. Yes. And actually, I think, when you look at
    some of the banks in your State, as well as other parts of the
    country, you have community banks, you also have CDFIs that are
    not only community banks, but clearly focused on community
    development--that are focused on financial education programs,
    but also going beyond that. They're looking for ways in which
    they can create affordable bank accounts and other types of
    affordable financial services and products for low-income
    communities.
        Senator Durbin. I'm going to turn it over to my colleague,
    but I'd ask you to follow up on that. And if you could give me
    the names of some of these institutions----
        Ms. Gambrell. Absolutely.
        Senator Durbin [continuing]. I'd like to be in touch with
    them.
        [The information follows:]

    ACCION Chicago,
    Chicago, Illinois
    ACCION Texas, Inc.,
    San Antonio, Texas
    ACCION USA, Inc.,
    New York, New York
    African Development Center,
    Minneapolis, Minesota
    Alternatives Federal Credit Union,
    Ithaca, New York
    Appalachian Community Enterprises, dba Access to Capital for
    Entrepreneurs,
    Cleveland, Georgia
    Aura Mortgage Advisors,
    Boston, Massachussetts
    Bethex Federal Credit Union,
    Bronx, New York
    Broadway Federal Bank,
    Los Angeles, California
    Columbus Housing Initiative,
    Columbus, Georgia
    Communicating Arts Credit Union,
    Detroit, Michigan
    Economic and Community Development Institute,
    Columbus, Ohio
    First Nations Oweesta,
    Rapid City, South Dakota
    Frontier Housing, Inc.,
    Morehead, Kentucky
    Grow Iowa Foundation, Inc.,
    Greenfield, Iowa
    Homewise, Inc.,
    Santa Fe, New Mexico
    Hope Enterprise Corporation/Hope Federal Credit Union,
    Jackson, Mississippi
    Indianapolis Neighborhood Housing Partnership, Inc.,
    Indianapolis, Indiana
    Kalamazoo Neighborhood Housing Services, Inc.,
    Kalamazoo, Michigan
    Kentucky Highlands Investment Corporation,
    London, Kentucky
    La Fuerza Unida Community Development Corporation,
    Glen Cove, New York
    Latino Community Credit Union,
    Durham, North Carolina
    Latino Economic Development Corporation,
    Washington, District of Columbia
    Low Income Investment Fund,
    San Francisco, California
    Montana Community Development Corporation,
    Missoula, Montana
    Nebraska Enterprise Fund,
    Oakland, Nebraska
    Neighborhood Development Center, Inc.,
    St. Paul, Minnesota
    Neighborhood Housing Services of Waco Inc.,
    Waco, Texas
    New Hampshire Community Loan Fund Inc.,
    Concord, New Hampshire
    New Mexico Community Development Loan Fund,
    Albuquerque, New Mexico
    Northeast Entrepreneur Fund, Inc.,
    Virginia, Minnesota
    North Side Community Federal Credit Union,
    Chicago, Illinois
    Northwest Ohio Development Agency,
    Toledo, Ohio
    Northeast South Dakota Economic Corporation,
    Sisseton, South Dakota
    Opportunity Fund,
    San Jose, California
    Oregon Microenterprise Network,
    Portland, Oregon
    Pacific Community Ventures, Inc.,
    San Francisco, California
    Premier Bancorp Inc.,
    Wilmette, Illinois
    Rural Community Assistance Corporation,
    West Sacramento, California
    ROC USA Capital,
    Concord, New Hampshire
    Seedco Financial Services,
    New York, New York
    Self-Help Federal Credit Union,
    Durham, North Carolina
    St. Louis Community Credit Union,
    St. Louis, Missouri
    The Housing Assistance Council,
    Washington, District of Columbia
    The Housing Fund, Inc.,
    Nashville, Tennessee
    TMC Development Working Solutions,
    San Francisco, California
    Valley Economic Development Center,
    Van Nuys, California
    Vermont Community Loan Fund, Inc.,
    Montpelier, Vermont
    Western Massachusetts Enterprise Fund Inc.,
    Holyoke, Massachusetts
    Wisconsin Women's Business Initiative Corporation,
    Milwaukee, Wisconsin
    Wyoming Women's Business Center,
    Laramie, Wyoming
                                     ______

        For more information please visit http://www.cdfifund.gov/docs/
    Financial%20 Education%20and%20CDFIs%20062911.pdf

        Senator Durbin. Senator Moran.
        Senator Moran. Chairman, thank you.

                    CDFI deg.CDFIS IN RURAL AMERICA

        Ms. Gambrell, I want to bring the rural aspect to your
    attention--of what you do. My home State of Kansas has received
    only 17 awards in the last 14 years, totaling $4.7 million. I
    think this comes from information that you provided.
        Ms. Gambrell. Correct.
        Senator Moran. And, at this time, there's only two
    certified CDFIs in Kansas, one in Topeka and one in Wichita.
    And my question is, What are you doing--what's the agency doing
    to make certain that rural aspects of your mission are cared
    for, are provided for?
        Ms. Gambrell. Thank you, Senator Moran. The CDFI Fund is
    focused on both urban and rural populations in rural
    communities. And, in fact, when you look at the number of CDFIs
    that are serving rural markets, you'll see that it's somewhere
    close to 24 percent. In your State of Kansas, you're right,
    about $4 million have been made through awards to organizations
    in Kansas.
        But, I would call your attention, as well, to the
    investments that happen in your State from those CDFIs that are
    not located in Kansas. And it's close to about $10 million, I
    believe, where regional or other national organizations have
    looked at projects and initiatives within the State and said,
    ``We'd like to make investments there.''
        Now, I'm not satisfied that there are such a low number of
    CDFIs in the State of Kansas. I'd like to remedy that. I think
    we can do better. And one of the things that we continue to do
    as an organization is to work with Members of Congress, but
    also look at ways in which we can address some of those gaps
    where there are not CDFIs in certain communities, and really
    look for ways in which we can build upon that.
        Senator Moran. Is--are the--is the circumstance in Kansas--
    is it representative of rural America?
        Ms. Gambrell. No, not----
        Senator Moran. Or are we unique in what at least appears to
    me to be a low number of participants?
        Ms. Gambrell. You're--you--Kansas may be a little unique.
    We certainly are seeing, in other rural communities, where
    there is a larger number of CDFIs. We're also seeing where
    there are larger amounts of investment. Now, that's not to say
    that in rural communities there are not challenges, as there
    are, I think, in all parts of the country. But, clearly, what
    we want to do is to build the capacity of those organizations
    and help reach out to the residents in those rural communities
    to identify, in a very targeted fashion, those initiatives and
    those projects that are actually going to help transform
    communities.
        Senator Moran. I look forward to--assuming that you're
    willing--to follow up with you and see if we can't help in that
    regard.
        Ms. Gambrell. I look forward to that, Senator. Thank you.
        Senator Moran. Thank you very much.

        SBA deg.BANKING REGULATIONS AND SMALL BUSINESS LENDING

        Ms. Mills, a couple of questions. First of all, do you see
    a connection between what I believe, and what I hear from my
    bankers, is an--my commercial bankers--is an increasing
    regulatory environment--the uncertainty of what's next, kind
    of, in the financial regulatory world, that I think has a
    consequence upon ability to make loans? As a--if that's true--
    if you agree with that, that there is an increasing regulatory
    environment upon financial institutions, is there a greater
    demand, then, for the SBA guarantee and loan programs to assist
    those banks to make those loans more likely? Is there an
    increasing demand, based upon the regulatory environment that
    financial institutions are facing?
        Ms. Mills. Well, certainly--Senator, it certainly was the
    case in October 2008 when the credit markets froze, many, many
    banks faced increased scrutiny from their regulators, and that
    came down in a number of ways. As a result of that, many banks
    pulled back, and they were afraid to take risk. And they had to
    also put up greater capital reserves, and that, once again, did
    not allow them the latitude to back all the small businesses in
    their community.
        We saw--when we put out the ARRA grants and we increased
    our guarantees to 90 percent, we saw an enormous jump in our
    loan volumes. And, in fact, our loan volumes are back at 2008
    levels. So, we have filled the gap that was created by many
    banks pulling back out of the market.
        We are seeing that ease, because we have pushed very hard
    on the regulators to be clear in their communications. And what
    bankers and small businesses don't like is conflicting
    responses. So, we have made sure that the guidance that is
    given around small business lending has more and more clarity
    and that it opens up the opportunity for these banks,
    particularly community banks, to come back in the lending game,
    in addition to the way they've come back to the SBA.
        We've added 1,200 new community banks, who had not made an
    SBA loan since 2007, in ARRA and in the Small Business Jobs
    Act.
        Senator Moran. Do you see that number flattening,
    continuing, or decreasing the number of those loans or the
    number of banks making those loans?
        Ms. Mills. We see the number of banks--we have about 5,000
    of the 8,000 banks that are out there that now have some kind
    of SBA activity on their books. So, we have very strong
    penetration. What we are concerned about is that the recovery
    has gaps in it, and some of the gaps are in small loan sizes
    and in underserved markets. So, we have accelerated our efforts
    in those two areas with programs called ``Small Loan
    Advantage'' and ``Community Advantage'', which actually works,
    with CDFIs and other financial institutions, to reach places
    where we don't have enough points of access now.

                      SBA deg.SBA DISASTER LOANS

        Senator Moran. Tell me about the relationship between the
    SBA and the Federal Emergency Management Agency (FEMA). And do
    the requirements for SBA assistance following a disaster--do
    they mirror FEMA's designation of a disaster area?
        Ms. Mills. We work extremely closely with FEMA. And I have
    been traveling with Secretary Janet Napolitano and with the
    FEMA administrator, who has been just terrific. And we
    colocate, in almost every location, with FEMA, when we are
    jointly at disasters. There are occasions where it is not a
    Presidentially declared disaster, it is a State disaster, and
    the Governor--will be a smaller disaster--the Governor would
    ask me, at the SBA, to declare that disaster. And we would go
    in independently. And in that case, we would carry the burden
    of, you know, helping those homeowners and small businesses.
    But, in all of the ones you're seeing right now, we are jointly
    active with FEMA.
        Senator Moran. In the absence of a Presidential
    declaration, a Governor's declaration of a disaster is
    sufficient for you to provide loan services to those affected
    by that disaster?
        Ms. Mills. Correct. A certain number of houses and a
    certain number of businesses are damaged. The Governor will ask
    me to declare that area. And we also do the surrounding areas,
    because a business in one area might draw its business from
    surrounding counties. So, we include those, and then they
    become eligible for SBA, and we drop people into the location.
        Senator Moran. You mentioned housing, and yet the word
    ``businesses''--it's the SBA. What role do you play in
    assistance for housing following a disaster?
        Ms. Mills. Because we are on the ground, and in order to
    avoid duplication of folks there, we also take on the
    responsibility for making home loans to people whose homes have
    been affected by the disaster. So, we make three kinds of
    loans: injury to homes, injury to businesses, and economic
    injury to businesses, where your roof is still fine, but your
    business is affected. And this was very true in the gulf area.
    So, we do all three.
        Senator Moran. And the advantage to the person who suffers
    the disaster is the certainty of the availability of credit and
    a lower interest rate than would presumably be available
    elsewhere?
        Ms. Mills. Correct. These are long-term, low-interest
    loans. And we tend to provide a broader set of insurance--
    broader set of financing than insurance will provide. So,
    insurance, when they get their insurance receipts, they repay
    the piece of the loan, but we will generally cover more.
        Senator Moran. The recent Government Accountability Office
    report indicates that there is perhaps duplication between FEMA
    and SBA in programs. I assume that you've seen the report, read
    the report. Do you agree? Are there things that--are--that are
    duplicative in regard to your two agencies?
        Ms. Mills. I have not actually seen that piece, but we will
    look into it. But, I do not believe--and I have been out in the
    field now--I've been to the flooding in Nashville; I've been to
    the tornados in Mississippi; I've been to the tornados in
    Alabama and to see, also, hurricane damage. And we operate side
    by side with FEMA. If someone does not qualify for an SBA loan,
    we refer them to FEMA, and they may qualify for FEMA grants.
    So, we actually are very highly aligned and not duplicative.

                        SBA deg.LOAN SERVICING

        Senator Moran. My final question, Mr. Chairman, is I have
    heard, from Kansas bankers, some frustration with the level of
    services provided by the SBA. They attribute that to a
    consolidation of processing in--apparently, in a facility in
    Virginia. Is that a complaint that you're aware of? And is
    there something that's being done? And are my bankers telling
    me the truth?
        Ms. Mills. Senator Moran, I am aware of your Kansas bankers
    and their concerns. In--several years ago, we consolidated all
    of our loan approvals in centers around the country to ensure
    oversight and nonduplication. Before that, every single office
    had its own loan approval authority. And frankly, in order to
    save money and eliminate duplication and increase the quality
    of the credit decisions and the uniformity of the credit
    decisions, we centralized those functions some years ago.
        Many bankers and offices miss that ability to make a local
    decision. That said, we track very carefully the turnaround
    times. They are in days. And we are very, very good now at
    aiding customers and processing these loans across the country.
    And we are happy to talk further to your bankers to make sure
    they're getting the service they need.
        Senator Moran. I'll do the same. I guess, my question is--I
    wanted to make certain that there is not an unnecessary delay
    in this consolidation. And I'll be glad to have that
    conversation with you and my bankers, perhaps at the same time.
        Mr. Chairman, thank you very much.
        Senator Durbin. Thanks a lot, Senator Moran.
        Senator Kirk.
        Senator Kirk. No questions. I'm waiting for the second
    panel.
        Senator Durbin. Okay. If I can ask a follow-up question or
    two.

                        SBA deg.SBA MICROLOANS

        Administrator Mills, let's talk about microloans for a
    second. The average microloan to small businesses is about
    $13,000. And I'm concerned, here, that your request for next
    year's budget dramatically cuts, by 55 percent, the amount of
    money available to counsel microloan borrowers. Those would
    seem to be the small businesses most in need of counseling.
    They are looking for small loans. I would guess that many are
    startup businesses. And we know the failure rate of businesses
    in the early days. So, how can we justify cutting back on
    counseling when it comes to this level of lending?
        Ms. Mills. The first thing I want to say is how much we
    appreciate your support of the Microloan Program. And, in fact,
    for next year, I want to emphasize that the actual amount of
    money going into the microloans is remaining at the current
    levels. We think this is a critical program. Our volumes are
    up, and we track it very carefully. And we have very, very good
    results from this program.
        We looked across this issue of duplication of counseling
    benefits, and one of the things that we found is that we think
    that counseling in the microloan arena is better done by our
    partners, and that our contribution really should be to create
    more loan product, more lending dollars, and make sure that the
    counseling, which we think is absolutely critical, is done by
    our lending partners who are on the ground.
        So, what we have done, in Community Advantage, is try to
    make a shift to doing what we do best and what we do the most
    efficiently, which is provide the dollars, and to work with
    them to make sure they take advantage, if not of the counseling
    and those operations, the counseling in nearby women's centers
    and small business development centers.
        Senator Durbin. I was going to ask you, when you say
    ``partners'', to whom are you referring to?
        Ms. Mills. Well, we have a set of counseling partners all
    across the country. And that involves 900 small business
    development centers, 110 women's centers, and 12,000 Service
    Corps of Retired Executives (SCORE) members and 350 chapters.
    We want to focus on those, making sure that those programs are
    functioning, they're cost effective, and that they're not
    duplicative, and focus our attention, in the microloan arena,
    in the area where I think we really give a much better bang for
    the buck, which is providing loan capital.
        Senator Durbin. So, let me ask you about that aspect. The
    Microloan program can accommodate up to 300 lenders. There are
    only 177 SBA-approved microloan lenders. In fact, in Illinois,
    there's just one: ACCION Chicago. Many small businesses in the
    rest of Illinois don't have easy access to SBA microloans. It
    appears to me, we need to increase the number of microlending
    partners, which mean that more small businesses will have
    access. What are we doing about that?
        Ms. Mills. We actually have a program that was funded in
    the Jobs act. The request for additional lenders just went out
    for intermediaries. And we are looking to add to that. In
    addition, we implemented ``Community Advantage,'' where we take
    CDFIs and we allow them access to our 7(a) program. This is
    really powerful. And the community has been asking for this for
    many years, because the 7(a) program is a broad and powerful
    program with much stability. And we now allow CDFIs--many of
    whom are our microlending intermediaries, to come into that
    program. It gives them enormous capacity.

                      CDFI deg.CDFI HEALTHY FOODS

        Senator Durbin. Director Gambrell, one last question. And I
    thought Senator Moran was going to ask this. I'll ask it
    instead. And it's about the Healthy Foods program. In my
    hometown of East St. Louis, Illinois, it was literally a food
    desert for the 25,000 or 30,000 people living there. There was
    just no place to shop. And, as a consequence, they were stuck
    with high prices, limited variety, and certainly not the
    healthiest alternatives, when it came to shopping. Then, along
    came Schnucks, a major grocery chain in St. Louis, opening up a
    store at 25th and State Street, my old neighborhood. And it
    transformed the town. They had a place to go. Everybody went
    shopping.
        Same thing happened in Chicago, on Roosevelt Road. There
    was a day when there were just no grocery stores in that area.
    And now there are a lot of them, which reflects a changing
    population and a commitment by these grocery chains.
        So, the First Lady and the President are pushing these
    healthy food alternatives, particularly for low-income
    families. And I know that they have an initiative that they've
    started. Can you tell me a little bit about what has been
    achieved to date and what you anticipate achieving in that
    regard?
        Ms. Gambrell. Thank you, Senator. So, the Healthy Foods
    Financing Initiative is one that the Treasury Department is
    proud to be a partner with the Department of Health and Human
    Services, as well as the Department of Agriculture--three
    agencies that have committed to looking at ways in which to
    address issues in food deserts.
        For the Treasury's part, the CDFI Fund is, again, a major
    partner. Thus far, we have sent out a healthy food supplemental
    questionnaire, as part of our competitive award round, under
    our Financial Assistance Awards, and we'll be getting that back
    from those applicants that have said, ``Yes, we want to be a
    part of this initiative, and this is how we can be''----
        Senator Durbin. Who received the questionnaire?
        Ms. Gambrell. These are from the applicants that actually
    have already applied for Financial Assistance Awards and
    indicated that they had an interest in applying for a healthy
    food----
        Senator Durbin. Can you generally describe them? Are they
    farmers' markets? Are they grocery chains?
        Ms. Gambrell. It really runs the gamut. And that, I think,
    is what we have certainly seen within the CDFI Fund industry,
    that we are looking for those CDFIs that are interested in
    bringing retail outlets, grocery stores, to those low-income
    communities. But, they are also involved in co-op markets, farm
    markets, distribution channels that actually transport food
    from local farmers into those food outlets, as well. So, it
    really does run the gamut.
        Senator Durbin. Great. Thank you. Any other questions?
        Senator Moran. Mr. Chairman, I apologize for not living up
    to your expectations. The food deserts are an important
    aspect--and again, I would--of something we're trying to make
    certain it doesn't continue. And there--I would just want to
    point out, once again, and--often thought of a food desert as
    an urban area. And we have those circumstances in Kansas. But,
    it's also--very much a rural issue, as well.
        And I'd again just highlight my earlier emphasis on making
    certain that our programs are designed to reach all areas of
    the country. And nutrition--in my view, one of the best things
    we can do for improving the healthcare of Americans, and
    thereby saving healthcare costs, is related--are nutrition,
    diet, exercise, and just this general wellness.
        And so, these are important issues. And I didn't want
    Chairman Durbin to be disappointed in my failure to express my
    views. But, more importantly, I want to make sure that we
    follow up and work together to figure out how we address this
    issue that's apparently particularly Kansas oriented.
        And you maybe have been telling me that there are CDFIs in
    Kansas City, Missouri, who are providing services in Kansas, as
    I thought about your answer about other States. And that makes
    some sense to me--our significant urban area along the Missouri
    border. So, look forward to having that dialogue.
        Thank you.
        Ms. Gambrell. As do I, Senator. Thank you.
        Senator Durbin. Senator Moran, thank you very much.
        And as Senator Kirk and I can tell you, there are parts of
    Illinois, downstate, that look an awful lot like Kansas. So, we
    have communal interest in a lot of these issues.
        Thanks, to this panel. We appreciate your testimony. And
    we'll be back in touch with some other follow-up questions as
    we prepare the budget for the next year.
        I'm going to welcome our second panel to the table and
    introduce them as they come up. Our first witness is Warner
    Cruz. He secured a loan, under an SBA program, to expand his
    business during the worst part of the recession. Mr. Cruz is a
    graduate of Augustana College, in Rock Island--which Senator
    Kirk just visited--and has a degree in international business
    administration and finance, minoring in Japanese. He worked for
    3 years in Japan. And even while working in Japan, he stayed
    integrated in the company that his father had started. He's now
    the president of J.C. Restoration, a small business that
    restores commercial and residential properties that suffered
    loss from fire, water, or storm damage.
        Next, we welcome Calvin Holmes, president of the Chicago
    Community Loan Fund, a Chicago CDFI. Mr. Holmes' community
    development career spans 25 years--he looks too young for that,
    but that's what it says--including work as a budget planner for
    rapid transit projects and property manager of a 200-unit
    assisted-living housing portfolio. Under his leadership, CCLFs
    lending has averaged nearly $1 billion in additional public and
    private sector capital in more than 55 lower wealth Chicagoland
    communities. He holds a master's degree in urban regional
    planning from Cornell and a BA in African-American urban
    studies from Northwestern.
        Finally, we welcome Ray Moncrief. He's the Executive Vice
    President and COO of the Kentucky Highlands Investment
    Corporation. He manages investing activities, including
    analyzing new investments. Mr. Moncrief has traveled nationally
    and internationally, speaking about the use of equity
    instruments as an economic development strategy. He sits on the
    board of several financial institutions and on the advisory
    boards for government agencies, to support community and small
    business development and venture capital. He's a graduate of
    Louisiana Tech.
        We're going to start with Mr. Cruz for an opening
    statement, allow that to the other two witnesses, and ask a few
    questions.
        Please be my guest.
    STATEMENT OF WARNER CRUZ, ILLINOIS SMALL BUSINESS
                PERSON OF THE YEAR, 2010, PRESIDENT, J.C.
                RESTORATION, ROLLING MEADOWS, ILLINOIS
        Mr. Cruz. Good morning, Senator Durbin, Senator Moran,
    Senator Kirk, ladies and gentlemen. My name is Warner Cruz, and
    I am 38 years old. I am a husband, a father, and a proud owner
    of a successful family business that is overwhelmed with
    blessings.
        I'm here before this panel to testify about the tremendous
    impact the SBA's 504 loan program had on my firm. In fact, I am
    confident that if it were not for the 504 blessing, I would not
    be here today.
        The name of my business is J.C. Restoration (JCR), located
    in the suburbs of Chicago. The ``J.C.'' stands for Jose Cruz,
    my father, who immigrated here from Guatemala in the early
    1970s. With no money, formal education, or the ability to speak
    English, he eventually incorporated the business in 1982.
    Today, JCR is an industry leader in the disaster restoration
    field. Our core business is to restore commercial and
    residential properties that have suffered loss from fire,
    water, or storm damage across the United States.
        In 2002, I purchased the business from Mom and Dad and
    became 100 percent owner. After 7 solid years of 25 to 35
    percent average growth, I felt it was time for JCR to really
    expand. Thanks to the SBA 504, I was able to obtain a loan and
    more out--move our business from a 13,000 square foot warehouse
    to our current 102,000 square foot, state-of-the-art facility.
    We invested more than $3 million on seven acres in transforming
    this once abandoned eyesore that sat dormant on seven--
    beautiful acres of land off of a major expressway. Our new
    building gleamed with a completely new energy efficient roof,
    light fixtures, and mechanicals, all designed with green in
    mind. Life was good.
        But, I haven't told you about the blessing yet. By the end
    of the third quarter in 2009, JCR sales plummeted 9 months in a
    row, due to the economic recession. The shock of moving into
    our new facility with great hopes of being able to handle the
    overabundance of work from the previous years was quite
    unnerving. Our sales decreased 29.4 percent, and we had to go
    into our own disaster response mode. The hardest thing I had to
    do was lay off 19 of our employees.
        The true blessing was this: if it weren't for the SBA 504
    that stabilized my $2 million loan at a fixed rate of 4.4
    percent over 20 years, I don't know what I would have done. The
    program preserved my working capital to where it was needed the
    most. I had great ease of mind knowing a conventional banker
    wasn't going to call me to raise their rates or devalue my
    property. The SBA 504 worked beautifully in the way the program
    was designed to protect me from inflationary pressures that I
    had never anticipated would happen.
        My testimony today is out of gratitude to the SBA. Not only
    did my business survive, today JCR is on pace to exceed sales
    of $20 million, after having our best year, last year, at $13.8
    million. We currently employ more than 150 full-time and part-
    time jobs. The SBA 504 loan program helped save my business.
        But, more powerful is, in 2010, JCR kept 67 businesses in
    business, including two hospitals and a major manufacturing
    plant that employs more than 300 workers, after they suffered a
    major disaster. The SBA should be proud in knowing they
    indirectly assisted in this creation and retention of hundreds
    of American jobs by blessing JCR with the 504 loan program.
        Thank you.
        Senator Durbin. What a great story. I was just telling
    Senator Moran, we knew a little bit about your background, and
    it's just wonderful that you can come and tell us that story.
        Calvin Holmes, your turn.
    STATEMENT OF CALVIN HOLMES, PRESIDENT, CHICAGO
                COMMUNITY LOAN FUND, CHICAGO, ILLINOIS
        Mr. Holmes. Okay. Thank you, Sir. Good morning Chairman
    Durbin, Ranking Member Moran, and Senator Kirk. And thank you,
    Chairman Durbin, for showcasing two of our recent investments
    in low-income communities in Chicago.
        It's an honor to speak with you today about the critical
    and effective role that CDFIs play in promoting economic
    growth. Thank you for the opportunity and for your long-term
    support of the CDFI Fund, which is the critical permanent
    capital financier to CDFIs.
        I know that you've already heard from Director Gambrell,
    but I also want to thank her, because, in my humble opinion,
    she is the venture capitalist to the poor.
        I run the Chicago Community Loan Fund (CCLF), a private,
    nonprofit financial institution certified by the CDFI Fund and
    a member of the Opportunity Finance Network. Since 1991, CCLF
    has been investing in nonprofit and for profit community
    developers, providing flexible financing and--for economic
    initiatives, and filling gaps in the marketplace as they arise.
        At $28 million in capital, we are clearly dwarfed by
    regulated financial institutions. However, we have lent our
    dollars over and over again to help our borrowers attract more
    than $900 million in additional capital for their projects to
    make 222 loans, supporting 6,400 units of housing, 1,300 jobs,
    and 2.1 million square feet of commercial and facility space.
    Historically, we have leveraged $20 for every $1 we invest. Our
    cumulative charge-off rate, over all this time, remains below 1
    percent. Without the CDFI Fund program investments, little of
    this would be possible.
        Given high unemployment rates in underserved communities,
    we are especially proud of two recent projects. One of them is
    on the board. Last July, one of our borrowers opened a $150
    million Wilson Yard project that included 178 units of
    affordable housing, a Healthy Foods, new Target and Aldi
    stores, and additional retail space for more goods and
    services. Target hired 300 workers, 80 percent of whom live
    within a 2-mile radius of the store. The CCLF's $1 million
    predevelopment loan helped the project move forward.
        The CCLF is very involved in helping stabilize communities
    devastated by foreclosures, providing loans to small developers
    to rehab abandoned homes through the city of Chicago's
    Neighborhood Stabilization Program (NSP). Our loans are not
    only stabilizing housing, but keeping small firms afloat during
    the housing market downturn. We estimate that more than 50
    percent of the 23 developers participating in the NSP might be
    out of business without the program, and 458 tradesmen and
    women have been kept employed.
        Simply, a lender like us that makes a loan before all the
    takeout financing is in place, and to smaller organizations,
    must have high capital ratios. Without question, the CDFI Funds
    awards are the most important way we do so. Every $1 we have
    received from the CDFI Fund at a critical juncture has allowed
    us to recruit at least $3 more in private capital. For these
    reasons, it is vitally important that the $227 million in the
    President's fiscal 2012 budget requested for the CDFI Fund is
    appropriated. We know that there are many tough decisions to
    make, but supporting distressed communities in this way is
    critical.
        I look forward to continuing to work with you, and thank
    you again for your support.
        Senator Durbin. Thanks, Mr. Holmes.
        Mr. Moncrief, it's good to have you here. Your perspective
    from Kentucky is a little different that the big city
    perspective, so we're anxious to hear your testimony.
    STATEMENT OF RAY MONCRIEF, EXECUTIVE VICE PRESIDENT AND
                CHIEF OPERATING OFFICER, KENTUCKY HIGHLANDS
                INVESTMENT CORPORATION, LONDON, KENTUCKY
        Mr. Moncrief. Thank you, Chairman Durbin, Ranking Member
    Moran, Senator Kirk. It's a pleasure being here.
        It's an honor to sit before you today to tell you about
    what we do, connecting the SBA and the CDFI Fund. I hope that,
    when I leave today, that my testimony shows that they don't
    compete, but they complement one another. And they're very
    vital, specifically in the area that I work, Senator Moran. I
    live in rural eastern Kentucky. Your comments on the radio the
    other day resonated with me where I live.
        I work for an organization that was just 43 years old who
    stimulates the local economy through the creation of businesses
    that hire people through employment. They accomplish this
    through financings in equity capitals, through subordinated
    debt, difficult financings to do. We do this with small
    businesses. And by ``small businesses,'' let me explain. The
    SBA defines a ``small business'' as any business, 500 or fewer.
    The average size of a small business that I deal with are 14
    employees, excluding government employees, schools, et cetera.
    So, I deal with very small businesses that require significant
    counseling.
        In addition to that, the banking crisis has been dramatic
    in our area. One example that I'd like to leave with you is
    that we have a manufacturer that hires 200 people whose bank
    was acquired by a larger regional. They were on the edge. They
    had not been profitable for 2 years. And they were told to seek
    their financing elsewhere. Because of where we are, we were
    able to put a financing together with another local community
    bank and provide a $1.5 million working capital line of credit
    for that facility to maintain those 200 jobs.
        The Microloan program is very important to us. We've--we
    have borrowed more than $3.8 million since its inception in
    1992. We've invested in more than 300 businesses. Last year
    alone, we did 36 financings for $850,000.
        Administrator Mills spoke about the Community Advantage
    Program. We are one--we were the very first Community Advantage
    lender in the United States, connecting the dots between the
    CDFI Fund and the SBA.
        The product called the SBA loan--Administrator Mills said
    that many of the banks in our area don't use that program. They
    don't, because of the rural nature, the hard-to-get-to, the
    size of the community banks, et cetera. So, we, as a CDFI Fund
    that's using the Community Advantage Program--it's vital for us
    to be able to offer the guaranteed loans that we do. The CDFI
    Fund is absolutely paramount, because we have to have the money
    to make the guaranteed loans. And the CDFI Fund and its FA
    awards allow us to capitalize our balance sheet and use those
    funds to indeed make those guaranteed loans under the 7(a)
    program.
        So, it is with that I'd urge this subcommittee to keep the
    SBA Microloan Program alive, thriving, as well as the CDFI
    Fund, at its current level of funding. Both are extraordinarily
    important to what we do, where we do it.
        Thank you.
        Senator Durbin. Thanks, Mr. Moncrief.

       CDFI deg.FORCLOSURE CRISIS AND DEVELOPMENT OPPORTUNITIES

        I'm going to, in the second round, address the other two
    witnesses. But, I'm just going to ask Mr. Holmes a question now
    so the other Senators have their chance.
        I've seen this movie before. I grew up in East St. Louis,
    Illinois. It was a town of 80,000 people, now in the range of
    25,000. In the early 1960s, white flight meant that people just
    left their homes behind. And as they did, the homes were
    abandoned, burned out, gutted, eventually bulldozed, and now it
    looks like a victim of some aerial bomb attack; the city just
    has so many vacant lots. Same thing is going on in Detroit.
    It's going on in a lot of places. I fear what's going to happen
    in the Chicagoland area, because I can see the same story
    playing out in areas like Marquette Park, where there are high
    foreclosure rates in otherwise long-time stable neighborhoods
    with great home stock--you know, these brick homes that we
    valued in Chicago became the trend after the Chicago fire.
        But, I'm asking you--because you talked about something
    that really catches my attention, of trying to help people
    finance the reconstruction or reoccupation of these homes. One
    of the obstacles I've seen in this is trying to find a bank
    that will cooperate. It seems that many banks are hell bent for
    foreclosure. And I don't understand why, because their asset is
    going to disintegrate to zero value if they go through
    foreclosure and don't have quick sale or reoccupation of the
    property. So, tell me--put this in perspective--tell me how it
    works, where you've been able to make it work to go into these
    foreclosure scenes, and what we might do to make sure that
    there's a better opportunity for that.
        Mr. Holmes. Got to remember to turn the talk button on.
        Senator Durbin, let me first say, it's really heartwarming
    to me to hear you talk about my hometown, as well. You may
    recall that I'm also a native of East St. Louis and my mother
    still lives there, at 88th and State Street. And, as you talked
    about the Schnook store that came online at 25th and State, I,
    too, celebrated not having the entire town be a food desert.
    So, it's always good to see, as they say in our neighborhood, a
    ``homeboy''.
        So, the foreclosure crisis, it is a pretty daunting
    experience, right? We are working with one- and two-person
    general contracting shops, many of them who would have been out
    of business today if they were not getting construction bridge
    loans for us in order to rehab these homes and to keep their
    crews alive. That's one of the things I very much wanted to do.
        One of the reasons that we are able to operate in this
    environment--and you so astutely noted, earlier, that the real
    estate values are continuing to decline in a number of these
    neighborhoods. So, when we look at loan-to-value, it's hard to
    get your comfort there. What we have, through the NSP, is a
    guarantee from the city of Chicago, is that they will work with
    us to make sure that, one way or the other, we will get to the
    finish line, so that, as a lender, if--we can make sure that
    the construction process is handled well and goes to plan, and
    get that building rehabilitated. If for some reason the
    absorption is not there, there isn't a home buyer on the other
    end immediately, the city assures us that they will work with
    us to make sure that we don't lose our shirts. So, that's one
    of the ways in which we work.
        Increasingly, however, in partnership with the city of
    Chicago and its administrator, through the MSP program, Mercy
    Portfolio Services, we are having a series of conversations
    with local banks, both regional and national, to bring them to
    the table so that they can provide end mortgages so that, at
    the end of our construction loan, there is a home buyer. And
    we're also working with them on other commercial mortgage
    products so that they can help us accelerate the rate at which
    we rehabilitate these homes in our devastated communities.
        Senator Durbin. My last question goes right to that point.
    The problem I've run into in the foreclosure situation is
    figuring out who makes the decision. You have a servicing bank,
    you have many lenders, you have all kinds of loan instruments
    and derivatives. It's hard to get anyone who can say yes or no.
    How do you break through all that to finally find someone who
    can make a critical decision about the future of that
    property--to get the bank to answer the phone and cooperate?
        Mr. Holmes. Well, Senator Durbin, it's a complicated
    process, as you well know. So, one of the initiatives that
    we're involved in, in Chicago, to be able to help the banks
    understand that it's in their best interest to participate with
    the community, is something called the Regional Home Ownership
    Preservation initiative, where we have a number of
    stakeholders, both at the public sector level, the private
    sector level, and the community organizations, who, through
    this collaboration, can get the attention of the decisionmakers
    and get them to make decisions. And there are some successes,
    where we have a number of banks who are offering up portions of
    their real-estate-owned portfolio, so that the community can
    take possession, or a nonprofit, or a joint venture between a
    for-profit and nonprofit, and rehabilitate those homes. So,
    through this collaborative nature, with the public sector at
    the table as a convener, we're starting to make some headway.
        Senator Durbin. Thanks.
        Senator Moran.
        Senator Moran. Chairman, thank you.

         CDFI deg.PUBLIC-PRIVATE PARTNERSHIPS IN CDFI PROJECTS

        Mr. Holmes, the Target photograph and the story that you
    told, I assume that Target, or any other company, would not
    have made that decision without some support. And I just want
    you to describe for me what it was that was--you were able to
    do that induced Target to believe this is a profitable
    location.
        Mr. Holmes. Well, the simplest way to think about our role
    in a $150 million transaction is, we help our borrower, who's
    the real estate developer, acquire all of the property, take
    care of all the encumbrances that make it really messy for a
    large retailer to even think about a site like that. So, by
    putting $1 million on the table earlier on in the deal--and
    there were other CDFIs, thankfully, that were involved in the
    process, as well; this is a really big project, so there were
    some other layers of even predevelopment financing--but, we all
    worked together to take care of that site, so that Target knows
    their developer----
        Senator Moran. You created the--excuse me for interrupting,
    but you created the environment by which Target now believes it
    can succeed, as compared to providing any kind of direct
    benefit to Target.
        Mr. Holmes. Exactly. But, a real easy way to think about it
    is that Target is not going to spend its R&D time, its staff
    focus time, its marketing time, its business planning time if
    the developer that is trying to recruit Target does not have
    site control. If Target doesn't believe that a developer can
    pull off the project, then they're not going to plan to open a
    store there. So, our money helps the developer go to Target and
    say, ``Don't worry about this. The city's behind us. We've got
    our financing lined up. We've got site control. We've taken
    care of all the encumbrances. We've still got other layers of
    financing to put in place, but you can rest assured that this
    project will move forward.''

           CDFI deg.GROCERY STORES AND COMMUNITY DEVELOPMENT

        Senator Moran. Mr. Moncrief, you also mentioned grocery
    stores. For much of the time I've been in the Congress, in the
    House, I have told my colleagues that--it goes back to the food
    desert conversation we had earlier--that, particularly where I
    came from as a Member of the House of Representatives, economic
    development can be whether or not there's a grocery store in
    town. It's what many people would consider very much the
    basics.
        I recall, after the tornado, in Greensburg, of now about 5
    years ago. Greensburg was the town hit by the F5 tornado--
    destroyed the entire town. One of the first conversations that
    people had with me and others--community leaders--was, Is
    Dillon's going to rebuild the grocery store? It was a
    determining factor as to whether anybody was going to live
    there. And I wonder if you have the experiences that would help
    keep Kansans and others figure out how we have those basic
    services in communities. How do we make sure the grocery store
    is there?
        Mr. Moncrief. Thank you, Senator Moran. Indeed, we have
    invested in grocery stores in those food deserts, where people
    don't have access to healthy foods.
        First of all, grocery--the grocery business, if it's
    nonchain, is very entrepreneurial. It requires all the products
    that we're talking about, things like SBA microloans, things
    like some of the money that we use from the CDFI Fund, and
    others, including venture capital.
        We recently did a grocery store in a rural part of
    Congressman Roger's district, where people had to drive 25
    miles to buy any type of grocery. We worked with that business
    to help it grow. And ultimately, it grew to such a size that it
    was actually sold out to a larger chain, which really had an
    impetus in that particular area, so that they brought all of
    the multiline food products to that particular area.
        The problem that we faced in the interior of Appalachia
    truly is one of healthy foods. There are people that don't have
    access to the basic amenities in the mountains of Appalachia,
    much less groceries. They have to drive miles and miles and
    miles. And according to the Appalachian Region Commission, many
    times Sunday lunch is a bag of Frito Lay potato chips. So, it
    is a problem that we're facing constantly, working with
    entrepreneurs to help them organize and create grocery products
    in those food deserts.

           CDFI deg.IMPACT OF REGULATIONS ON COMMUNITY BANKS

        Senator Moran. Mr. Moncrief, one of the other things that
    you mentioned that particularly caught my attention was about
    the ability for a local bank to provide lending to a near-
    failing company, I guess, or a company that was struggling. And
    it's one of the concerns I have that I've tried to highlight,
    both here in this subcommittee, but as a member of the Senate
    Banking Committee. In my view, the regulatory burden that
    community banks are facing, increasing the cost of being in
    business, which generally means that either a marginal bank no
    longer continues to exist in a community or it becomes a branch
    of some larger banking organization. And I was hoping that
    you--you don't have to confirm my belief that the regulatory
    environment is the cause of this, but I would love to have you
    confirm that there are dramatic consequences to the ability of
    our communities to survive, to prosper, to grow in the absence
    of that hometown financial institution. And if we can alleviate
    that trend, or reduce the likelihood--I suppose I'm willing to
    see small banks, small financial institutions go out of
    business if that's the nature of the market forces, there's no
    option, but for them to go out of business because Government
    is putting such a regulatory burden upon them that the cost of
    being in business is so high that they have no choice but to
    spread those costs among a much larger financial institution--
    my question to you is, Can you give me the evidence, can you
    support my premise, that there is a bad consequence that occurs
    in the absence of hometown financial institutions?
        Mr. Moncrief. Senator Moran, I would have traveled to
    Washington, DC, just to answer this very question. It's a very
    important question. Bank consolidation is the worst threat to
    rural economic development that exists, so much so that we find
    banks that we've worked with, in the years that I've been doing
    this, that we no longer work with, because they've been
    acquired by a larger regional that's been consolidated, and the
    corporate headquarters are in a distant city, which means that
    those banks that aren't bankable, under--according to credit
    scoring sorts of things, don't receive the financing that they
    need.
        There literally are trillions of dollars pent up in the
    banking institutions today that cannot be lent because of the
    regulatory environment that we in, at present. There are banks
    that I go to every day--a typical example is, today, I was
    sharing that I am in a problem with a small business, that's
    paying $5,000 a month for one of its loans, that breached a
    covenant and is in foreclosure procedures today. It will put
    about 35 people on the street if we don't avert that, working
    in the special assets section of this bank, because of
    regulations that says that this bank had a--or, this company
    had a loss, it doesn't have quite the cash liquidity, although
    it is servicing its debt, that bank--that company likely will
    be sold, likely would go out of business, if we don't avert the
    foreclosure procedure by that bank.
        Regulation is gruesome, is brutal and burdensome, and it is
    the regulators that decide who to preserve on the balance sheet
    and take income for those loans.
        Senator Moran. I'm glad you made the trip to Washington,
    DC. And thank you for confirming both aspects----
        Mr. Moncrief. Absolutely.
        Senator Moran [continuing]. Of my premise.
        Mr. Cruz, thank you for your testimony. The key to our
    country's future of success is the ability of entrepreneurs and
    small businessmen and women to succeed. In the process of
    pursuing a profit or pursuing the creation of wealth, you put
    people to work. And anytime we can tell the story and see the
    role model, the success that you provide today, it's a great
    story for America. And it ought to be goal--and I'm certain
    that it is--the goal of every Member of the Senate to see that
    the American Dream can be fulfilled, as you and your family are
    doing so. Thank you for the inspiration.
        Thank you, Mr. Chairman.
        Senator Durbin. Senator Kirk.
        Senator Kirk. Well, Mr. Cruz, I also want to congratulate
    you as an ``Augie''. I just got back from Augustine, and I'm--
    yesterday--and President Bahls would be pretty proud of you and
    what you did. I just moved into, I think, a 600 square foot
    apartment. So, to think about a 100,000 square foot facility,
    that is more space than I can possibly imagine, given what I
    just did.
        And, Calvin, you're a fellow Cornellian, and I'm very proud
    of you, as well, and what you've been able to do here. I don't
    know if you ever worked with Karen Muchin, very much in the
    CDFI Fund world--I've known her for 25 years, and very
    impressed with this--what you've been able to--done.

                      SBA deg.SBA LOAN PROCESSING

        To Mr. Cruz, I should say, gracias, or more--the language
    you're probably more familiar with, arigato, in Japanese. Let
    me just ask you about what else we could do for you. One of the
    big reasons why I ran for the Senate was to enact the Small
    Business Bill of Rights--10 new policies to help out small
    business. One of the things I've been worried about is how
    burdened you are with State and Federal paperwork. And a role
    for the SBA also to ideally take advantage of 21st century
    technology and have one Web site, where all of your Federal
    bureaucracy is taken care of--IRS, OSHA, and EPA. What struck
    me is how many times you have to write your own name on all of
    these Federal forms--and address and TIN number and everything
    else. And it should be the mission of the SBA to farm all this
    data out to the bureaucracy, with a goal of 200 hours per year,
    maximum, per entrepreneur, to fill out government paperwork.
    But, can you describe--how much time are you spending now,
    and----
        Mr. Cruz. In terms of--thank you, Senator Kirk--in terms of
    the question on the SBA loan, we were very fortunate, where we
    had a local SCORE office that was very, very helpful, and we
    used a company called Growth Corp, who pretty much guided us
    through the process. And surprisingly, it was very seamless.
    And it wasn't until after we received the loan and we actually
    did the construction that I realized, speaking with other
    people that had tried to obtain an SBA loan, the amount of work
    and paperwork that they went through, that some of them even
    gave up. So, I'm--I was very fortunate, where I didn't have
    that much trouble. And meeting with Mrs. Mills last year, and
    thanking her for that, she had said that's one of the
    initiatives that the SBA is working on is, to try to make it
    easier for businesses, paperworkwise.

           SBA deg.ATTRACTING INVESTMENT BY MAJOR RETAILERS

        Senator Kirk. Right. Calvin, You've got a big-box store,
    here. And so, I am totally impressed with what you've done, and
    think you should keep on going. But, there are a lot of people
    in Chicago that say, ``A Walmart shouldn't come into the
    community.'' What do you think of this view that some big boxes
    are okay and some big boxes--and does that hurt your ability to
    attract new investment and exactly what you've done?
        Mr. Holmes. So, I knew one of you would give me a very
    tough question. And I'm not sure I'm in a position to speak to
    whether or not we should have unions, or not. I can tell you
    that a number of our constituents really do believe in livable
    wages. And the union question is a----
        Senator Kirk. So, you shouldn't----
        Mr. Holmes [continuing]. Big part of that.
        Senator Kirk. You should not be allowed to work with a
    Walmart, is what you're saying.
        Mr. Holmes. What we do is not finance the big national
    retailers, per se. We actually finance the developer who's
    going to bring the brick and mortar envelope to the site for
    that retailer.
        Senator Kirk. Would this have been a bad idea, if Walmart
    had come?
        Mr. Holmes. We think that it's important to have a wide
    variety of high-quality goods and services in working class
    communities, Senator Kirk.
        Senator Kirk. Right.
        Mr. Holmes. And we understand that there is a range of
    national and regional and chainlets that can do that. We are in
    a community of people who are incredibly concerned about making
    sure that there are employers who will pay a fair and decent
    wage to working class families. Some of the retailers are
    really questionable in that respect. So, there are lots of
    things that we're trying to get our arms around. At the end of
    the day, we want a healthy mix of retailers in working class
    communities.
        Senator Kirk. One of the other arguments against big boxes
    is, all the little retailers on all the other streets who would
    oppose a Target coming in. How did you handle that?
        Mr. Holmes. I can tell you, I don't have the exact quote,
    but there is a small business owner who owned a salon just a
    couple of blocks to the north of the Target store, near the
    Wilson ``L'' stop, and her last name actually happens to be the
    same as mine. And she said, when we were at the grand opening
    with Mayor Daley, that she welcomed the Walmart sorry, not the
    Walmart--the Target--because she saw it as an economic engine
    that was going to increase the foot traffic in the general
    vicinity. Therefore, she thought she would benefit from having
    the national retailer so close to her store.
        Senator Kirk. I think that's exactly the point. I think the
    big boxes can totally transform a neighborhood. So, I think
    what you've done is exactly right. And I'm hoping that we don't
    have ``politically correct'' tests. My hope is that your job is
    economic development, and we keep it on that, without the SEIU
    or other unions coming in, saying that you cannot work with a
    certain party who would bring another $150 million into another
    neighborhood.
        Thank you, Mr. Chairman.

          SBA deg.FAMILY-OWNED SMALL BUSINESS AND SBA LENDING

        Senator Durbin. Mr. Cruz, if I'm not mistaken, I met your
    mother and father at a luncheon in Chicago. And I just want to
    make sure that, although your father receives a great deal of
    credit, that your mom is also acknowledged.
        If you'd like to say a word about her role in the
    development of your business.
        Mr. Cruz. Thank you, Senator Durbin. My parents wanted to
    come here so badly, to be part of this, to witness this. My
    mother and father did, together, start this business. And as a
    child--I have three sisters, and I remember--there was a time
    where they were in their--in our small home with a small
    garage, and both of them were cleaning furniture after smoke
    damage--thinking that these two people are my heroes. And I
    will share your compliments with them. Thank you for asking.
        Senator Durbin. If I remember correctly, your dad came to
    this country with limited English skills and went to work at
    this business and, when the owner finally decided to give it
    up, offered it to your father. And that's what launched where
    you're sitting today.
        Mr. Cruz. That's correct.
        Senator Durbin. It's a great, great story. How did you find
    out about this SBA program?
        Mr. Cruz. Well, my conventional banker had mentioned the
    process to me. And 4 years previous, probably 5 years previous,
    we had started to fill out an application to see if we would be
    able to obtain an SBA loan. And, like I had said to Senator
    Kirk, the paperwork was unbelievable. So, I went to a local
    SCORE office, and they gave me a bunch of literature, and read
    it, and then found----
        Senator Durbin. For the record, tell us what SCORE is. I
    know, and I think most of the members do. But, let's put it in
    the record.
        Mr. Cruz. SCORE are local offices that share information
    about helping your businesses grow, and specifically the SBA
    and the different programs----
        Senator Durbin. These are retired
        Mr. Cruz [continuing]. That they----
        Senator Durbin [continuing]. Executives----
        Mr. Cruz. Correct.
        Senator Durbin [continuing]. That give you----
        Mr. Cruz. Correct. Ex-business owners. So, it was very
    great, talking with them, because they understood our
    challenges and the time that we didn't have to fill out all the
    paperwork, and what we needed to do to make it happen. They
    introduced us to an office that specialized in SBA loans. And
    again, it was seamless, this what we were able to do is
    amazing. And I'm extremely grateful to the program.

                         ADDITIONAL COMMITTEE QUESTIONS

        Senator Durbin. Great. Thank you very much.
        I want to thank the entire panel. It's terrific to hear,
    firsthand, your experience with these Federal agencies, and
    demystify some of this regulatory gobbledygook, and put it into
    real life terms. Thank you very much for that.
        And we may have some follow-up questions. We'll get back in
    touch with you.
        [The following questions were not asked at the hearing, but
    were submitted to the Department for response subsequent to the
    hearing:]
                    Questions Submitted to Donna J. Gambrell
                Questions Submitted by Senator Richard J. Durbin
        Question. Treasury's fiscal year 2010 Performance and
    Accountability Report states that the Community Development Financial
    Institutions (CDFI) Fund awardees created or maintained more than
    80,000 jobs through loans and investments in fiscal year 2010 compared
    to the 2008 level of 29,500. As Federal CDFI funding has grown, the
    program has been able to maintain and actually improve on job creation
    per Federal dollar spent. Between fiscal year 2008 and fiscal year
    2010, funding increased by 250 percent, but job creation increased by
    275 percent.
        Does the CDFI Fund rely on CDFI self-reporting to determine job
    creation estimates? Does the CDFI Fund audit awardees after the fact to
    verify this data and track program outcomes? How else does the CDFI
    Fund hold awardees accountable after awards are made?
        Answer. Each CDFI program awardee is required to sign an assistance
    agreement prior to receiving an award, which provides the terms and
    conditions of the award use. Failure to meet the terms and conditions
    may cause the CDFI Fund to impose one or more sanctions, which may
    include requiring the awardee to return award funds.
        CDFI program awardees are required to self report on their
    financial performance and community impacts, including job creation
    estimates \1\ annually for a 3-year period following receipt of the
    award. Award recipients report their annual performance through a Web-
    based reporting system, the Community Investment Impact System (CIIS).
    Each awardee has 180 days from its fiscal year end to report key
    financial performance and community impact data through CIIS. This
    allows the awardee to complete and support its annual audit and enables
    the CDFI Fund to verify reported information through desk reviews
    against the organization's audit.
    ---------------------------------------------------------------------------
        \1\ Jobs maintained are jobs at the business at the time the loan
    or investment is made. Jobs created are new jobs created after the loan
    or investment is made. Total jobs are computed as FTEs based on at
    least a 25-hour work week. Part-time employees are combined to FTEs.
    ---------------------------------------------------------------------------
        The CDFI Fund collects full-time equivalent (FTE) data through
    annual Institution Level and Transaction Level reports. Data is
    provided by awardees, based on the source \2\ listed for their
    estimates; the data are compared to benchmarks derived from Federal
    statistical agencies (e.g., Bureau of Labor Statistics) for accuracy
    and ``reasonableness'' as defined by the CDFI Fund.
    ---------------------------------------------------------------------------
        \2\ Source of job estimates includes new hires as a result of the
    financing; estimates based on State or local wage data; estimates based
    on economic impact modeling systems (i.e., IMPLAN, RIMSII, or REMI);
    real estate developer estimates about jobs created by type of business
    and square-footage built; or other sources.
    ---------------------------------------------------------------------------
        The annual reports filed by awardees detail an organization's
    financial position, current assets and liabilities, summary of income
    and expenses, loan purchases and sales, lending and financing
    activities, portfolio-at-risk, populations, and geography served by
    target markets, community impacts including job creation and businesses
    financed, development services, depository offerings, award compliance,
    and summary ratios used for compliance monitoring.
        In past years, CDFI Fund awardees were measured on their ability to
    increase total assets. While growing assets may illustrate a healthy
    financial institution, it is critical to know that CDFIs are using
    their resources to make loans and investments in distressed
    communities. Beginning this year, awardees are now measured by the
    number and amount of loans originated during the fiscal year, not the
    total portfolio outstanding on their books. This helps the CDFI Fund
    hold awardees accountable for their ability to continually deploy
    capital each year of the reporting period.
        Question. The statute authorizing the CDFI Fund requires that
    financial assistance awards be matched with funds from sources other
    than the Federal Government on a one-to-one basis. However, for fiscal
    year 2009 and fiscal year 2010 CDFI Fund awards, our appropriations
    bill waived the matching requirement due to the tightening of the
    credit markets and difficulty in raising funds from philanthropic
    sources. For fiscal year 2012, the administration requests to reinstate
    the matching fund requirement for CDFI Fund programs.
        Has the economy recovered to the point where the private sector and
    philanthropic community is now more able to contribute matching funds
    to enable greater leveraging of public resources?
        Would reinstating the matching fund requirement disadvantage CDFIs
    in the most distressed communities?
        Answer. For decades, CDFIs have met the challenge of providing
    access to capital and credit in communities impacted by economic
    turbulence. For fiscal year 2012, the CDFI Fund does not recommend
    waiving the matching fund requirement for CDFI programs. While Treasury
    realizes that challenges raising private sector matching funds may
    exist, matching funds address several related objectives. First,
    private matching funds multiply the impact of scarce Federal funds. A
    one-to-one match means that each Federal $1 generates $2 for CDFIs and
    cuts the Federal cost of job creation, affordable housing development,
    and other community benefits in half. Second, CDFIs use the match
    requirement to attract private sector contributions. The Federal match
    encourages private support. Third, private match provides external
    validation that a CDFI applicant has the capacity to forge partnerships
    with the private sector. Private providers of matching funds have
    independently vetted the applicant and demonstrated their support with
    money. Fourth, a private source of matching funds is more likely to
    stay involved with a CDFI, often in ways that go beyond the funding
    itself.
        Because demand for the program in recent years has been so
    competitive, the administration believes that those CDFIs that receive
    awards from the CDFI Fund will be able to honor the match requirement
    for fiscal year 2012. However, the administration realizes that many
    challenges still remain for CDFIs to raise the private sector matching
    funds that could prevent some CDFIs from applying. While it is likely
    that the CDFI Fund will not receive as many applications by reinstating
    the match requirement, the CDFI Fund believes that this is the most
    responsible way to handle the trust placed by the Congress to provide
    grants to the highest-qualified applicants.

                              SUBCOMMITTEE RECESS

        Senator Durbin. I thank those who attended this hearing.
        At this point, the hearing stands recessed.
        [Whereupon, at 11:20 a.m., Thursday, May 25, the hearing
    was concluded, and the subcommittee was recessed to reconvene
    subject to the call of the Chair.]

                  MATERIAL SUBMITTED SUBSEQUENT TO THE HEARING

        [Clerk's Note.--The following testimonies were received
    subsequent to the hearing for inclusion in the record.]
      Prepared Statement of the Community Development Bankers Association
        The members of the Community Development Bankers Association (CDBA)
    thanks Chairman Durbin and Ranking Member Moran for the opportunity to
    submit testimony on the Obama administration 2012 budget request for
    the Community Development Financial Institutions (CDFI) Fund of the
    Department of the Treasury. We thank you for your past support of the
    CDFI Fund, the community development finance sector, and the Low and
    Moderate Income (LMI) people and communities we serve.
        We strongly urge you to support the President's budget request of
    $227 million for the CDFI Fund. CDBA is the national trade association
    of the community development bank sector. We are the voice and champion
    of banks and thrifts with a mission of serving LMI people and
    communities.
        Currently there are 91 certified CDFI banks with approximately
    $28.3 billion in aggregate total assets and a median asset size of
    approximately $200 million.\1\ While we account for less than 10
    percent of the total number of CDFIs we comprise approximately 50
    percent of the total assets of the CDFI industry.
    ---------------------------------------------------------------------------
        \1\ Source: FDIC call report data at March 3, 2011.
    ---------------------------------------------------------------------------
        CDFI banks are regulated FDIC-insured financial institutions
    subject to the same standards and regulatory scrutiny as other
    traditional banks. Yet, we are distinctively different as demonstrated
    by our track record of commitment to our communities. All of CDBA's
    members have been certified by the Department of the Treasury as CDFIs,
    meaning at least 60 percent of their total activities are targeted to
    LMI communities--with most targeting significantly more of their
    resources to these areas. As documented by analysis of the National
    Community Investment Fund (NCIF) \2\, significantly more of our lending
    and service activity is concentrated in low- to moderate-income
    communities than traditional financial institutions.
    ---------------------------------------------------------------------------
        \2\ National Community Investment Fund's annual Social Performance
    Metrics analysis (see http://www.ncif.org/).
    ---------------------------------------------------------------------------
        CDFI banks provide financing that is catalytic in sparking economic
    activity within their communities. For example:
      --The Central Bank of Kansas City is financing an exciting economic
            revitalization project in the long-neglected Rainbow Corridor
            of Kansas City, Kansas. 39Rainbow is a 26,000+ square foot
            mixed-use retail, residential, and hotel development that will
            create hundreds of jobs and serve as an anchor to spark the
            revitalization of the surrounding neighborhood. The project has
            strong civic support with the city of Kansas City (KS) and
            State of Kansas providing tax and development incentives to
            promote investment in the urban core.
      --The Pan American Bank helped the Velez family grow their small
            wholesale seafood business--which serves food product retailers
            in Chicagoland. Pan American financed El Ray Seafood's
            expansion to larger facility and it has now grown to employ
            eight people.
      --The International Bank of Chicago enabled the Trinh family to
            expand their tofu and bean sprout production business through a
            loan to buy a warehouse in a low-income Chicago neighborhood.
            The business couldn't fully respond to customer demand due to
            the limited size of their facility. Now settled into their new
            facility, they have just hired two additional employees.
      --Southern Bancorp helped stabilize and expand Strohm Manufacturing
            located in Clarksdale, Mississippi, one of the poorest counties
            in the South. Following the death of the founder and increasing
            global competition, Strohm struggled to stay in business.
            Southern Bancorp helped restructure this family's business debt
            and provided them with a line of credit. Strohm now employs 10
            people.
        Illinois is home to 43 certified CDFIs--of which 16 are CDFI banks.
    Illinois CDFIs have received more than $115.5 million in support from
    the CDFI Fund since 1996. This Federal money has been absolutely
    critical to combating long-term poverty, unemployment, and social ills
    of too many Illinois communities and citizens. Loss of--or reductions
    in--funding for the CDFI Fund will have a direct and immediate impact
    on our ability to serve our communities and facilitate economic
    recovery and job creation.
        Since 1996, hundreds of CDFIs and banks have participated in the
    programs of the CDFI Fund. The programs of the CDFI Fund have a proven,
    documented track record of creating impact and have become invaluable
    in helping banks find ways to serve credit markets and communities that
    otherwise might not be served. The programs of the CDFI Fund use very
    modest public resources to leverage large amounts of private dollars.
    Analysis by the Treasury Department estimates that the leverage factor
    is as high as 20 to 1. This finding makes the CDFI Fund one of the
    smartest investments of Federal resources to solve some of the Nation's
    most critical economic problems. The CDFI Fund is truly one of the
    Federal Government's best market-based strategies for leveraging and
    channeling needed resources to our most challenged communities.
        CDBA wholeheartedly supports all of the CDFI Fund's programs. The
    CDFI Fund's Bank Enterprise Awards (BEA) program is particularly
    important to CDFI banks and the communities they serve; it supports new
    investment in CDFIs of all types and provides resources to reach the
    most underserved communities. BEA resources are well-targeted to the
    neediest communities by requiring that direct lending and services be
    targeted to places with at least 30 percent poverty and 1.5 times the
    national unemployment rate. BEA is also focused on the smallest and
    most mission-focused banks. In fact, since 2007, CDFI banks have
    received 78 percent of all BEA awards and the smallest banks (with less
    than $250 million in total assets) have received more than 57 percent
    of all funding. Of the $227 million requested in the President's
    budget, we ask that at least $22 million be reserved for the BEA
    Program.
        We fully recognize that Federal appropriators face great challenges
    this year. But, as you know, low-income families and communities are
    among the hardest hit during periods of economic distress. This
    recession has been no exception. The CDFI Fund has already endured a
    $20 million cut in funding between fiscal year 2010 and fiscal year
    2011. In the interests of promoting new jobs and economic recovery in
    the hardest hit rural and urban communities of our Nation, we urge you
    to maintain fiscal year 2011 funding levels of $227 million for the
    CDFI Fund in fiscal year 2011. Any further reductions in the CDFI
    Fund's appropriations will directly result in the loss of jobs,
    affordable housing, and small business credit that will be felt across
    the Nation in the places that need it most.
        We strongly urge you to support continued funding at the fiscal
    year 2011 level and as requested in the President's budget.
        We thank Chairman Durbin, Ranking Member Moran, and the members of
    the subcommittee for the opportunity to express our views.
                                     ______

                   Letter From Women Impacting Public Policy
                                                          May 18, 2011.
    Hon. Richard J. Durbin,
    Chair, Subcommittee on Financial Services and General Government,
    Washington, DC.
        Dear Senator Durbin: We are writing to express our views on the
    Small Business Administration's (SBA) proposed budget for fiscal year
    2012. Women Impacting Public Policy (WIPP) supports funding for
    programs and services that benefit the women-owned business community
    including the Women's Procurement Program, Women Business Centers
    (WBCs), and SBA's Office of Advocacy. WIPP is a national, nonpartisan
    organization representing 54 organizations and more than 500,000 women
    business owners nationwide.
        WIPP supports the proposed $1 million funding for the Women Owned
    Small Business Federal Contract program included in the President's
    proposed budget. This program, which has taken 11 years to enact, is
    designed to give women-owned businesses greater access to Federal
    contracting. It will allow contracting officers, for the first time, to
    restrict competition for Federal contracts to women-owned businesses.
    This program will also assist Federal agencies with reaching the
    Federal goal of awarding at least 5 percent of contracts to women-owned
    businesses. Central to the success of this program are procurement
    center representatives (PCRs), breakout procurement center
    representatives (breakout PCRs), and commercial marketing
    representatives (CMRs). We supported increased funding for PCRs,
    breakout PCRs, and CMRs because of their importance in ensuring small
    business participation in the procurement process.
        In addition, we support the proposed $14 million in funding for
    Women Business Centers (WBCs). WBCs provide essential training,
    counseling, and mentoring to help women looking to start or grow a
    successful business. According to the SBA's Office of Entrepreneurial
    Development (ED) 2010 Impact Report, WBC's clients who received 3 or
    more hours of counseling reported a 47 percent increase in sales while
    clients who received less than 3 hours of counseling reported only a 36
    percent increase in sales. Businesses that receive assistance from WBCs
    have significantly higher survival rates that those businesses not
    receiving similar support.
        WIPP also supports the Microloan and technical assistance (TA)
    programs at the SBA. These programs support entrepreneurs and small
    businesses seeking grow their businesses in underserved communities
    across the country. In addition, we support continuing the PRIME
    program, which is the only major program designed to provide TA funding
    to intermediaries which are not lenders.
        Last, we support funding for the Office of Advocacy. WIPP supports
    the President's recommended funding of $9,120,000 for SBA's Office of
    Advocacy. Small businesses need to have an independent voice in Federal
    regulatory process.
        We urge you to support funding for these important programs.
                Sincerely,
                                                Barbara Kasoff,
                                                             President.

      FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR FISCAL
                                   YEAR 2012

                                  ----------

                            WEDNESDAY, JUNE 8, 2011

                                           U.S. Senate,
               Subcommittee of the Committee on Appropriations,
                                                        Washington, DC.
        The subcommittee met at 10:31 a.m., in room SD-138, Dirksen
    Senate Office Building, Hon. Richard J. Durbin (chairman)
    presiding.
        Present: Senators Durbin, Moran, and Kirk.

                           DEPARTMENT OF THE TREASURY

                            Internal Revenue Service

    STATEMENT OF HON. DOUGLAS H. SHULMAN, COMMISSIONER

                 OPENING STATEMENT OF SENATOR RICHARD J. DURBIN

        Senator Durbin. Good morning. I'm pleased to convene this
    hearing to consider the fiscal year 2012 funding request for
    the Internal Revenue Service (IRS). It's the largest single
    account within our subcommittee. Our focus today is on the
    President's budget request for the IRS. The $13.6 billion in
    annual funding constitutes more than one-half the total amount
    of discretionary funding under our jurisdiction.
        I'm pleased to share the dais with my friend and
    distinguished ranking member, Senator Moran of Kansas, and
    other Members will probably join us.
        Joining us today to present testimony about the resource
    needs of the IRS is the Honorable Douglas H. Shulman, now in
    his fourth year of a 5-year term as the 47th Commissioner of
    the IRS.
        Thanks for your service and for accepting the challenge to
    help lead the IRS from good to great. I welcome the opportunity
    to conduct a critical oversight of the IRS and its programs
    through our discussion today.
        The Congress exercises its most-effective oversight of
    agencies and programs through the appropriations process. It
    allows for an annual check-up and review of operations and
    spending.
        To complement congressional oversight, the IRS has a cadre
    of important watchdogs and keen observers, including J. Russell
    George, Treasury Inspector General for Tax Administration; Nina
    E. Olson, the National Taxpayer Advocate; Paul Cherecwich, Jr.
    Chairman, IRS Oversight Board; the U.S. Government
    Accountability Office (GAO); and Colleen M. Kelley, national
    president, National Treasury Employees Union (NTEU). Lots of
    people are watching. I appreciate the exemplary work and
    constructive contributions of each of these entities to help us
    prepare for today's hearing.
        The IRS administers the tax laws and collects revenues that
    fund more than 96 percent of Federal Government operations.
    Each year the 95,000-plus employees of the IRS make hundreds of
    millions of contacts with American taxpayers and businesses.
        The IRS represents the face of Government to more U.S.
    citizens than any other agency of Government.
        On a budget in this fiscal year of $12.15 billion, the IRS
    collected $2.345 trillion in taxes--93 percent of all Federal
    receipts. That's $194 in revenue for every $1 of appropriated
    funds given to run this agency. They processed 230 million tax
    returns, including 141 million individual returns, 7 million
    corporate, and 30 million employment tax returns. They issued
    109.5 million refunds worth $366 billion, and the list goes on.
        For fiscal year 2012, the President's budget request for
    funding of $13.2 billion represents an overall increase of $1.1
    billion, or about 9.4 percent more than the fiscal year 2011
    level. For the IRS accounts, the fiscal year 2011 enacted bill
    maintained funding at the same level as provided in fiscal year
    2010. I recognize that such a level falls more than $487
    million short of what the President had requested for this
    year, so there has been belt tightening all around, and it's
    affected your agency.

                               PREPARED STATEMENT

        We will talk today about the budgetary challenges which you
    face in the upcoming year, some of the policy challenges which
    drive spending in your agency, and I look forward to hearing
    more about the challenges the IRS faces in these difficult
    budgetary times.
        [The statements follow:]
                Prepared Statement of Senator Richard J. Durbin
        Good morning. I am pleased to convene this hearing to consider the
    fiscal year 2012 funding request of the Internal Revenue Service (IRS),
    the largest single account within the Senate Appropriations
    Subcommittee on Financial Services and General Government.
        Our focus today is on the President's fiscal year 2012 budget
    request for the IRS. The $13.6 billion in annual funding for the IRS
    alone constitutes just more than one-half of the total amount of
    discretionary funding under the jurisdiction of this subcommittee.
        I am pleased to share the dais with my distinguished ranking
    member, Senator Jerry Moran, and other members of the subcommittee.
        Joining us today to present testimony about the resource needs of
    the IRS is the Honorable Douglas H. Shulman, now in his fourth year of
    a 5-year term as the 47th Commissioner of the IRS. Thank you for your
    service and for accepting the challenge to help lead the IRS from
    ``good to great''.
        I welcome the opportunity today to conduct critical oversight of
    the IRS and its programs through a candid discussion of where the
    agency is today, where it needs to be, and how we can ensure that the
    IRS has the necessary resources to fulfill its important missions.
        The Congress probably exercises its most effective oversight of
    agencies and programs through the appropriations process. It allows an
    annual check-up and review of operations and spending.
        To complement congressional oversight, the IRS has a cadre of
    important watchdogs and keen observers monitoring and evaluating its
    operations. These include the Treasury Inspector General for Tax
    Administration (TIGTA); the National Taxpayer Advocate, the IRS
    Oversight Board; the Government Accountability Office; and the National
    Treasury Employees Union.
        I appreciate the exemplary work and constructive contributions of
    each of these entities to help critique, guide, promote, and improve
    the work of the IRS. I invited top officials of each of these
    organizations to submit written materials to enrich the subcommittee's
    work and augment the record of these proceedings today.
        I ask unanimous consent that the statements and accompanying
    materials received by the subcommittee be made a part of the permanent
    record of this hearing.
                           accomplishments of the irs
        The IRS administers the tax laws and collects the revenues that
    fund more than 96 percent of Federal Government operations and public
    services.
        Each year, the 95,425 employees of the IRS make hundreds of
    millions of contacts with American taxpayers and businesses. The IRS
    represents the face of Government to more U.S. citizens than any other
    agency.
        During fiscal year 2010, the IRS:
      --On a budget of $12.15 billion, collected $2.345 trillion in taxes--
            93 percent of all Federal receipts. That's $194 in revenue for
            every $1 in appropriated funds.
      --Processed 230 million tax returns, including 141 million individual
            returns, 7 million corporate returns, and 30 million employment
            tax returns.
      --Issued 109.5 million refunds worth $366 billion.
      --Spent an average of 53 cents to collect each $100 of tax revenue.
      --Examined more than 1.58 million individual income tax returns (an
            11 percent increase more than fiscal year 2009) and nearly
            30,000 returns filed by corporations.
      --More than doubled its offshore presence--adding offices in Asia and
            Central America, boosting law enforcement staffing throughout
            the globe, and expanding interaction with international
            organizations--all designed to investigate and crack down on
            tax absconders wherever they may be.
      --Increased automated under-reporter contact closures to more than
            4.3 million--a 19.8 percent increase more than fiscal year
            2009--and surpassing the 4 million mark for the first time.
      --Provided taxpayer assistance through 305 million visits to the
            IRS.gov Web site (double the volume in 2004)--responding to the
            growing demand for electronic tools and online access to
            information.
      --Answered 47 million calls to customer service phone lines.
      --Assisted more than 78 million taxpayers through its telephone
            helpline or at walk-in sites.
      --Received 35.1 million automated calls, a 21 percent uptick from
            fiscal year 2009, reflecting rising demand for self-service
            options.
                               the budget request
        For fiscal year 2012, the President's budget requests funding of
    $13.284 billion, representing an overall increase of $1.138 billion, or
    9.4 percent, above the fiscal year 2011 enacted level of $12.146
    billion under the continuing resolution enacted on April 15 to cover
    the balance of this fiscal year.
        For the IRS accounts, the fiscal year 2011 enacted bill maintained
    funding at the same level as provided in the fiscal year 2010
    enactment. I recognize that such level falls more than $487 million
    short of what the President requested for this year.
        While my preference would have been to fund the IRS at the level
    recommended in our July 2010 Committee-reported bill, I regret to say
    that we faced a significant reduction in our available discretionary
    resources.
        In fact, our overall allocation cap was 10 percent below the fiscal
    year 2010 enacted level, compelling some difficult negotiations and
    funding decisions to finish the fiscal year 2011 bill this spring. I am
    pleased we were able to avert the troubling $603 million cut below
    fiscal year 2010 for the IRS that was included in the House-passed H.R.
    1.
        The fiscal 2012 funding forecast is, to put it mildly, bleak. This
    subcommittee faces grim prospects and challenging funding decisions for
    the ensuing fiscal year, and beyond. It will be helpful to hear
    Commissioner Shulman's honest appraisal of the resource needs that the
    IRS will require to achieve its dual mission of:
      --Providing America's taxpayers with top quality service by helping
            them understand and meet their tax responsibilities; and
      --Applying the tax law with integrity and fairness to all.
        I look forward to hearing more about the particular challenges the
    IRS faces in these lean budgetary times, and how this subcommittee can
    be helpful in supporting the mission of the IRS.

        Now I'd like to turn the floor over to my colleague,
    Senator Moran.

                        STATEMENT OF SENATOR JERRY MORAN

        Senator Moran. Chairman Durbin, thank you. Thanks for the
    hearing today.
        Welcome, Commissioner Shulman.
        I understand that the IRS is tasked with enormous
    responsibilities. The IRS collects the revenue that funds
    Government and administers our tax laws.
        The IRS's goal of improving services, making voluntary
    compliance easier, and enforcing the laws to ensure that
    everyone pays their fair share of taxes, is all laudable. I
    also believe we would all agree that we should make sure that
    our tax code and the IRS compliance and enforcement efforts
    don't make it even harder for taxpayers and small businessmen
    and women to meet their tax obligations.
        As we know, the American economy is facing very difficult
    times, and we need to get the country's economy moving again.
    Americans are struggling, and overly burdensome regulations and
    reporting requirements hamper the ability of our Nation's small
    businesses to grow their businesses and create jobs.
        I was very pleased to see the Congress address some of the
    uncertainty by passing legislation to repeal the costly and
    unprecedented 1099 tax reporting mandate in the new healthcare
    law. This marks a significant change in our healthcare law, and
    that repeal of the 1099 requirement is good news for small
    business and agriculture producers, who bear the largest burden
    under these provisions. I am interested in talking to you, Mr.
    Commissioner, about the consequences of that repeal on your
    appropriations and budget request.
        I note that the President's request for the IRS for fiscal
    year 2012 is almost $13.3 billion. This is an approximate $1.1
    billion more than the 2010 enacted level and the fiscal year
    2011 level, resulting in a 9 percent increase. Almost half a
    billion of that increase is requested to begin implementation
    of the new healthcare law. Given the current fiscal reality, I
    am interested to learn how the IRS intends to prioritize its
    goals and carry out its core responsibilities of enforcement
    and taxpayer services and make progress on important
    information technology projects.
        I appreciate the significant and complex responsibilities
    that the IRS faces. Given our Government's fiscal constraints,
    we must carefully review all agency budget requests to ensure
    taxpayers are receiving the best value for their dollars. We
    must make sure that we address our country's economic problems
    in a fiscally responsible way.
        Mr. Chairman, I look forward to hearing the testimony, and
    I thank you for calling the hearing and look forward to working
    with you on the subjects within this subcommittee's
    jurisdiction.
        Senator Durbin. Thanks a lot, Senator Moran. And, Mr.
    Shulman, the floor is yours.

                  SUMMARY STATEMENT OF HON. DOUGLAS H. SHULMAN

        Mr. Shulman. Thank you, Chairman Durbin and Ranking Member
    Moran. It's good to be here, and I appreciate the opportunity
    to testify about our 2012 budget.
        This budget was crafted during a time of fiscal austerity
    and belt tightening for the Nation, and it's incumbent upon all
    of us in Government to be as efficient as possible and to spend
    taxpayer dollars wisely. This means, in my mind, finding
    savings where we can, and continuing to invest in strategic
    priorities that allow us to improve service and voluntary
    compliance.
        The fiscal year 2012 budget includes almost $190 million in
    efficiency savings and reductions, and you've got my commitment
    to continue to look for ways to save the Federal Government
    money.
        Against this backdrop, it's also clear that the IRS is
    vital to both the functioning of the Government and keeping our
    Nation and economy strong. In fiscal year 2010, the IRS
    collected, as the chairman noted, $2.345 trillion in gross
    revenues to fund the Federal Government, which is approximately
    93 percent of all Federal receipts. For every $1 spent on the
    IRS, we collect approximately $200 of revenue.
        Mr. Chairman, one of our core duties, as you noted, is
    conducting the filing season. Despite late tax law changes,
    this filing season actually went relatively smoothly. As of the
    end of May, we had gotten about 133 million individual returns.
    We issued more than 100 million refunds, totaling $285 billion.
    We've also answered more than 50 million taxpayer calls this
    year.
        The IRS e-file program, which is lauded by many as one of
    the most successful modernization programs in all of
    Government, continues to show growth. This year, we reached two
    very major milestones. One is, for the first time ever, we had
    100 million people electronically file. And this year--we
    started the e-file program in 1986--we crossed the 1 billionth
    electronic filing of a tax return this year. Clearly it's
    changed the way Americans interact with the IRS.
        This is also a big deal for efficiency. It costs us 17
    cents to process an electronically filed return. It costs us
    $3.66 to process a paper return. And we've been reaping
    benefits and downsizing our operations ever since e-file
    started.
        Let me also note that we continue to try to help taxpayers
    who are struggling to regain their footing after the recession.
    This year, we started something we call our Fresh Start
    program, which expands our Offer in Compromise program. It made
    lien withdrawal easier for taxpayers, it made it easier for
    small businesses to enter an installment plan, and it changed
    our lien criteria.
        Now, in recognition of the critical role that we play in
    the economy--both helping taxpayers file their taxes and also
    collecting the revenue--the President asked for judicious
    investments in IRS in the 2012 budget. These investments
    reflect our balanced approach to both taxpayer service and
    compliance programs, and our commitment to administer the tax
    laws in a balanced and fair manner.
        It also includes funding to finish, for the 2012 filing
    season, our key core account database. If and when we've a
    fully operational account database, it will mean faster
    processing of returns, expedited refunds for all Americans,
    better customer service, and enhanced data security.
        I also want to emphasize that, because of our unique
    revenue collection function, all of the investments in the IRS
    more than pay for themselves by generating much more revenue
    than they cost.
        Mr. Chairman, I would be remiss if I did not mention for a
    moment the House budget resolution, which provided a funding
    level for the Financial Services and General Government
    Subcommittee of approximately $2 billion below the fiscal year
    2011 enacted level. Because, as you mentioned, we're the
    majority of the Financial Services and General Government bill,
    cuts of this magnitude would be substantial and affect all of
    IRS operations--from answering taxpayer questions on the phone
    to front-line compliance activities, such as audit coverage.
        Because the lost revenues from reduced tax law enforcement,
    cuts such as those in the House budget resolution would
    actually increase the deficit by decreasing revenues. In
    addition, conspicuous drops in our enforcement activities could
    have an impact on longer-term voluntary compliance in the
    country.

                              PREPARED STATEMENTS

        So let me conclude by just saying, I recognize that we are
    in a very challenging fiscal environment, and that there's
    going to be a lot of difficult choices that you and your
    colleagues are going to need to make. I look very much forward
    to a constructive dialogue over the weeks and months ahead with
    this subcommittee, and very much appreciate the support that
    this subcommittee has given the IRS.
        [The statement follows:]
                    Prepared Statement of Douglas H. Shulman
                            introduction and summary
        Chairman Durbin, Ranking Member Moran, and members of the
    subcommittee, thank you for the opportunity to appear today to discuss
    the President's fiscal year 2012 budget request for the Internal
    Revenue Service (IRS).
        This budget was crafted during a time of fiscal austerity and belt
    tightening for the Nation and it is incumbent upon all of us in
    Government to be as efficient as possible and spend taxpayer dollars
    wisely. That means finding savings where we can, and continuing to
    invest in strategic priorities that allow us to continuously improve.
        Against this backdrop, it is clear that the IRS is vital both to
    the functioning of Government and keeping our Nation and economy
    strong. In fiscal year 2010, the IRS collected $2.345 trillion in gross
    revenue to support the Federal Government, approximately 93 percent of
    all Federal receipts. Moreover, for fiscal year 2010, we processed more
    than 140 million individual income tax returns and issued 109.5 million
    refunds to individual taxpayers totaling $366 billion.
    A Record of Success
        Mr. Chairman, the IRS is also proud of its implementation track
    record over the past few years.
        We have run smooth filing seasons for the last several years,
    despite new tasks being added to our agenda and late passage of
    legislation.
        We have also made good strides in cracking down on international
    tax evasion. We struck a landmark deal with the Government of
    Switzerland, and for the first time received information on thousands
    of Americans hiding assets in Swiss bank accounts. As we turned up the
    pressure on those not paying taxes on overseas assets, we had
    approximately 15,000 voluntary disclosures from individuals who came in
    under our special Voluntary Disclosure Program. Since the special
    program closed, we received an additional 4,000 voluntary disclosures
    from individuals with bank accounts from around the world.
        Many of these voluntary disclosure cases involve significant
    amounts of previously unpaid tax.
        However, collecting such substantial additional revenue for past
    misdeeds is not the only important consideration here. Regardless of
    dollar size, it is important that we are bringing thousands of U.S.
    taxpayers back into the system so they properly report and pay their
    taxes for years to come on their offshore accounts.
        In February 2011, the IRS announced a new special voluntary
    disclosure program designed to help people with undisclosed income from
    hidden offshore accounts get current with their taxes.
        Our goal in our offshore efforts is to fundamentally change the
    risk calculus of taxpayers. We are well on our way to deterring the
    next generation of taxpayers from using hidden bank accounts to avoid
    paying taxes.
        We have also been ushering in a new relationship with corporate
    taxpayers with a major focus on creating forums and venues where we can
    resolve issues faster and provide more certainty.
        The impetus for this new approach stems from the simple shared
    belief that at the end of the day, taxpayers and tax authorities pretty
    much want the same thing. They want a balanced tax administration
    system that provides:
      --Certainty regarding a taxpayer's tax obligations sooner rather than
            later;
      --Consistent treatment across taxpayers; and
      --An efficient use of Government and taxpayer resources by focusing
            on the issues and taxpayers that pose the greatest risk of tax
            noncompliance.
        There are several interlocking pieces that will help advance this
    transformation. It requires more transparency on both sides; a re-
    tooling of our audit approach; and a commitment to resolving issues
    quickly and clarifying uncertainty in the law.
        We now have a number of innovative, forward-thinking programs and
    forums, such as our industry issue resolution program, compliance
    assurance program, fast track settlement, and our uncertain tax
    positions reporting requirement that are focused as a package on the
    goals of faster issue resolution and greater certainty for those
    taxpayers who want to be transparent.
        One of the most important initiatives that the IRS has undertaken
    in recent memory is the return preparer initiative, which is now being
    implemented. In September 2010, we launched the new online Preparer Tax
    Identification Number (PTIN) application system. It is up and running
    with more than 700,000 preparers already registered in the system.
        More than just an identification number, the PTIN registration
    process gives the IRS an important and better line of sight into the
    return preparer community than we have ever had before. We can leverage
    that information to help us better communicate, analyze trends, spot
    anomalies and potentially detect fraud.
        The registration process will help us build in several years a
    publicly accessible database of preparers who are authorized to prepare
    returns. This is an extremely important tool for consumers as they will
    be able to search the database to ensure that their preparer is
    registered. It will also make it easier to find and track the bad
    actors out there. They will not be able to pull up stakes and move
    around anonymously.
        The IRS is also very proud of its work in implementing the tax-
    related provisions of the American Recovery and Reinvestment Act (ARRA)
    and other economic recovery legislation. We put out billions of dollars
    to help people buy homes and stabilize the housing market through the
    First-time Homebuyer Credit, and we added $400 to $800 to families'
    paychecks through the Making Work Pay Credit, just to name two
    provisions.
        The IRS continues to provide taxpayers with quality customer
    service and different service channels and products. They run the gamut
    from traditional walk-in sites for those who need to see an IRS
    representative face-to-face, to toll-free automated and assistor
    telephone service, to Web-based applications and social media. All make
    it easier for taxpayers to file and pay their taxes.
        Telephone level of service has recovered after several challenging
    years. This year we are targeting a 71 percent assistor level of
    service for the full year. Toll-free tax law accuracy and accounts
    remain respectively at 93 percent and 95 percent, and the overall toll-
    free customer satisfaction rating stood at 92 percent. Last year, we
    also saw a 70 percent e-file rate for individuals as compared to a mere
    10 percent 15 years ago. As noted in the next section, this translates
    into a huge savings.
        IRS.gov has become the favorite source of information for millions
    of taxpayers. For fiscal year 2010, there were almost 305 million Web
    page visits to IRS.gov--a 14 percent increase over the same time period
    in fiscal year 2009. Use of the ``Where's My Refund'' electronic
    tracking tool continued to post double-digit yearly gains.
        The IRS is increasingly communicating with taxpayers who may not
    get their information from traditional sources, such as newspapers and
    broadcast and cable news. By employing social and new media, such as
    YouTube, Twitter and even iTunes, we are able to reach these taxpayers
    with important service and compliance messages.
        In January 2011, the IRS also unveiled IRS2Go, its first smartphone
    application that lets taxpayers check on the status of their tax refund
    and obtain helpful tax information.
        This new smartphone app reflects our commitment to modernizing the
    agency and engaging taxpayers where and when they want.
        Finally, the IRS continues to run robust compliance programs. We
    continue to have appropriate and balanced audit coverage rates across
    taxpayers and to innovate in our collection programs.
        And in our latest effort to help struggling taxpayers, the IRS
    announced on February 24, 2011, a series of new steps to help people
    get a fresh start with their tax liabilities.
        The goal is to help individuals and small businesses meet their tax
    obligations, without adding unnecessary burden to taxpayers.
    Specifically, the IRS set forth new policies and programs to help
    taxpayers pay back taxes and avoid tax liens.
        The announcement centers on the IRS making important changes to its
    lien filing practices that will lessen the negative impact on
    taxpayers. The changes include:
      --Significantly increasing the dollar threshold when liens are
            generally issued, resulting in fewer tax liens;
      --Making it easier for taxpayers to obtain lien withdrawals after
            paying a tax bill;
      --Withdrawing liens in most cases where a taxpayer enters into a
            Direct Debit Installment Agreement;
      --Creating easier access to installment agreements for more
            struggling small businesses; and
      --Expanding a streamlined Offer-in-Compromise program to cover more
            taxpayers.
        In short, despite a quickly evolving taxpayer base and
    unprecedented demands on IRS resources, the IRS continues to deliver
    for the American people.
    Working Smarter and Greater Efficiencies
        The IRS continues to reap the financial benefits of the E-File
    program, one of the most successful modernization programs in
    Government. Today, we receive nearly 100 million tax returns
    electronically. In the past these returns had to be opened, sorted, and
    transcribed manually. The efficiency savings have allowed us to reduce
    our submission processing sites in half. This year we are closing our
    fifth of the original 10 sites that processed paper returns.
        The fiscal year 2012 budget request includes almost $190 million in
    efficiency savings, reductions, and nonrecurring activities. While
    these targets are substantial, I am confident that we will meet them
    and more, by finding cost-savings in our operations wherever we can.
        I have also challenged the IRS leadership and indeed, all IRS
    employees, to take a hard look at their operations and look for
    potential savings and efficiencies.
        Even in a tough budget environment, I am confident that the IRS
    will continue to deliver value for the American taxpayer and will
    emerge as a stronger agency in the years to come.
        I am particularly pleased with the progress that we are making in
    achieving efficiencies in our technology operations. The IRS has
    embarked on a multi-year effort to streamline and standardize processes
    that will allow for substantial efficiency gains. For example, the
    Information Technology Infrastructure Library is a collection of best
    practices used to aid in the implementation of a lifecycle framework
    for IT Service Management. In September 2010, an independent third
    party found that the IRS recently reached Capability Maturity Model
    Level 2 based on established criteria.
        Achieving this level allows standardized project management
    practices across projects. This will improve our agility and quality in
    delivering software to our business customers and the taxpaying public,
    as well as reduce the cost of developing and maintaining products, and
    improve the cost of engineering services.
    Investing in Core Programs
        Indeed, it is in recognition of the critical role that the IRS
    plays in the economy that the fiscal year 2012 request includes a
    judicious investment in the IRS' core service and enforcement programs
    and initiatives. Enforcement and customer service are not an either/or
    proposition. Accomplishing our mission requires that we do both well.
        The request also includes the necessary funding for completing on
    time for the 2012 filing season the core taxpayer account database. A
    fully operational customer account database will mean faster processing
    of returns, expedited refunds for 140 million individual taxpayers and
    enhanced data security.
        The funding in the President's budget request will be used to carry
    out the IRS' strategic and balanced agenda that includes:
      --Improved service to taxpayers, including enhancements to the
            IRS.gov Web site to meet taxpayer needs and growing demand for
            more e-services;
      --Robust and targeted enforcement programs to address offshore tax
            evasion and improve tax compliance for corporate and high-
            income taxpayers;
      --Completion of the new taxpayer account database and enhancements to
            our electronic filing platforms;
      --Leveraging the return preparer program to reduce noncompliance;
      --Implementation of our uncertain tax position reporting
            requirements;
      --Combating errors and fraud for refundable tax credits, such as the
            Earned Income Tax Credit (EITC);
      --Better use of data, such as credit card and securities basis
            information reporting;
      --Implementation of new tax provisions found in major recent
            legislation, including the Affordable Care Act (ACA);
      --Workforce development to ensure that we have a talented and capable
            workforce for the foreseeable future; and
      --Enhancing workplace/physical security for IRS employees.
        The IRS will also administer those portions of ARRA that were
    extended into 2011. These include the expanded EITC for families with
    three or more children and the American Opportunity Tax Credit to help
    pay tuition and other expenses for individuals enrolled in institutions
    of higher education. In addition, we continue to administer the Health
    Coverage Tax Credit (HCTC) that was enacted as part of the Trade
    Adjustment Assistance Reform Act of 2002.
        The new enforcement personnel included in the request will generate
    more than $1.3 billion in additional annual enforcement revenue once
    the new hires reach full potential in fiscal year 2014. The roughly $6
    to $1 return on investment estimate related to these initiatives does
    not include the indirect revenue effect of the deterrence value of
    these investments and other IRS enforcement programs, which is
    conservatively estimated to be at least three times the direct revenue
    impact.
                                      aca
        IRS will need to implement and administer the tax provisions of the
    ACA (Public Law 111-148) in 2012. IRS seeks to be helpful to families
    and businesses that will benefit from the ACA. In fact, some benefits
    have already begun. For example, upon enactment of the ACA, IRS
    immediately began to make sure that small employers were aware of a
    significant new tax credit to help them provide health coverage to
    their workers.
        Because the tax credit was enacted mid-year, and became effective
    immediately, IRS conducted a significant outreach campaign to small
    businesses. In addition to mailing postcards to millions of employers
    alerting them to the new credit, IRS held or attended more than 1,000
    outreach events targeted at small businesses and the tax practitioners
    who serve them.
        Working with the Department of Health and Human Services, we also
    administered a program to provide $1 billion in tax credits and grants
    to qualifying therapeutic discovery projects.
        In addition, we have implemented or have begun to implement changes
    that expanded the tax credit for adoptive parents, a new exclusion for
    loan forgiveness programs for certain health professionals, and a new
    excise tax on indoor tanning services.
        We are also working diligently to implement the tax law components
    of the changes made to the health insurance marketplace that will begin
    in 2014. Let me put these efforts in context by describing the
    activities that we are undertaking to plan for these upcoming changes.
        The IRS also has significant information technology development
    work that must be completed in order to administer these provisions.
    The vast majority of the resources that the IRS will require between
    now and 2014 will be dedicated to technology and the associated
    business process design required to effectively administer these new
    provisions.
    Exchanges and Medicaid Health Coverage
        Individuals seeking subsidized coverage will interact with the IRS
    at a few discrete points in the process:
          Obtaining Coverage Through Exchanges and/or Medicaid.--The ACA
            outlines eligibility rules for the premium assistance tax
            credit, as well as Medicaid. In both cases, the household
            income as reported to the IRS by approximately 140 million
            taxpayers on the 2012 tax returns will be relevant to
            eligibility determination. IRS will alter its systems to take
            account of the new concept of household income, and is planning
            to provide significant educational tools to help individuals
            understand what household income represents. Furthermore,
            planning is underway to determine the best way to provide this
            information to taxpayers via the Web, telephone, and other
            channels.
          Receiving Advance Premium Tax Credits.--Individuals who are
            determined to be eligible for the premium assistance tax credit
            can receive the benefit through advance monthly payments that
            are made directly to the plan provider. Working with the
            Treasury Financial Management Service, which will be making the
            advanced payment, IRS will develop new systems for the
            administration of the tax credit. In addition, IRS will work
            with the exchanges as appropriate to ensure there is
            significant outreach and education to make taxpayers who are
            receiving the advance payments aware of the importance of
            reporting mid-year changes in circumstance that could affect
            their eligibility for, or the amount of the credit.
          Reconciling the Premium Assistance Tax Credit With Advance
            Payments Made Through the Year.--The ACA provides that
            individuals will reconcile the amount of advance payments of
            the premium credit with the actual amount as computed on the
            tax return. In other words, advance payments made throughout
            2014 will be reconciled with individuals' tax returns that are
            filed in the spring of 2015. To the extent that the ultimate
            credit amount is larger than the sum of the advance payments,
            the additional amount will be added to the taxpayer's refund.
            If the ultimate credit amount is lower than the sum of the
            advance credit, the taxpayer will owe additional tax on the
            return, potentially subject to a cap.
    Individual Coverage Requirement
        IRS will also be responsible for administering the requirement that
    individuals who can afford health coverage either obtain it or make a
    payment to IRS. While implementation of this requirement does not come
    into effect until 2014, and will appear on the 2014 tax forms that will
    be filed in the spring of 2015, we have nonetheless received a number
    of questions about how this provision will be implemented.
        First, we anticipate providing significant outreach and education
    on this provision. This will come directly from IRS and in partnership
    with State and Federal agencies, employers, tax return preparers, and
    others. Our experience in administering new tax laws suggests that the
    vast majority of individuals will successfully incorporate this
    provision into their tax year 2014 returns, filed in 2015.
        The forms will provide instructions on how individuals can
    determine if they met the coverage requirement, and if not, how to
    compute the payment and include it in that year's tax liability. We
    also plan to work closely with the tax return preparation industry to
    ensure that the professionals who advise taxpayers are fully informed
    about this provision. Today, approximately 60 percent of taxpayers use
    a return preparer and another 25 percent use software to prepare their
    own returns.
    Employer Provisions
        Finally, IRS will administer the employer responsibility payment
    for large employers who do not offer affordable coverage, and have at
    least one employee who receives subsidized coverage through the
    exchange. This provision closely intersects with the rest of the
    exchange provisions, and we are working closely with the Department of
    Health and Human Services and the Department of Labor to reach out to
    the employer community, understand what questions and issues they
    foresee, and incorporate the feedback that we get into the up-front
    program design and regulatory guidance.
    Tax Law Changes
        IRS is also working diligently to implement other tax law changes
    that come into effect over the next several years. Earlier in my
    testimony I mentioned several that we are already implementing, and
    would be happy to answer any questions that you have on those, or the
    provisions coming into effect in the months and years ahead.
                                   conclusion
        In conclusion, let me thank the subcommittee again for this
    opportunity to discuss the IRS budget request for fiscal year 2012
    which reflects the progress and improvements the IRS continues to
    make--even in a difficult budget environment.
        I believe the fiscal year 2012 budget is fiscally prudent and makes
    wise investments in strategic priorities in enforcement, service, and
    business modernization. It will help ensure that the IRS will continue
    its vital role in keeping our Nation and economy healthy and strong.
                                     ______

      Prepared Statement of J. Russell George, Inspector General for Tax
                   Administration, Department of the Treasury
        Chairman Durbin, Ranking Member Moran, and members of the
    subcommittee, I thank you for this opportunity to provide a written
    statement regarding the fiscal year 2012 budget request for the
    Internal Revenue Service (IRS).
             overview of the irs's fiscal year 2012 budget request
        IRS is the largest component of the Department of the Treasury and
    has primary responsibility for administering the Federal tax system.
    Since the Federal tax system is a system that relies upon voluntary
    compliance, almost everything IRS does in some way relates to fostering
    compliance with tax laws. IRS provides taxpayer service programs that
    help millions of taxpayers to understand and meet their tax obligations
    and administers enforcement programs aimed at deterring taxpayers who
    are inclined to evade their responsibilities. IRS is charged with
    vigorously pursuing those who violate tax laws.
        IRS must strive to enforce the tax laws fairly and efficiently
    while balancing service and education to promote voluntary compliance
    and reduce taxpayer burden. To accomplish these efforts, the proposed
    fiscal year 2012 IRS budget requested approximately $13.3 billion \1\
    in total appropriated resources. The total appropriations amount is an
    increase of $1.138 billion, or 9.4 percent, more than the fiscal year
    2010 enacted level.
    ---------------------------------------------------------------------------
        \1\ The fiscal year 2012 budget request also includes approximately
    $138 million from reimbursable programs and $204 million from user fees
    for a total operating level of $13.6 billion.
    ---------------------------------------------------------------------------
    Program Summary by Appropriation Account
        IRS fiscal year 2012 budget request includes appropriations for
    five IRS budget accounts, as depicted in the graph shown:

        Generally, these five appropriation accounts fund the IRS's tax
    administration functions. The three primary appropriation accounts are
    taxpayer services, enforcement, and operations support. The taxpayer
    services account funds programs that focus on assisting taxpayers with
    understanding and meeting their tax obligations, while the enforcement
    account supports the IRS's examination and collection efforts. The
    operations support account funds functions essential to the overall
    operation of the IRS, such as infrastructure and information services.
    The Business Systems Modernization (BSM) account provides funding for
    the development of a new taxpayer account database and investments in
    electronic filing. Finally, the Health Coverage Tax Credit
    Administration account supports the administration of the Health
    Coverage Tax Credit.\2\
    ---------------------------------------------------------------------------
        \2\ The Health Coverage Tax Credit is a refundable credit for
    health insurance available to qualified individuals, enacted as part of
    the Trade Adjustment Assistance Reform Act of 2002, Public Law 107-210,
    116 Stat. 933 (2002).
    ---------------------------------------------------------------------------
        The administration seeks to increase funding more than fiscal year
    2010 enacted operating levels for all of the appropriation accounts,
    ranging from 3 to 26 percent increases (see following table). The
    budget request includes a net increase in IRS staffing of more than
    5,100 employees, for a total of more than 100,500 IRS employees.

                    IRS FISCAL YEAR 2012 BUDGET REQUEST INCREASE OVER FISCAL YEAR 2010 ENACTED BUDGET
                                                 [Dollars in thousands]
    ----------------------------------------------------------------------------------------------------------------
                                                        Fiscal year     Fiscal year                     Percentage
                  Appropriation account                2010 enacted    2012 request    Dollar change     increase
    ----------------------------------------------------------------------------------------------------------------
    Taxpayer services...............................      $2,278,830      $2,345,133         $66,303            2.91
    Enforcement.....................................      $5,504,000      $5,966,619        $462,619            8.41
    Operations support..............................      $4,083,884      $4,620,526        $536,642           13.14
    BSM.............................................        $263,897        $333,600         $69,703           26.41
    Health Insurance Tax Credit Administration......         $15,512         $18,029          $2,517           16.23
                                                     ---------------------------------------------------------------
          Total budget appropriated resources.......     $12,146,123     $13,283,907      $1,137,784            9.37
    ----------------------------------------------------------------------------------------------------------------

    IRS Fiscal Year 2012 Priorities
        The IRS will focus efforts on the following priorities in fiscal
    year 2012 (these priorities are reflected in multiple appropriation
    accounts):
          Enforcement.--A serious challenge confronting the IRS is the tax
            gap.\3\ Despite an estimated voluntary compliance rate of 84
            percent and IRS enforcement actions, a significant amount of
            income remains unreported and unpaid. IRS estimated the gross
            tax gap for tax year 2001, the most current figure to date, to
            be approximately $345 billion. IRS' strategy for reducing the
            tax gap is largely dependent on funding for additional
            compliance resources as well as legislative changes.
    ---------------------------------------------------------------------------
        \3\ The Tax Gap is the difference between the estimated amount
    taxpayers owed and the amount they voluntarily and timely paid each
    year.
    ---------------------------------------------------------------------------
          In fiscal year 2012, IRS will continue to invest in compliance
            programs, including its relatively newly enhanced international
            enforcement initiatives to address offshore tax evasion. These
            initiatives are designed to address the under-reporting of
            income associated with international financial activities and
            expand enforcement efforts to address noncompliance by
            corporate and high-wealth taxpayers and the complex business
            enterprises they control (including corporations, partnerships,
            and trusts). IRS plans to use audit results and intelligence
            from ongoing offshore initiatives to refine case identification
            and selection methods to identify promoters, facilitators, and
            participants in abusive offshore arrangements.
          In addition, IRS will continue to pursue other significant
            initiatives, such as the Compliance Assurance Process program,
            industry issue resolution projects, and fast track settlements,
            aimed at earlier and speedier issue resolution and greater
            efficiency. These initiatives are a major part of the overall
            retooling of IRS' relationships with large corporate taxpayers.
          IRS also plans to continue to implement the recommendations of
            the Tax Return Preparer Strategy by addressing the challenges
            associated with the implementation of registration, continuing
            education, and testing requirements for tax return preparers
            that are scheduled to go into effect in fiscal year 2011. IRS
            took a major step forward in launching its new Preparer Tax
            Identification Number online registration process. The process
            gives IRS an important and improved line of sight into the
            return preparer community. IRS plans to use the information to
            analyze trends, spot anomalies, and potentially detect fraud.
            In addition, IRS will continue to develop and implement
            legislation to increase the use of electronic filing among the
            paid preparer community.
          Taxpayer Services.--Assisting taxpayers with their tax questions
            before they file their tax returns helps prevent inadvertent
            noncompliance and reduces the need for IRS to send burdensome
            postfiling notices and other correspondence. In fiscal year
            2012, IRS plans to increase its service level by adding
            resources to meet the ever-increasing demand and by continuing
            to make efficiency improvements, such as automated self-service
            applications that allow taxpayers to obtain information on less
            complicated issues (e.g., refund inquiries). IRS believes that
            these improvements will allow staff to address the more complex
            tax-law issues stemming from the passage of new legislation. In
            addition, IRS continues to study the services it offers to
            taxpayers on the Internet, at walk-in sites, and on its toll-
            free telephone lines. IRS officials are also exploring the
            relationships between taxpayer errors and unclear
            correspondence to guide them in the development of new
            approaches to service.
          BSM.--Data and technology are central to the future of tax
            administration. For the 2012 filing season, IRS plans to
            complete the new taxpayer account database and continue to make
            investments in its electronic filing systems. Completion of the
            core taxpayer account database is the cornerstone of IRS
            modernization that is expected to expedite refunds to millions
            of individual taxpayers. It is also a prerequisite for other
            major initiatives, such as the expansion of online paperless
            services. The ability of IRS to support increasingly complex
            taxpayer service and compliance initiatives will be severely
            limited until the new taxpayer account database is completed.
          The fiscal year 2012 BSM budget request is $333.6 million and 453
            full-time Equivalents (FTE).\4\ This is an increase of $69.7
            million (26.4 percent) and 120 FTEs more than the fiscal year
            2010 enacted level of $264 million and 333 FTEs. Almost one-
            half of the budget request will fund continued development of
            the Customer Account Data Engine 2 (CADE 2).\5\ While the
            current BSM is in its 12th year, the IRS' modernization efforts
            started in the 1980s. IRS originally estimated that the BSM
            effort would last up to 15 years and incur contractor costs of
            approximately $8 billion. To date, the current BSM has received
            $3.24 billion in contractor services, plus an additional $474
            million for internal IRS costs.
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        \4\ A measure of labor hours in which 1 FTE is equal to 8 hours
    multiplied by the number of compensable days in a particular fiscal
    year.
        \5\ CADE 2 creates a modernized processing and data-centric
    infrastructure that will enable the IRS to improve the accuracy and
    speed of individual taxpayer account processing, enhance the customer
    experience through improved access to account information, and increase
    the effectiveness and efficiency of agency operations.
    ---------------------------------------------------------------------------
          BSM funding is intended to improve taxpayer service and
            enforcement, and reduce the costs and risks of operating
            parallel tax processing systems.\6\ IRS plans to update and
            settle individual taxpayer accounts in 24 to 48 hours with
            current, complete, and authoritative data which should
            facilitate expanded opportunities for compliance, increase
            analytical capabilities, and accelerate the identification of
            fraudulent trends.
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        \6\ The IRS operates parallel tax processing systems that require
    updates to all systems when tax legislation is changed or updated.
    These parallel systems include CADE, CADE 2, and the Individual Master
    File.
    ---------------------------------------------------------------------------
          The increases more than the fiscal year 2010 budget seem
            reasonable considering the investments in developing and
            rolling out the CADE 2 during fiscal year 2012. Because the IRS
            is taking more responsibilities for program management, there
            are more IRS resources and fewer contractor resources devoted
            to BSM, thus the increase in labor costs. Finally, the other
            major BSM projects (e.g., Modernized e-File \7\) have reduced
            budgets for fiscal year 2012 as they are winding down.
    ---------------------------------------------------------------------------
        \7\ The Modernized e-File project develops the modernized, Web-
    based platform for filing approximately 330 IRS forms electronically,
    beginning with the U.S. Corporation Income Tax Return (Form 1120), U.S.
    Income Tax Return for an S Corporation (Form 1120S), and Return of
    Organization Exempt From Income Tax (Form 990). The project serves to
    streamline filing processes and reduce the costs associated with a
    paper-based process.
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          In the area of information technology systems operations, the
            fiscal year 2012 IRS budget request presents several budgetary
            increases related to maintaining and improving information
            technology operations and taxpayer service, including $33
            million to expand online options through IRS.gov improvements,
            $25 million for portal migration, and $27.5 million to update
            the Integrated Financial System.
          The portal initiative funds the second year of a 3-year effort to
            replace the aging infrastructure of the portals and complete
            the migration of the two portals by August 2013, when the
            existing contracts expire. This will result in significant
            enhancements to online capabilities for tax preparers and other
            registered users. Failure to complete the portal migration by
            this date will result in increased portal operating costs and
            increased risk under existing sole-source contracts. In
            addition, taxpayer and tax practitioners will continue to use
            more expensive, labor-intensive service delivery channels such
            as calling the 1-800 telephone number or visiting an IRS
            taxpayer assistance center.
    Implementation of the ACA
        The implementation of the ACA \8\ presents a major challenge to the
    IRS. ACA represents the largest set of tax law changes in more than 20
    years, with more than 40 provisions that amend the tax laws. Although
    the new law goes into effect gradually over many years, several
    provisions required immediate action by IRS, including the Small
    Business Health Care Tax Credit, the Qualifying Therapeutic Discovery
    Credit, and the expanded Adoption Credit. To enact the range of
    retroactive provisions, the IRS focused on developing new systems and
    business processes for near-term provisions, conducting initial
    planning for long-term provisions, and defining appropriate outreach
    activities for each affected group.
    ---------------------------------------------------------------------------
        \8\ Public Law 111-148, 124 Stat. 119.
    ---------------------------------------------------------------------------
           analysis of the requested fiscal year 2012 budget increase
        The fiscal year 2012 budget request of $13.3 billion for IRS is a
    $1.138 billion (9.4 percent) increase more than the fiscal year 2010
    enacted budget. The $1.138 billion consists of the following:
    Changes to the Base
        Adjustment To Reach Fiscal Year 2011 President's Budget Level
    \9\.--Increase of $402 million, including a $123 million increase
    related to the BSM appropriation.
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        \9\ The initiatives included in the fiscal year 2011 budget
    submission are separate from the $839 million in program increases
    included in the fiscal year 2012 budget submission.
    ---------------------------------------------------------------------------
        Maintaining Current Levels.--Increase of $86 million.
        Program Reinvestment.--Increase of $1.5 million (one-time cost).
        These increases are offset by a decrease of $190 million in
    efficiencies and savings, including a $1 million decrease related to
    the modernization appropriation.
    Program Changes
        Program Increases.--Increase of $839 million, including an increase
    of $52 million in the operations support appropriation for costs
    related to maintenance of deployed modernization systems. This $52
    million increase is offset by a corresponding decrease of $52 million
    in the modernization appropriation for fiscal year 2012.
    Adjustment To Reach Fiscal Year 2011 President's Budget Level
        IRS is requesting about $402 million to reach the fiscal year 2011
    President's budget request adjusted for the proposed pay freeze. IRS
    has not issued new guidance for the fiscal year 2012 budget regarding
    the impact of the full-year fiscal year 2011 continuing resolution
    signed by the President on April 15, 2011. Therefore, we are presenting
    the information as reflected in IRS' fiscal year 2012 budget request
    dated February 14, 2011.
        The fiscal year 2012 budget request does not specify which
    initiatives are included in the $402 million increase. However, we
    reviewed IRS' fiscal year 2011 budget request, and identified the
    following program changes in addition to changes to the base:
      --$21 million to increase the telephone level of service;
      --$25 million to improve and redesign IRS.gov Web site;
      --$247 million to reduce the tax gap. The three largest initiatives
            associated with this effort are $121 million for international
            enforcement to address offshore tax evasion; $78 million for
            under-reporting by corporate and high-wealth taxpayers, tax
            abuse, and other under-reporting issues; and $38 million to
            broaden collection coverage;
      --$168 million to complete development of the new taxpayer account
            database and continue investments in electronic filing systems.
        This includes continuing development and deployment of BSM projects
            such as Modernized e-File, core infrastructure (such as
            portals, hardware, software, and security), and system
            engineering management capabilities (including project planning
            and monitoring); and
      --$3 million program reinvestment of a portion of the electronic
            filing savings to fund the one-time separation costs associated
            with the September 30, 2011, closure of the Atlanta submission
            processing site.
        Additionally, IRS identified $9 million in program reductions to
    the taxpayer advocate service case processing activities, Low-income
    Taxpayer Clinic grants, Tax Counseling for the Elderly program, and
    Volunteer Income Tax Assistance grants to realign the programs to the
    fiscal year 2009 enacted levels.
    Maintaining Current Levels
        The IRS is requesting about $86 million to fund nonlabor inflation
    adjustments and an increase in Federal Employment Retirement System
    participation. Nonlabor inflation adjustments include rent, postage,
    supplies, and equipment. No inflation adjustment is requested for pay
    in fiscal year 2012.
    Program Reinvestment
        The increased use of electronic filing has led to the consolidation
    of sites that process paper individual returns. Resources from
    electronic filing savings will be reinvested to fund one-time
    separation costs associated with the September 30, 2011, closure of the
    Atlanta submission processing site. The IRS fiscal year 2012 budget
    request includes a net increase of $1.5 million related to this effort.
    Efficiencies and Savings
        The IRS fiscal year 2012 budget request includes a net reduction of
    about $190 million related to efficiency savings. This $190 million
    reduction represents a total of 523 FTEs. The four largest areas of
    cost savings are outlined below.
        $75 Million Decrease From Reduced Information Technology
    Infrastructure.--The IRS intends to reduce its infrastructure through
    the use of the Capability Maturity Model (a process improvement
    approach that yields efficiencies in software engineering); the use of
    the Information Technology Infrastructure Library, which will allow IRS
    to improve the quality of its information technology services; and
    further consolidate its security activities to leverage security best
    practices.
        $27.3 Million Decrease From Reduced Training, Travel, and
    Programs.--IRS intends to reduce nontechnical training and noncase-
    related travel, and plans to implement various program efficiencies.
    IRS expects to achieve program efficiencies in the BSM, Health
    Insurance Tax Credit Administration, and various taxpayer communication
    and education programs. IRS also projects this efficiency initiative
    will lead to a reduction of 41 FTEs.
        $22.4 Million Decrease From Increased Electronic Filing Savings.--
    This decrease results from savings from increased electronic filing.
    Savings are based on projected growth in electronic filing and
    continued modernization efforts. As a result of this efficiency
    initiative, IRS projects it would need 416 fewer FTEs in submission
    processing.
        $22 Million Decrease From Nonrecurring Savings.--These savings
    would result from the net reduction of nonrecurring, one-time costs
    associated with various fiscal year 2011 enforcement initiatives (e.g.,
    information technology equipment and training).
    Program Increases
        The IRS is requesting an increase of about $839 million for:
      --enforcement initiatives;
      --infrastructure initiatives; and
      --taxpayer service initiatives.
        The largest component of the $839 million increase is $606 million
    related to enforcement initiatives. The $606 million for the
    enforcement initiatives includes $243 million for activities IRS
    believes will yield direct measurable results through an ROI. IRS
    estimates that the activities funded by the $243 million increase will
    generate $1.3 billion annually in additional enforcement revenues in
    fiscal year 2014. As stated earlier, many of the initiatives affect
    more than one appropriation account. Additionally, the $839 million in
    fiscal year 2012 program increases are in addition to the increases
    requested for all five appropriation accounts to reach the fiscal year
    2011 budget request.
        The fiscal year 2012 budget request does not separately align the
    various program increases to the tax gap; however, many of the
    initiatives refer to the tax gap. IRS also states that helping
    taxpayers understand their obligations under the tax law is critical to
    improving compliance and addressing the tax gap.
        IRS Enforcement Initiatives.--$606 million increase \10\ focuses on
    activities targeted at improving compliance through nine multi-year
    initiatives. These activities form the backbone of the IRS's approach
    to address the tax gap.
    ---------------------------------------------------------------------------
        \10\ IRS enforcement initiatives are funded from a variety of
    appropriations. Therefore, the requested $606 million increase in
    enforcement initiatives will not equal the requested $462 million
    increase in enforcement appropriations identified on page 3.
    ---------------------------------------------------------------------------
        The five largest enforcement initiatives are summarized below.
        $260.3 Million To Ensure Accurate Delivery of Tax Credits.--This
    initiative calls for 834 new FTEs. IRS expects this initiative will
    improve the delivery of existing credits through a combination of
    improved technology tools and increased enforcement staffing. The
    initiative also funds the information technology and other systems
    required to implement the new ACA's Premium Assistance Tax Credit,
    which becomes effective in 2014. IRS expects that this initiative will
    produce additional annual enforcement revenue of $183.3 million (an ROI
    of 4 to 1) in fiscal year 2014.
        $96.7 Million To Increase Coverage To Address Tax Law Changes and
    Other Compliance Issues (Tax Gap).--This initiative calls for 497 new
    FTEs. IRS anticipates this initiative will address compliance issues
    and new responsibilities arising from recent tax law changes included
    in major legislation such as the American Recovery and Reinvestment Act
    of 2009 \11\ and the ACA. This initiative will fund compliance programs
    needed for new provisions such as direct-pay bonds, new requirements on
    tax-exempt hospitals, a new fee on manufacturers and importers of
    branded prescription drugs, and the excise tax on indoor tanning. It
    will also increase audits of specialty programs (i.e., employment tax,
    excise tax, and estate and gift tax). IRS believes this initiative will
    produce additional annual enforcement revenue of $80.8 million (an ROI
    of 3 to 1) in fiscal year 2014.
    ---------------------------------------------------------------------------
        \11\ Public Law 111-5, 123 Stat. 115.
    ---------------------------------------------------------------------------
        $72.6 Million To Increase International Service and Enforcement.--
    This initiative calls for 377 new FTEs. IRS expects it will be able to
    implement changes required by enactment of the Hiring Incentives to
    Restore Employment (HIRE) Act of 2010,\12\ with funding for this
    initiative. IRS will implement the reporting, disclosure, and
    withholding requirements and expand coverage of international filings;
    conduct more in-depth international compliance work; strengthen
    compliance efforts related to offshore activity; and expand the Global
    High-Wealth Compliance Group. IRS predicts that this initiative will
    produce additional annual enforcement revenue of $467.1 million (an ROI
    of 8 to 1) in fiscal year 2014.
    ---------------------------------------------------------------------------
        \12\ Public Law 111-147, 124 Stat. 71.
    ---------------------------------------------------------------------------
        $58.5 Million To Administer New Statutory Reporting Requirements.--
    This initiative calls for 187 new FTEs. Recent legislation established
    significant new information reporting and sharing requirements from
    third parties (such as employers and health insurance providers), and
    the exchanges to administer the ACA's Premium Assistance Tax Credit,
    the individual coverage requirement, and the employer responsibility
    payment. Effective implementation requires significant enhancements to
    existing information returns systems to handle the additional volumes
    and new information reporting categories. This initiative also includes
    resources to implement provisions that allow IRS to share tax data with
    State and Federal entities to determine eligibility for the credit and
    to ensure the secure exchange of information.
        $52 Million To Increase Collection Coverage.--This initiative calls
    for 413 new FTEs. IRS expects this initiative will expand work on the
    collection inventory and improve collection processes to bring
    taxpayers who fail to pay their debt into compliance and produce
    additional annual enforcement revenue of $398.3 million (an ROI of 9 to
    1) in fiscal year 2014.
        Infrastructure Initiatives.--$119 million increase focuses on
    enhancing employee security, developing disaster recovery system
    capability, and establishing systems to implement various provisions of
    ACA through four initiatives. The three largest initiatives are
    summarized below.
          $62.5 Million To Implement Individual Coverage Requirement and
            Employer Responsibility Payments.--This IRS initiative supports
            the development of information technology, infrastructure, and
            systems to implement the provisions of ACA that establish
            shared responsibility payments for both individuals and
            employers. IRS requested an additional 65 FTEs for this program
            initiative. Beginning in 2014, the ACA requires individuals who
            are able to afford health insurance to obtain minimum essential
            coverage or pay a penalty. If affordable coverage is not
            available, certain individuals may be eligible for an
            exemption.
          $27.5 Million To Update the Integrated Financial System (IFS).--
            IRS believes updating the IFS will ensure compliance with
            future Federal accounting requirements; eliminate current work-
            around processes necessary to support adjustments and
            reimbursable receivables activities not provided in the current
            system; eliminate the year-end blackout period and multiple
            budget versions; and eliminate the month-end accrual process
            because liabilities would post upon receipt. This initiative
            calls for five new FTEs.
          $15.5 Million To Enhance Physical Security for Federal
            Employees.--The February 2010 attack against the Austin, Texas,
            IRS office killed one IRS employee and injured several others.
            As a result of this attack, this initiative will provide the
            investments needed to update and/or upgrade the physical
            security of IRS facilities. The investments are designed to
            enhance the overall security of IRS employees in the workplace.
            This initiative calls for 10 new FTEs.
        Taxpayer Services Initiatives.--$114 million increase focuses on
    improving taxpayer service and the IRS.gov Web site through two
    initiatives as summarized below.
          $81.3 Million To Improve Taxpayer Service.--IRS expects this
            initiative and the $25.9 million increase requested for fiscal
            year 2011 will provide additional staffing of at least 519 FTEs
            to address rising demand and increase the customer service
            representative level of service from the planned target of 71
            percent in fiscal year 2010 to 80 percent in fiscal year 2012,
            while maintaining a 93 percent customer satisfaction rate for
            toll-free telephone services. This initiative also includes
            funding to help taxpayers understand the new tax law provisions
            and to make related call center and infrastructure changes to
            handle anticipated inquiries, including questions regarding the
            ACA.
          $33 Million To Expand Online Options Through IRS.gov
            Improvements.--This IRS initiative will continue the multi-year
            effort to replace the outdated web portal environment and
            provide additional online services to taxpayers. This
            initiative will allow the IRS to continue the replacement of an
            outdated web portal environment that has reached the end of its
            useful life with the help of 15 additional FTEs.
        Chairman Durbin, Ranking Member Moran, and members of the
    subcommittee, I thank you for the opportunity to provide this statement
    regarding the fiscal year 2012 budget request for IRS.
                                     ______

       Prepared Statement of Nina E. Olson, National Taxpayer Advocate,
              Internal Revenue Service, Department of the Treasury
        Chairman Durbin, Ranking Member Moran, and distinguished members of
    this subcommittee: Thank you for inviting me to submit this written
    statement regarding the proposed budget of the Internal Revenue Service
    (IRS) for fiscal year 2012.\1\ As the National Taxpayer Advocate, the
    statutory voice for taxpayers and taxpayer rights inside IRS, I submit
    the following thoughts for your consideration:
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        \1\ The views expressed herein are solely those of the National
    Taxpayer Advocate. The National Taxpayer Advocate is appointed by the
    Secretary of the Treasury and reports to the Commissioner of the
    Internal Revenue Service (IRS). However, the National Taxpayer Advocate
    presents an independent taxpayer perspective that does not necessarily
    reflect the position of IRS, the Treasury Department, or the Office of
    Management and Budget. Congressional testimony requested from the
    National Taxpayer Advocate is not submitted to IRS, the Treasury
    Department, or the Office of Management and Budget for prior approval.
    However, we have provided courtesy copies of this statement to both IRS
    and the Treasury Department in advance of this hearing.
    ---------------------------------------------------------------------------
      --IRS requires additional funding to collect the revenue that
            supports the Federal Government and to better meet the service
            needs of the taxpaying public.
      --IRS, in particular, requires more funding to improve taxpayer
            services. Both the quality of taxpayer services, like answering
            taxpayer phone calls and responding to correspondence, and the
            quantity of taxpayer outreach and education have diminished in
            recent years. At this point, only 5 percent of the IRS budget
            is allocated for pre-filing taxpayer assistance and education.
            In addition, the combination of increased IRS enforcement
            actions and the recession has created substantially greater
            taxpayer need for assistance from the Taxpayer Advocate Service
            (TAS) and the Low Income Taxpayer Clinic program.
      --The existing IRS budget structure does not accurately portray the
            activities of IRS. In particular, a significant percentage, and
            perhaps the majority, of funding included in the ``taxpayer
            services'' account is not spent on programs commonly viewed as
            taxpayer service.
      --The ``program integrity allocation adjustment'' mechanism has been
            used in a manner that enables the IRS to receive extra funding
            for enforcement but not for its taxpayer service activities.
            Under the proposed fiscal year 2012 budget, IRS would receive
            an additional $936 million in enforcement funding through this
            mechanism (which amounts to 16 percent of the $5,966,619,000
            enforcement total), while receiving $0 in additional taxpayer-
            service funding through this mechanism.\2\ This is true despite
            the fact that taxpayer service indisputably plays a significant
            role in promoting tax compliance.
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        \2\ IRS FY 2012 Budget Request, Congressional Budget Submission 77
    (Feb. 14, 2011), available at http://www.treasury.gov/about/budget-
    performance/Documents/CJ_FY2012_IRS_508.pdf.
    ---------------------------------------------------------------------------
      --IRS desperately needs to conduct or commission better research so
            it can allocate its service and enforcement resources more
            efficiently.
      --IRS should revise its mission statement to acknowledge explicitly
            that its traditional role as the tax collector has expanded in
            recent years so that it is now both:
        --collecting taxes; and
        --administering social and economic benefits programs.
        This dual role should also be recognized explicitly in the budget
            to ensure the IRS receives sufficient funding to staff and
            perform both roles effectively.
        Before I delve into these issues, I want to take a moment to
    acknowledge the extraordinary work of the IRS workforce and its
    leadership. In fiscal year 2010, IRS collected more than $2.3 trillion
    to support the financial commitments of the Federal Government.\3\ It
    processed about 2.7 billion information returns \4\ and about 230
    million tax returns, including 141 million individual returns, 7
    million corporation returns, and 30 million employment tax returns.\5\
    Customer service representatives answered 47 million calls,\6\ and IRS
    enforcement personnel ramped up examination and collection
    activities.\7\ At the same time, IRS launched major initiatives to
    regulate Federal tax return preparers and combat noncompliance by
    taxpayers utilizing offshore bank accounts. There are always tasks IRS
    could perform better--and I will address some of them below--but I
    think it is important to place these comments in context by
    acknowledging how much the IRS does very well.
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        \3\ IRS Data Book, FY 2010, Table 1.
        \4\ Id. at Table 14.
        \5\ Id. at Table 2.
        \6\ IRS, Joint Operations Center, Snapshot Reports: Enterprise
    Snapshot (week ending September 30, 2010).
        \7\ See IRS FY 2010 Enforcement Results, available at http://
    www.irs.gov/pub/irs-utl/2010_enforcement_results.pdf.
    ---------------------------------------------------------------------------
       irs requires additional funding to maximize the collection of tax
      revenue and to better meet the service needs of the taxpaying public
        As I have testified previously, I view IRS as the accounts
    receivable department of the Federal Government. If the Federal
    Government were a private company, its management would fund the
    accounts receivable department at whatever level it believed would
    maximize the company's bottom line. Since the IRS is not a private
    company, maximizing the bottom line is not--in and of itself--an
    appropriate goal. But the public sector analogue should be to maximize
    tax compliance, especially voluntary compliance, with due regard for
    protecting taxpayer rights and minimizing taxpayer burden. Studies show
    that if IRS were given more resources, it could collect substantially
    more revenue.
        In my 2006 Annual Report to Congress, I recommended that the
    Congress provide IRS with after-inflation increases of about 2 percent
    to 3 percent a year for the foreseeable future. I continue to believe
    that increasing IRS budget at this rate is an excellent financial
    investment.
        Most Federal expenditure programs are just that--expenditure
    programs. The funds are intended to be spent on worthwhile programs,
    but the expenditures generally do not directly generate more Federal
    revenue. IRS is different. IRS collects well more than 90 percent of
    all Federal revenue.\8\ On a budget of about $12.1 billion, \9\ IRS
    collected about $2.35 trillion in fiscal year 2010.\10\ In other words,
    every $1 appropriated for the IRS produced about $194 in Federal
    revenue.
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        \8\ See IRS Fact Sheet, FS-2011-09, IRS FY 2012 Budget Proposal
    Summary (February 2011), available at http://www.irs.gov/newsroom/
    article/0,,id=235959,00.html.
        \9\ Department of the Treasury, FY 2012 Budget in Brief (showing
    fiscal year 2010 enacted levels).
        \10\ Government Accountability Office, GAO-11-142, Financial Audit:
    IRS's Fiscal Years 2010 and 2009 Financial Statements at 59 (November
    2010).
    ---------------------------------------------------------------------------
        In evaluating the likely revenue benefits of additional funding,
    the average return on investment (ROI) of 194:1 is less important than
    the marginal ROI that can be achieved for each additional $1 spent.
    While the marginal ROI is considerably less than 194:1 and will differ
    by program, studies generally show that, within reasonable limits, each
    additional $1 appropriated to IRS generates substantially more than an
    additional $1 in Federal revenue, assuming the funding is wisely spent.
    (As I discuss below, however, IRS needs to develop improved methods to
    measure the ROI of its activities.)
        Because of our national fiscal challenges, there has been
    considerable discussion recently about freezing or reducing all
    domestic discretionary spending. In my view, IRS as the tax collector
    should be exempt from any such freeze or reduction. Reducing funding
    for IRS will almost surely increase the deficit, because the reduction
    in revenue collected by the IRS will exceed the reduction in funding. A
    decision by the Congress to address our budget problem by cutting IRS
    funding would be akin to a private business attempting to address a
    spending shortfall by cutting its accounts receivable department. In
    other words, it would be penny-wise, but pound-foolish.
    Recommendation
        In light of IRS' unique role as the Federal revenue collector, I
    recommend that the Congress develop new budget procedures to ensure
    that IRS is funded at whatever level will maximize tax compliance, with
    due regard for protecting taxpayer rights and minimizing taxpayer
    burden. Over the long term, this approach may include exempting IRS
    from spending ceilings or even taking IRS off-budget. In the short run,
    this approach should include carving out IRS from discretionary budget
    freezes intended to reduce the deficit, as cuts to IRS budget are
    likely to increase the deficit.
       irs especially requires more funding to improve taxpayer services
        IRS' fiscal year 2005-fiscal year 2009 strategic plan was based on
    the slogan, ``Service + Enforcement = Compliance'', and IRS in fiscal
    year 2006 proposed to restructure its budget so that the two principal
    categories would be ``taxpayer services'' and ``enforcement''. In both
    cases, service is listed before enforcement. Although we view this
    formula as simplistic,\11\ it reflects the indisputable premise that
    both taxpayer service and enforcement contribute to tax compliance.
    Despite the intended implication that there is some rough equivalence
    between taxpayer service and enforcement in bringing about tax
    compliance, however, there is no equivalence in the IRS budget.
    ---------------------------------------------------------------------------
        \11\ See, e.g., Internal Revenue Service FY 2008 Budget Request:
    Hearing Before the Subcomm. on Financial Services and General
    Government of the S. Comm. on Appropriations, 110th Congress (2007)
    (statement of Nina E. Olson, National Taxpayer Advocate); Internal
    Revenue Service FY 2006 Budget Request: Hearing Before the Subcomm. on
    Transportation, Treasury, the Judiciary, Housing and Urban Development,
    and Related Agencies of the S. Comm. on Appropriations, 109th Congress
    (2005) (statement of Nina E. Olson, National Taxpayer Advocate).
    ---------------------------------------------------------------------------
        For fiscal year 2012, the proposed budget would spend $701 million
    on ``Pre-filing Taxpayer Assistance and Education'', which is what most
    taxpayers think of as taxpayer service. This amounts to only 5 percent
    of the IRS budget. The last few years have been particularly
    challenging for IRS and many taxpayers, as the recently enacted
    Economic Stimulus Payments, First-Time Homebuyer Credits, and Making
    Work Pay Credits, among other tax benefits, have proven complex to
    claim or substantiate and have led to a significant increase in
    taxpayer inquiries and problems. As I will describe below, IRS has been
    unable to keep up with taxpayer needs.
        Significantly, IRS has been ramping up spending for enforcement
    programs in recent years while holding taxpayer-service spending flat.
    If the proposed fiscal year 2012 budget is adopted without change,
    spending for the enforcement account will have increased by 15.4
    percent while spending for the taxpayer services account will have
    declined by 0.3 percent since fiscal year 2006 on an inflation-adjusted
    basis.\12\
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        \12\ Compare Department of the Treasury, FY 2012 Budget-in-Brief
    with Department of the Treasury, FY 2008 Budget-in-Brief. (The fiscal
    year 2006 budget was adopted using a different budget structure. The
    proposed fiscal year 2008 budget shows the enacted fiscal year 2006
    totals as translated into the current budget structure.) Inflation
    adjustments were made using the Bureau of Labor Statistics inflation
    calculator, available at http://data.bls.gov/cgi-bin/cpicalc.pl.
    ---------------------------------------------------------------------------
        Not surprisingly, key IRS performance measures have improved for
    enforcement, but declined for taxpayer service. For example, IRS'
    fiscal year 2010 Management Discussion and Analysis included in the
    GAO's financial audit of the IRS states: ``Collection related to
    enforcement activities totaled $57.6 billion, a 34 percent increase
    over fiscal year 2004.'' \13\ By contrast, I note that IRS answered 74
    percent of all calls from taxpayers seeking to speak with a telephone
    assister in fiscal year 2010 as compared with 87 percent in fiscal year
    2004, a decline of 13 percentage points, or 15 percent.\14\ IRS'
    ability to timely process taxpayer correspondence has also declined.
    Comparing the final week of fiscal year 2004 with the final week of
    fiscal year 2010, the backlog of taxpayer correspondence in the tax
    adjustments inventory has jumped by 76 percent (from 357,151 to
    628,016), the percentage of ``uncontrolled'' correspondence received,
    but not yet entered into IRS computer systems has increased by 134
    percent (from 8.3 percent to 19.4 percent of correspondence), and the
    percentage of taxpayer correspondence classified as ``overage'' has
    increased by 135 percent (from 11.5 percent to 27 percent).\15\
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        \13\ Government Accountability Office, GAO-11-142, Financial Audit:
    IRS's Fiscal Years 2010 and 2009 Financial Statements at 23 (November
    2010).
        \14\ See IRS FY 2010 Enforcement Results, available at http://
    www.irs.gov/pub/irs-utl/2010_enforcement_results.pdf.
        \15\ Compare IRS, Joint Operations Center, Weekly Enterprise
    Adjustments Inventory Report (week ending September 25, 2010) with IRS,
    Joint Operations Center, Weekly Enterprise Adjustments Inventory Report
    (week ending September 25, 2004).
    ---------------------------------------------------------------------------
    Taxpayer Service Contributes to Higher Rates of Tax Compliance, and
            Outreach and Education in Particular Should be Increased
        Despite general agreement that both service and enforcement
    contribute to greater tax compliance, policymakers seeking to improve
    compliance and close the tax gap tend to focus almost exclusively on
    new enforcement measures--more audits, more collection actions, and
    more third-party information reporting to facilitate data-matching. The
    central role that service plays in promoting tax compliance is all too
    often overlooked.
        At the most basic level, there would be no compliance if IRS did
    not publish forms and publications, provide instructions on how to file
    returns, and answer filing-related questions. However, taxpayer service
    goes beyond merely publishing forms and answering telephone calls.
        Taxpayer outreach and education are critically important to
    achieving voluntary tax compliance, which is the cheapest type of
    compliance for the government. In my view, IRS is not conducting nearly
    enough outreach and education to taxpayers, especially self-employed
    and small business taxpayers, to maximize voluntary compliance.
    According to IRS' most recent estimate of unpaid taxes, $148 billion,
    or 43 percent of the aggregate tax gap, is attributable to unreported
    income earned by unincorporated businesses and the associated unpaid
    self-employment tax.\16\
    ---------------------------------------------------------------------------
        \16\ See IRS News Release, IR-2006-28, IRS Updates Tax Gap
    Estimates (February 14, 2006) (accompanying slide 1), available at
    http://www.irs.gov/newsroom/article/0,,id=154496,00.html.
    ---------------------------------------------------------------------------
        To be sure, a portion of the small business tax gap reflects a
    willful failure to report income. However, another portion reflects
    lack of knowledge about how to comply. For example, consider an
    individual without a college degree who becomes a successful plumber or
    electrician with a growing customer base. If he hires employees, he
    will face a host of employment, immigration verification, and local,
    State and Federal tax requirements, including the need to withhold and
    pay over payroll taxes with respect to his employees and to file
    employment tax and income tax returns on behalf of his business.
    Moreover, he likely will need to grapple with complex rules such as
    those dealing with automobile and transportation expenses, inventory,
    and depreciation of equipment and other fixed assets. For most
    taxpayers, these requirements would seem daunting or even impenetrable,
    and some taxpayers inevitably do not comply simply because they have no
    idea where to begin.
        IRS' current compliance strategy, which consists largely of posting
    general information on its Web site and auditing a tiny fraction of
    small business returns,\17\ can be improved. IRS can increase
    compliance in the small business community efficiently if it expands
    its outreach and education efforts through a more robust field function
    and commits more resources to meeting proactively with small businesses
    that are starting operations.
    ---------------------------------------------------------------------------
        \17\ In fiscal year 2010, IRS audited 0.58 percent of all business
    returns, including 0.94 percent of small C corporations (under $10
    million in assets), 0.37 percent of Subchapter S returns, and 0.36
    percent of partnership returns. See IRS Fiscal Year 2010 Enforcement
    Results, available at http://www.irs.gov/pub/irs-utl/
    2010_enforcement_results.pdf.
    ---------------------------------------------------------------------------
        In fiscal year 2006, the Appropriations Committees of the House and
    the Senate directed IRS, the IRS Oversight Board, and the National
    Taxpayer Advocate to collaboratively develop a 5-year strategic plan
    for taxpayer service.\18\ In response, the IRS developed a plan known
    as Taxpayer Assistance Blueprint (TAB). IRS conducted extensive
    research on the needs and preferences of individual taxpayers in the
    course of developing TAB. Pursuant to annual appropriations directives,
    IRS is continuing to provide the Appropriations Committees with annual
    progress reports.
    ---------------------------------------------------------------------------
        \18\ House Report 109-307, at 209 (2005) (Conference Report).
    ---------------------------------------------------------------------------
        As I have recommended before--and as the Appropriations Committees
    urged 2 years ago \19\--IRS should expand the scope of its TAB research
    studies to include self-employed and small business taxpayers and then
    should apply the knowledge it acquires through the studies to all of
    its interactions with those taxpayers. IRS should also expand its
    outreach to tax-exempt organizations to improve compliance in that
    sector.
    ---------------------------------------------------------------------------
        \19\ The House report ``urge[d] the IRS to continue to expand upon
    its TAB-related work with regard to small business and self-employed
    taxpayers and tax-exempt and government entities, and to include these
    additional categories in the annual IRS update to the TAB.'' House
    Report 111-202, at 21-22 (2009). The Joint Explanatory Statement of
    Managers accompanying the conference report made clear that the House
    language was approved by the conference committee. House Report 111-
    366, at 892 (2009) (Conference Report).
    ---------------------------------------------------------------------------
    Taxpayer Services Should Be Strengthened To Meet the Service Needs of
            U.S. Taxpayers.
        Beyond compliance, I believe IRS has an obligation to provide high-
    quality service to its taxpayers simply as a matter of good government.
    When we ask people to pay over a large percentage of their income to
    the Government each year, the least we can do is make the process as
    simple and painless as possible.
        In important respects, IRS taxpayer service is falling short.
    Consider the following four examples:
          Telephone Service.--Each year, tens of millions of taxpayers call
            the IRS seeking help with a wide variety of issues, including
            account questions and tax-filing questions. Yet IRS is unable
            to answer a large percentage of these telephone calls. The
            Customer Account Services (CAS) Customer Service Representative
            Level of Service (LOS), generally measures the percentage of
            calls that get through to a representative among all callers
            seeking to do so. By this measure, as noted, IRS answered 87
            percent of its calls in fiscal year 2004. Since that time, LOS
            has been declining, plummeting to a low of 53 percent in fiscal
            year 2008. In other words, IRS telephone assistors in fiscal
            year 2008 were unable to answer nearly one-half of the calls
            they received.
          In fiscal year 2010, LOS rebounded somewhat to about 74 percent,
            and it is running at about that level so far in fiscal year
            2011.\20\
    ---------------------------------------------------------------------------
        \20\ See IRS FY 2010 Enforcement Results, available at http://
    www.irs.gov/pub/irs-utl/2010_enforcement_results.pdf; IRS, Joint
    Operations Center, Snapshot Reports: Customer Account Services--CAS
    (week ending May 21, 2011).
    ---------------------------------------------------------------------------
          While answering 74 percent of calls is a vast improvement over 53
            percent, it means IRS is still failing to answer 1 out of every
            4 calls it receives from taxpayers who need assistance. Equally
            concerning, among calls that do get answered, the average wait
            time in fiscal year 2010 was nearly 11 minutes,\21\ up from
            about 4\1/2\ minutes in fiscal year 2007.\22\
    ---------------------------------------------------------------------------
        \21\ IRS, Joint Operations Center, Snapshot Reports: Customer
    Account Services--CAS (week ending September 30, 2010).
        \22\ IRS, Joint Operations Center, Snapshot Reports: Customer
    Account Services--CAS (week ending September 30, 2007).
    ---------------------------------------------------------------------------
        Although hard to quantify, the impact of IRS' inability to answer
    taxpayer calls is significant and has considerable downstream
    consequences:
      --When taxpayers call the toll-free line with tax law questions and
            cannot get through, some will just give up and not bother to
            file their tax returns. Others will file inaccurate returns
            that require IRS follow-up action and taxpayer response.
      --When taxpayers receive notices proposing additional tax, many have
            questions and try to reach IRS by phone. If they cannot get
            through, they remain unsure about what to do and some will not
            respond, requiring IRS to take further steps and potentially
            exposing those taxpayers to enforced collection action. Others
            will write letters to IRS, requiring IRS employees in the AM
            function to respond.
        In his book, ``Many Unhappy Returns: One Man's Quest to Turn Around
    the Most Unpopular Organization in America'', former Commissioner
    Charles Rossotti addressed the importance of maintaining a high level
    of service on IRS' toll-free lines:

        ``Apart from the justifiable outrage it causes among honest
    taxpayers, I have never understood why anyone would think it is good
    business to fail to answer a phone call from someone who owed you
    money.'' \23\
    ---------------------------------------------------------------------------
        \23\ Charles O. Rossotti, Many Unhappy Returns: One Man's Quest to
    Turn Around the Most Unpopular Organization in America 285 (2005).

        Let me be clear that I am not being critical of IRS' handling of
    the increased telephone volume--it generally is applying its current
    resources appropriately and is seeking new ways to use those resources
    more productively. However, to meet taxpayers' needs, to improve
    taxpayers' ability to comply with the law and respond to IRS notices,
    and to reduce the aggregate burden on IRS when those who cannot get
    through by phone contact IRS through multiple channels with the same
    question, I believe IRS must be able to answer at least 85 percent of
    taxpayer calls and keep taxpayers on hold for no longer than an average
    of 5 minutes.\24\
    ---------------------------------------------------------------------------
        \24\ For a more detailed discussion of IRS' toll-free telephone
    service, see National Taxpayer Advocate 2009 Annual Report to Congress
    4-16 (Most Serious Problem: IRS Toll-Free Telephone Service Is
    Declining as Taxpayer Demand for Telephone Service Is Increasing).
    ---------------------------------------------------------------------------
          Taxpayer Correspondence.--IRS' responsiveness to taxpayer
            correspondence is also lagging. Some AM employees shuttle back
            and forth between working with paper correspondence (including
            the processing of amended returns) and answering telephone
            calls. When IRS employees dedicated exclusively to answering
            taxpayer calls cannot handle the volumes, AM employees are
            shifted from handling paper correspondence to help out. Not
            surprisingly, as call volumes have increased and AM employees
            have been moved to answer telephone calls, paper correspondence
            inventories have increased as well. The correspondence
            inventory rose from approximately 480,000 at the end of fiscal
            year 2007 to approximately 628,000 at the end of fiscal year
            2010--a 31 percent increase.\25\
    ---------------------------------------------------------------------------
        \25\ IRS, Joint Operations Center, Weekly Enterprise Adjustments
    Inventory Report (weeks ending September 29, 2007 and September 25,
    2010, respectively).
    ---------------------------------------------------------------------------
          To some degree, the combination of poor telephone service and
            slow correspondence processing creates a vicious cycle:
            Taxpayers who cannot get through to IRS by telephone send
            letters, causing more work for employees assigned to paper
            correspondence and leading to correspondence backlogs and
            delays in processing amended returns, while taxpayers who write
            to IRS and do not receive timely responses call IRS to try to
            figure out what happened. IRS requires taxpayers to file their
            returns and respond to notices on a timely basis. Taxpayers
            have a right to expect comparable timeliness of the IRS.
          TAS.--The workload facing my own organization, the TAS, has
            increased substantially in recent years. Although TAS has other
            important responsibilities, we are primarily the case-working
            operation of IRS for taxpayers who are experiencing a
            significant hardship. We assist taxpayers who are experiencing
            a current or imminent financial hardship as a result of an IRS
            action or inaction (e.g., where an IRS levy against a
            taxpayer's paycheck will lead to eviction or a shutoff of
            utilities) or who are experiencing a systemic hardship because
            IRS has not served them on a timely or accurate basis (e.g.,
            where IRS has failed to issue a refund or process a taxpayer's
            response to an audit or collection notice). By statute, the
            Congress has required that TAS make at least one advocate
            available for each State,\26\ and we currently have 74 offices
            that serve taxpayers. Many of you are familiar with our local
            taxpayer advocates, because TAS handles congressionally
            referred taxpayer cases as well.
    ---------------------------------------------------------------------------
        \26\ IRC Sec. 7803(c)(2)(D)(i)(I).
    ---------------------------------------------------------------------------
          TAS's annual case receipts rose from 168,856 in fiscal year 2004
            to 298,933 in fiscal year 2010--an increase of 77 percent. For
            the first half of fiscal year 2011, TAS case receipts have
            risen by an additional 4.3 percent as compared with the first
            half of fiscal year 2010. There are two main drivers of this
            increase. First, the majority of TAS' cases stems from IRS
            compliance actions, and IRS has substantially increased the
            number of these actions in recent years.\27\ Second, TAS
            receives more cases during economic downturns, when more
            taxpayers cannot pay their tax bills and get into trouble with
            IRS.
    ---------------------------------------------------------------------------
        \27\ From fiscal year 2004 to fiscal year 2010, levies rose from
    2,029,613 to 3,606,818; liens rose from 534,392 to 1,096,376; and
    seizures rose from 440 to 605. See IRS FY 2010 Enforcement Results,
    available at http://www.irs.gov/pub/irs-utl/
    2010_enforcement_results.pdf.
    ---------------------------------------------------------------------------
          To date, TAS has managed to handle the increased caseload. After
            several years of declining staffing, the TAS has been able to
            hire three new categories of employees over the past few years
            to assist our case advocates in doing their jobs. We now have
            116 ``intake advocates'', who answer telephone calls, respond
            to simple taxpayer questions, and assist with case-building by
            identifying key facts and issues and requesting necessary
            documentation. We also have 127 ``lead case advocates'', who
            mentor and assist case advocates with unusually challenging
            cases, maintain partial caseloads of their own, and help
            develop the TAS best practices. Finally, we have 18 ``campus
            technical advisors'', who provide technical guidance and
            support on complex cases worked by IRS in each of its 10
            campuses. These additional specialty positions have freed up
            our case advocates to spend more direct time resolving taxpayer
            cases and have given them helpful resources when they get stuck
            on technical issues. The TAS management has also taken steps to
            improve efficiencies.\28\
    ---------------------------------------------------------------------------
        \28\ One important current project is the development and
    deployment of a new, fully integrated system for TAS, which will
    automate many manual operations and integrate case advocacy, systemic
    advocacy, and all other TAS activities. This system, known as the
    Taxpayer Advocate Service Integrated System (TASIS), will replace more
    than 10 stand-alone systems and databases and improve efficiency by
    enabling employees to work across IRS systems, maintain and search case
    files electronically, and handle the intake, screening, and
    distribution of work electronically. TASIS will also enable management
    to ensure a more even distribution of workload because it will provide
    information not merely on the number of cases per case advocate, but
    also on case complexity, required skills, and anticipated time required
    for case completion. Assuming the funding committed to the project is
    not cut or deferred, we anticipate that much of TASIS will be
    operational in 2013.
    ---------------------------------------------------------------------------
          As a result of these measures, I am pleased to report that the
            TAS has continued to perform well. In fiscal year 2010, the TAS
            obtained full relief for taxpayers in 69 percent of our cases
            and partial relief for taxpayers in an additional 5 percent.
            (In other cases, taxpayers generally are not entitled to
            relief.) These levels are consistent with historical norms. In
            addition, ongoing surveys conducted by an independent polling
            firm among taxpayers assisted by the TAS show that customer
            satisfaction stood at 84 percent in fiscal year 2004 and at 85
            percent in fiscal year 2010.
          Despite these positive results, the significant increase in case
            inventories is beginning to strain TAS' capacity. In fiscal
            year 2004, TAS case advocates annually handled an average of
            135 cases, and their caseloads have been steadily increasing
            since that time. In fiscal year 2010, the average annual
            caseload per advocate rose to 240 cases, and in fiscal year
            2011, it is projected to reach 249 cases.\29\
    ---------------------------------------------------------------------------
        \29\ Average annual caseloads represent aggregate TAS case receipts
    divided by the sum of case advocates, intake advocates, and half of
    TAS's lead case advocates. (lead case advocates spend approximately 50
    percent of their time on non-case-specific work, including training and
    nonevaluative reviews).
    ---------------------------------------------------------------------------
          Because cases generally come to TAS only when a taxpayer is
            suffering from a financial hardship or the IRS' regular
            processes have not worked as they should, the TAS as a
            practical matter is often a taxpayer's last resort. As the IRS'
            ``safety net'' for taxpayers, TAS has had a policy of assisting
            all taxpayers who meet our case-acceptance criteria since the
            Congress created our organization in 1998. If the imbalance
            between our resources and the demand for our services widens
            much further, however, we will have no choice but to decline to
            accept certain categories of cases, leaving taxpayers to fend
            for themselves. I have served as the National Taxpayer Advocate
            for 10 years, and this is the first time I have felt compelled
            to sound this alarm. But I am deeply concerned that if TAS is
            subject to spending freezes and does not have adequate
            resources, we will be forced to turn away cases and taxpayers
            will suffer significant hardships as a consequence.
          Low-income Taxpayer Clinics (LITCs).--In 1998, the Congress
            established a grant program to fund LITCs.\30\ LITCs primarily
            represent low-income taxpayers in Federal tax controversies
            with IRS for free or for a nominal charge.\31\ For fiscal year
            2010, the Congress provided $10 million for LITCs.
    ---------------------------------------------------------------------------
        \30\ See IRC Sec. 7526.
        \31\ Some LITCs provide tax education and outreach for taxpayers
    who speak English as a second language.
    ---------------------------------------------------------------------------
          Largely because of the recession and consequent job losses, LITC
            case inventories have risen substantially. LITCs collectively
            worked 16,374 cases in 2008 and 21,801 cases in 2009, an
            increase of 33 percent. During the first 6 months of 2010,
            LITCs worked 17,293 cases--more than the number they handled
            during all of 2008. Low-income taxpayers who face IRS audits or
            collection action have few alternative options for assistance.
            With roughly a doubling of cases in the last 2 years, it is
            critical that LITCs receive sufficient resources to deal with
            these caseloads.
          In its fiscal year 2011 budget recommendation, the IRS Oversight
            Board recommended a $2.3 million initiative to expand coverage
            of the LITC program. The Oversight Board noted:

            ``The current economic environment presents significant
            challenges as the number of taxpayers who cannot pay their
            liabilities is increasing while available assistance from tax
            professionals is declining.

            ``Taxpayers who want to comply with their tax obligations and
            responsibilities must have access to information, assistance,
            and, when appropriate, representation. Low-income taxpayers who
            cannot afford representation can be at a disadvantage in
            resolving tax disputes with the IRS. For example, a recent TAS
            research study found that taxpayers who were represented in
            Earned Income Tax Credit (EITC) audits by attorneys,
            accountants, enrolled agents, or even unenrolled return
            preparers, were nearly twice as likely to receive the EITC, and
            received almost twice as much EITC, as taxpayers who were
            unrepresented. Thus, LITCs ensure that low-income taxpayers
            receive the correct outcome in controversies with the IRS and
            pay the correct tax amount.'' \32\
    ---------------------------------------------------------------------------
        \32\ IRS Oversight Board, FY 2011 IRS Budget Recommendation 23-24
    (March 2010).

          The administration's proposed fiscal year 2012 budget would
            reduce funding for LITCs by $500,000. I believe the LITCs need
            additional funding to provide assistance to low-income
            taxpayers whom IRS has targeted for enforcement action.
    Recommendations
        Both to improve tax compliance and to meet the needs of the
    taxpaying public, I recommend that the Congress provide additional
    funding for taxpayer-service activities, including increased funding
    for LITCs.
        To enable the IRS to better meet the needs of small business
    taxpayers and tax-exempt organizations, I recommend that the Congress
    direct the IRS to conduct comprehensive TAB-like research studies of
    those populations.
     irs budget structure does not accurately portray the irs' activities
             and probably overstates spending for taxpayer service
        As discussed above, IRS since fiscal year 2006, has been proposing
    its budget by classifying most activities as either ``taxpayer
    services'' or ``enforcement''. For a number of reasons, including the
    availability of program integrity allocation adjustments for
    enforcement initiatives (discussed below) and how IRS approaches a
    program, the classification of an activity as taxpayer service or
    enforcement has consequences.
        One threshold challenge in dividing the budget in this way is that
    there is no universal agreement on where to draw the line between
    service and enforcement. For the most part, I think people view
    ``taxpayer service'' as including IRS activities that assist them in
    voluntarily complying with their tax obligations. I think most people
    view enforcement as including activities IRS undertakes to collect tax
    liabilities that have not been fully and timely paid.
        The current budget follows what I view as a fairly arbitrary
    division of IRS' activities into the taxpayer services and enforcement
    buckets. A few examples will illustrate:
          Processing Tax Returns.--The budget treats the processing of tax
            returns entirely as a taxpayer service. In a response included
            in the National Taxpayer Advocate's 2010 Annual Report to
            Congress, IRS wrote: ``The millions of taxpayers who each year
            voluntarily file and pay their taxes likely would not view the
            processing of their refunds as anything other than a service
            activity.'' \33\ The thinking behind this statement is not
            self-evident. It is true, as IRS has pointed out, that refunds
            are issued to many taxpayers in the course of returns
            processing, and it is understandable that taxpayers receiving a
            refund may see that activity as a service.
    ---------------------------------------------------------------------------
        \33\ National Taxpayer Advocate 2010 Annual Report to Congress 65-
    66 (Most Serious Problem: The Wage & Investment Division Is Tasked With
    Supporting Multiple Agency-Wide Operations, Impeding Its Ability to
    Serve Its Core Base of Individual Taxpayers Effectively).
    ---------------------------------------------------------------------------
          It is also true, however, that taxpayers filing returns with
            balances due are required to remit payment with their returns
            and that IRS uses the information provided on all tax returns
            to help it determine which taxpayers to audit. As I observed
            only somewhat facetiously in my report, if collecting tax
            payments and facilitating audit selection are the types of
            services the IRS provides, I believe most taxpayers would
            choose to take a pass. In my view, returns processing is best
            classified as neither service nor enforcement. It is simply an
            overhead or support function that enables the IRS to collect
            taxes.
          AM.--Funding for the AM program, which includes the toll-free
            phone lines and correspondence processing, is included in the
            taxpayer services account, even though most of the AM budget is
            allocated toward working with taxpayers by phone or letter
            after IRS has proposed a tax adjustment. If IRS generates a
            notice telling a taxpayer he or she has under-reported income
            and owes additional tax, it is far from clear that the follow-
            up costs should be viewed as a ``service'' rather than
            ``enforcement''.
          Field Assistance.--Funding for the Field Assistance Program,
            which includes IRS walk-in sites, is also included in the
            taxpayer services account. As with AM, more than half the work
            performed in the walk-in sites relates to account and notice
            work, so the decision to classify these activities as services
            is questionable.
          Small Business/Self-employed Operating Division.--The Small
            Business/Self-Employed Operating Division (SB/SE) is tasked
            with serving all small businesses and self-employed taxpayers.
            For reasons I have described above, outreach and education are
            particularly important for this population. First-time business
            owners face a daunting array of employment tax requirements in
            addition to recordkeeping and other business income tax
            requirements. Growing businesses may not recognize tax issues
            that arise as they become more successful. Businesses
            experiencing financial difficulties may not understand that
            ignoring tax issues can further impair their economic viability
            in the short and long terms. Yet SB/SE is funded almost
            exclusively from the enforcement account. Only 1 percent of its
            funding comes from the taxpayer services account.\34\
    ---------------------------------------------------------------------------
        \34\ IRS, Integrated Financial System, Status of Available Funds
    Report (FY 2010).
    ---------------------------------------------------------------------------
          TAS and Appeals.--Under the current budget structure, the TAS is
            funded entirely under the taxpayer services account, while the
            Office of Appeals is funded entirely under the enforcement
            account. I am discussing TAS and appeals together because they
            share similar characteristics. Neither function initiates
            contact with taxpayers. Rather, both functions become involved
            in a case when a taxpayer is dissatisfied with actions another
            IRS function has taken and seeks us out for assistance. This
            similarity raises questions about the underlying rationale for
            the difference in budget classification.
          There are other reasons to question the distinction as well. Most
            important, sound accounting principles generally require that
            revenues be matched with the expenses that generate them. If
            IRS enforcement functions propose and collect additional tax
            amounts, downstream costs associated with the revenue IRS
            receives arguably should be treated as part of the costs of
            enforcement. If IRS treats revenue generated by the collection
            function as ``enforcement'' revenue, but apportions the costs
            of working with the affected taxpayers to the taxpayer services
            account--as it currently does by treating TAS as a service
            expense--the net amount of IRS enforcement revenue will be
            overstated, perhaps considerably so. This will result in an
            inflated return on investment (ROI) on enforcement spending and
            has the potential to distort funding decisions.
          In addition, the Office of Appeals is constantly seeking to
            reassure skeptical taxpayers and practitioners that, despite
            its placement within IRS, it is independent from the IRS
            examination and collection functions and will provide taxpayers
            with an impartial hearing. The decision to fund Appeals
            entirely from the enforcement account along with the
            examination and collection functions may undermine appeals'
            effort to persuade outsiders that it is not simply another IRS
            enforcement function.
          With respect to the foregoing examples, there is no objectively
            ``correct'' answer, so the existing budget categories are not
            necessarily wrong. But neither are they necessarily right, and
            that is the source of my concern. Using the terms ``taxpayer
            services'' and ``enforcement'' implies a bright-line
            distinction that cannot accurately be drawn. In that sense, the
            labels are arbitrary and somewhat misleading. In addition,
            because of the significant number of programs placed within the
            taxpayer services account that do not clearly belong there, I
            believe the budget may substantially overstate the amount of
            funding provided for programs that a layman would consider to
            be taxpayer services. This is significant as a matter of truth
            in packaging because it may paint an exaggerated portrait of
            how much emphasis IRS places on taxpayer service activities. As
            discussed below, it is also significant because programs
            assigned to the enforcement account may have more funding
            flexibility due to the operation of program integrity
            allocation adjustments.
    Recommendations
        I recommend the following steps:
      --Move the funding associated with returns processing into the
            operations support account.
      --Divide the funding associated with AM and field assistance
            activities between the taxpayer services account and the
            enforcement account based on the underlying activities to which
            they relate.
      --Divide funding for TAS between the taxpayer services account and
            the enforcement account based on the percentage of TAS cases
            that are service-related and the percentage of TAS cases that
            are enforcement-related.
      --Consider for the longer term devising a set of budget categories
            that do away with the artificial distinction between taxpayer
            service and enforcement.
    the ``program integrity allocation adjustment'' mechanism has been used
         in a manner that enables irs to receive extra funding for its
      enforcement activities but not for its taxpayer service activities,
     despite the fact that taxpayer service activities also contribute to
                                   compliance
        During the last few years, the IRS budget has utilized a mechanism
    that makes it relatively easy to provide increases for enforcement
    spending, but the procedure is not used for the taxpayer services
    account. Under this mechanism, known as a ``program integrity
    allocation adjustment,'' new funding appropriated for IRS enforcement
    programs generally does not count against otherwise applicable spending
    ceilings provided:
      --the IRS's existing enforcement base is fully funded; and
      --a determination is made that the proposed additional expenditures
            will generate a ROI of greater than 1:1 (i.e., the additional
            expenditures will reduce the deficit on a net basis).
        These conditions reflect the fact that IRS is able to project the
    direct ROI of its enforcement activities--it can measure to the dollar
    the amounts collected by its examination, collection, and document-
    matching functions--but faces a much harder task in measuring the ROI
    of taxpayer services. As discussed above, it seems intuitively clear
    that the ROI of taxpayer service activities is greater than 1:1. Basic
    services like publishing tax forms, providing guidance, and answering
    taxpayer questions are essential for enabling taxpayers to file returns
    and enabling the IRS to collect revenue. Yet because the IRS cannot
    quantify either the overall ROI of taxpayer service spending or the ROI
    of specific taxpayer service initiatives, taxpayer services spending is
    not currently considered eligible for program integrity allocation
    adjustments.
        As a consequence, the IRS has been able to request larger increases
    each year for enforcement than for taxpayer services, and it is
    increasingly becoming more of an enforcement agency with a relatively
    smaller focus on taxpayer service. If the proposed fiscal year 2012
    budget is adopted without change, as noted above, spending for the
    enforcement account will have increased by 15.4 percent while spending
    for the taxpayer services account will have declined by 0.3 percent
    since fiscal year 2006 on an inflation-adjusted basis.\35\ In essence,
    the 15.4 percent increase in enforcement is entirely attributable to
    program integrity allocation adjustments. Under the proposed fiscal
    year 2012 budget, the IRS would receive an additional $936 million in
    enforcement funding through this mechanism, which amounts to 16 percent
    of the $5,966,619,000 enforcement total.
    ---------------------------------------------------------------------------
        \35\ Compare Department of the Treasury, FY 2012 Budget-in-Brief
    with Department of the Treasury, FY 2008 Budget-in-Brief. (The fiscal
    year 2006 budget was adopted using a different budget structure. The
    proposed fiscal year 2008 budget shows the enacted fiscal year 2006
    totals as translated into the current budget structure.) Inflation
    adjustments were made using the Bureau of Labor Statistics inflation
    calculator, available at http://data.bls.gov/cgi-bin/cpicalc.pl.
    ---------------------------------------------------------------------------
        Moreover, the recent trend is likely to continue. The
    administration's fiscal year 2012 budget proposal contains spending
    projections for future years. Over the next 5 years (from fiscal year
    2012 to fiscal year 2016), it projects that enforcement spending will
    rise by another 28 percent while taxpayer services spending will
    slightly decline.\36\
    ---------------------------------------------------------------------------
        \36\ Budget of the United States Government: Analytical
    Perspectives, Supplemental Materials Fiscal Year 2012: Federal Programs
    by Agency and Account, at 317-318, available at http://
    www.whitehouse.gov/sites/default/files/omb/budget/fy2012/assets/
    33_1.pdf. Taxpayer service spending is shown on page 317 (see line
    labeled ``Taxpayer Services: Appropriations, discretionary . . .
    803''). Enforcement spending is the sum of the line on page 317 labeled
    ``(Federal law enforcement activities): Appropriations, discretionary .
    . . 751'' and the line on page 318 labeled ``(Central fiscal
    operations): Appropriations, discretionary . . .  803.''
    ---------------------------------------------------------------------------
        I am deeply concerned about the widening resource gap between the
    agency's taxpayer service and enforcement programs. First, for reasons
    discussed in the prior section, I think the distinction between service
    and enforcement can be highly artificial and arbitrary. To provide
    substantial additional funding to any program that gets classified as
    ``enforcement'' while reducing or holding flat spending for any program
    that gets classified as ``taxpayer service'' will not result in a
    balanced agency and may even encourage game-playing to classify
    priority programs as enforcement. Moreover, the classification of a
    program as ``enforcement'' rather than ``service'' has significant
    implications for the way IRS treats taxpayers.
        Second, as I have also discussed, it is widely acknowledged that
    taxpayer service contributes significantly to compliance. In some
    cases, service may contribute even more than enforcement to improved
    compliance. Because IRS currently is unable to compute an ROI for
    service activities, however, service activities by themselves do not
    qualify for allocation adjustments.
        Third, the Congress has given IRS an increasing number of social
    and economic benefit programs to administer, and as I will discuss
    below, both of these types of benefits programs typically require more
    service.
        The use of program integrity allocation adjustments has enabled IRS
    to receive more funding than would otherwise be the case, and I think
    that is positive. But I strongly encourage IRS and this subcommittee to
    consider ways to modify the way allocation adjustments are used so that
    taxpayer needs are met and IRS remains a balanced agency. One
    possibility is to define new compliance initiatives more broadly, so
    that they include both an enforcement component and a service
    component. Because the projected ROI of some types of enforcement
    initiatives is high, a more broadly constructed initiative could still
    produce an ROI of greater than 1:1 (i.e., the service components would
    piggyback on the high-ROI enforcement activity). That could satisfy the
    requirements for an allocation adjustment while giving the agency more
    flexibility to meet taxpayer needs and improve compliance in obvious
    yet currently immeasurable ways.
    Example of a Broader Compliance Initiative
        Assume the IRS is planning a new enforcement initiative to improve
    compliance among small business taxpayers. The initiative will cost $50
    million and is projected to produce an ROI of 6:1 (or $300 million in
    additional revenue). IRS intends to request $50 million for this
    initiative as a program integrity allocation adjustment.
        Assume further that IRS has identified taxpayer service activities
    that would also improve small business compliance, such as new or
    additional types of outreach and education. The cost of the service
    initiative would be $25 million, but IRS cannot quantify the ROI.
        If IRS defines new compliance initiatives more broadly to include
    service activities, it could package the enforcement measures with the
    outreach and education measures and request $75 million for the
    combined initiative as an allocation adjustment. The ROI would still be
    positive (the $75 million cost and projected revenue of $300 million
    would produce an ROI of 4:1). Most important, IRS would be operating a
    more integrated, effective, and balanced compliance program.
    Recommendation
        I recommend that IRS and the Congress consider ways to broaden the
    use of program integrity allocation adjustments so that compliance
    initiatives include taxpayer service components.
     irs desperately needs to conduct or commission better research so it
      can allocate its service and enforcement resources more efficiently
        IRS would be able to allocate its resources more effectively if it
    had a better understanding of the causes of noncompliance and could
    test alternative compliance approaches. At present, IRS has a tendency
    to treat all noncompliance as willful and to treat taxpayers who do not
    fully comply as ``bad'' taxpayers.
        If all noncompliance reflected a willful decision by taxpayers to
    cheat the Government, a compliance approach that emphasizes hard-core
    enforcement measures might make sense. But much, if not most,
    noncompliance occurs for different reasons. In some cases, taxpayers do
    not know the rules. In some cases, taxpayers find complying with the
    rules excessively burdensome or confusing. In other instances,
    significant life events arise (e.g., illness, unemployment, or divorce)
    and taxpayers do not file returns. (This cuts both ways from a revenue
    standpoint. Some taxpayers who owe tax do not file returns, but many
    taxpayers who are due refunds each year also do not file returns and
    thus overpay their taxes.) In still other cases, taxpayers are too
    intimidated to file returns. For example, an individual who loses his
    job and cannot afford to pay may decide against filing a return because
    he fears what may happen if he reports a tax liability and cannot pay
    it.
        In large part, IRS' one-size-fits-all approach reflects the absence
    of data on which to base better resource-allocation decisions. It bears
    emphasizing that ``direct enforcement revenue'' constitutes only about
    2 percent of the revenue IRS collects.\37\ Ninety-eight percent of the
    revenue IRS collects is paid voluntarily due to a combination of its
    taxpayer service programs and the indirect, deterrent effect of its
    enforcement activities. However, IRS does not have adequate data to
    determine the relative contribution to compliance of taxpayer service
    and enforcement, let alone which components of taxpayer service and
    enforcement are most effective. Without these critical pieces of
    information, resource-allocation decisions are necessarily made more on
    the basis of best guesses and hunches than empirical evidence.
    ---------------------------------------------------------------------------
        \37\ In fiscal year 2010, the IRS collected $2.345 trillion. See
    IRS Data Book, FY 2010, Table 1. The amount of enforcement revenue it
    collected was $57.6 billion. See IRS FY 2010 Enforcement Results,
    available at http://www.irs.gov/pub/irs-utl/
    2010_enforcement_results.pdf.
    ---------------------------------------------------------------------------
        I suggest that the Congress consider directing IRS to undertake
    additional research studies, perhaps utilizing the expertise of outside
    experts, to improve the accuracy of its ROI estimates for various
    categories of work, especially taxpayer service and the indirect effect
    of enforcement actions. IRS should also improve its methods of
    verifying, retrospectively, the marginal ROI it has achieved for each
    category of work. ROI estimates should include costs relating to the
    downstream consequences of the various categories of IRS work,
    including increased phone calls and correspondence, Appeals
    conferences, TAS cases, and Tax Court litigation.
        I acknowledge that developing reasonably accurate modeling is a
    significant challenge and will require a commitment of resources.
    Nonetheless, I have recommended in the past and continue to believe
    that this information will aid IRS enormously in making resource-
    allocation decisions and will provide Members of Congress with
    additional information on which to base future funding decisions.\38\
    ---------------------------------------------------------------------------
        \38\ The congressional budget rules currently prohibit the
    Congressional Budget Office or the Office of Management and Budget from
    treating changes in discretionary appropriations to the IRS as giving
    rise to scorable increases in tax receipts. See House Report 101-964
    (1990). See also Office of Management and Budget, OMB Circular No. A-
    11, Part 8, Appendix A, Principle 14 (2006). Because changes to IRS
    funding levels undoubtedly have an impact on tax collections, this
    prohibition seemingly reflects the practical difficulty of devising
    accurate estimates. Yet accurate estimates would be helpful to the
    Congress, and we believe the IRS should make developing better
    estimates a priority objective.
    ---------------------------------------------------------------------------
    Recommendation
        I recommend that the Congress direct IRS to undertake additional
    research studies, perhaps utilizing the expertise of outside experts,
    to improve the accuracy of its ROI estimates for various categories of
    work, especially taxpayer service and the indirect effect of
    enforcement actions.
    irs should revise its mission statement to explicitly acknowledge that
    its traditional role as the tax collector has expanded in recent years
     so that it is now both collecting taxes and administering social and
                           economic benefit programs
        Historically, IRS' mission has been to collect taxes imposed by the
    Congress to fund Federal spending. In recent years, however, the
    Congress has increasingly been using the tax code to provide economic
    incentives or social benefits for taxpayers.
        In 1975, the Congress enacted the Earned Income Tax Credit, which
    allows low-income, working taxpayers to receive, through the tax code,
    Government payments that exceed their income tax liabilities. In 2008,
    the Congress directed IRS to make Economic Stimulus Payments. Also
    beginning in 2008, the Congress made available the first of three
    iterations of the First-Time Homebuyer Credit. Beginning in 2009, the
    Congress provided the Making Work Pay Credit. Then last year, the
    Congress enacted the Hiring Incentives to Restore Employment Act, which
    provides incentives for small businesses to hire additional workers,
    and the Patient Protection and ACA, which contains numerous provisions
    that will require interaction between IRS and businesses or
    individuals.
        In many cases, there are compelling reasons for administering these
    programs through the tax code. Absent adequate planning, however, I am
    concerned that directing a law enforcement agency to administer such
    programs could be problematic. While enforcement measures are required
    to prevent inappropriate claims in benefits programs, the overriding
    objective of agencies that administer benefits programs has
    traditionally been to help as many eligible persons qualify for the
    benefits as possible. That requires extensive outreach and even working
    one-on-one with potentially eligible individuals.
        There are significant differences between benefits agencies and
    enforcement agencies in terms of culture, mind set, and the skill sets
    and training of their employees. Benefits agencies like the Social
    Security Administration and the Department of Veterans Affairs, despite
    some shortcomings, are primarily trying to get to yes--to help as many
    eligible persons qualify for benefits as possible. Enforcement agencies
    are more in the business of saying no. As IRS prepares to administer
    large portions of the healthcare legislation, including approving
    claims by low-income persons for healthcare tax credits and imposing a
    penalty tax on those who are required to purchase health insurance but
    fail to do so, I believe IRS should hire and train a new category of
    caseworkers--employees with social welfare-type backgrounds or similar
    training who will work one-on-one with taxpayers to resolve legitimate
    disagreements, instead of merely sending out notices saying, in effect,
    ``you owe us.''
        In addition, IRS will require more funding to perform effectively
    both its traditional tax collection role and its expanding role as a
    benefits administrator. I am convinced that with adequate planning and
    funding, IRS can do the job. But if IRS does not recognize the
    importance of improving its benefits administration capacity or does
    not receive adequate funding, there are likely to be significant
    violations of taxpayer rights and significant taxpayer burden. In this
    regard, the trend toward increased funding for IRS' enforcement account
    relative to the taxpayer services account, as discussed above, is
    concerning and should be carefully evaluated.
        To help ensure that IRS focuses on these challenges and that its
    needs are recognized in the budget process, I believe IRS should revise
    its mission statement to make explicit that its mission is both to
    collect taxes and to deliver economic and social benefits authorized by
    the Congress. In this connection, the IRS should:
      --revise Revenue Procedure 64-22 to include the IRS'responsibility as
            a benefits administrator;
      --create a new program office and deputy commissioner position to
            provide strategic direction for all benefits programs; and
      --conduct a comprehensive evaluation of the administration of
            previous and existing benefits programs to aid in the planning
            and implementation of future programs.
    Recommendation
        I recommend that the IRS revise its mission statement to make
    explicit that its mission is both to collect taxes and to deliver
    economic and social benefits authorized by the Congress.
                                   conclusion
        In this statement, I have attempted to describe six issues that
    this subcommittee may wish to consider. Some require immediate
    attention, while others would benefit from consideration over the
    longer term. In the near term, my overriding concern relates to the
    overall funding of the IRS. As the Nation's tax collector, the IRS is
    part of the solution to the problem of budget deficits, not part of the
    problem. There has been considerable discussion about freezing all
    domestic discretionary spending, which would presumably include funding
    for the IRS. I believe freezing or restricting IRS funding--either for
    taxpayer service activities or for enforcement activities--would be a
    mistake and would undermine the goal of closing the tax gap and
    reducing the deficit. I strongly encourage this subcommittee and the
    Congress to find a way to exempt the IRS from any such cuts.
                                     ______

      Prepared Statement of Paul Cherecwich, Jr., Chairman, IRS Oversight
                       Board, Department of the Treasury
        The Internal Revenue Service (IRS) Oversight Board thanks Chairman
    Durbin, Ranking Member Moran, and members of the subcommittee for the
    opportunity to present the Oversight Board's views on the
    administration's fiscal year 2012 IRS budget request.
        This statement presents the Board's recommendations for the IRS'
    fiscal year 2012 budget and why the Board believes this level of
    funding is needed to meet the IRS needs. Created as part of the IRS
    Restructuring and Reform Act of 1998, the Oversight Board's
    responsibilities include overseeing the IRS in its administration,
    management, conduct, direction, and supervision of the execution and
    application of internal revenue laws. The Board is also responsible for
    ensuring that the IRS' organization and operations allow the agency to
    carry out its mission.
        The Board has a responsibility to ensure that the IRS' budget and
    the related measured contained in the performance budget support the
    IRS Strategic Plan 2009-2013. In addition to this statement, the Board
    developed a special report in which it explains the detailed rationale
    for its budget recommendations. The report is available online at
    www.irsoversightboard.treas.gov.
              fiscal year 2012 irs budget recommendations summary
        The IRS Oversight Board recommends a fiscal year 2012 IRS budget of
    $13.342 billion, an increase of $1.2 billion more than the fiscal year
    2010 enacted IRS budget, and an increase of $709 million more than the
    President's fiscal year 2011 IRS budget request.
        The Board's fiscal year 2012 recommendation is substantially higher
    than those made in the IRS fiscal year 2010 and fiscal year 2011 budget
    recommendations due in part to the cost to implement provisions of the
    Patient Protection and Affordable Care Act (ACA), which totals $473
    million in the Board's fiscal year 2012 IRS budget recommendation.
    Tables 1 and 2 show more information on the Board's budget
    recommendations. Table 1 shows the program initiatives or increases the
    Board is recommending, and Table 2 shows the Board's recommendations
    budget by account. The Board has also included an appendix to this
    statement that summaries new tax law provisions that have placed
    additional demands on IRS resources during the 2007-2010 filing
    seasons.
        The Board's foremost priority within its fiscal year 2012 budget
    recommendation is the $333.6 million in total funding recommended for
    the Business Systems Modernization (BSM) account, along with an
    associated $52 million within the operations support account for
    information technology infrastructure to support ongoing BSM
    maintenance.
        The Board's second-highest priority is funding of taxpayer service
    that allows for the restoration of an 80 percent level of service (LOS)
    on IRS toll-free telephone assistance during fiscal year 2012. The
    Board believes that additional funding is needed to improve toll-free
    service, as major changes to the tax laws in recent years have
    contributed to a substantial increase in the number of calls to the IRS
    and a corresponding drop in the LOS. The Board notes that it foresees a
    greater demand for toll-free assistance in the coming years, driven by
    a proliferation of new tax provisions.

      TABLE 1.--IRS OVERSIGHT BOARD RECOMMENDED FISCAL YEAR 2012 IRS BUDGET
    ------------------------------------------------------------------------
                                                                  Amount
    ------------------------------------------------------------------------
    Fiscal year 2010 enacted budget........................     $12,146,123
                                                            ================
    Fiscal year 2011 annualized continuing resolution Level     $12,146,123
    Maintaining current levels.............................         $85,754
    Efficiencies/savings...................................       ($189,957)
    Base reinvestment: consolidate submission processing             $1,486
     Atlanta...............................................
    Adjustment fiscal year 2011 President's policy level...        $401,665
                                                            ----------------
          Fiscal year 2012 adjusted base...................     $12,445,071
                                                            ================
    Improve taxpayer service...............................         $81,307
    IRS.gov improvements...................................         $33,000
                                                            ----------------
    Taxpayer service initiatives...........................        $114,307
                                                            ================
    Increase international service and enforcement.........         $72,596
    Increase collection coverage...........................         $52,000
    Implement merchant card and basis reporting............         $35,730
    Increase coverage to address tax law changes and other          $96,718
     compliance issues.....................................
    Ensure accurate delivery of tax credits................        $260,293
    Administer new statutory reporting requirements........         $58,505
    Leverage return preparer...............................         $16,600
    Address appeals workload growth........................          $9,100
    Implement uncertain tax position (UTP) reporting                 $4,129
     requirements..........................................
                                                            ----------------
    Enforcement initiatives................................        $605,671
                                                            ================
    Enhance security and disaster recovery.................         $35,000
    Update integrated financial system.....................         $27,500
    Leveraging data to improve compliance..................          $1,400
    Enhance physical security for employees................         $31,057
    Implement individual coverage requirement and employer          $62,477
     responsibility payments...............................
    Attract, retain, and develop a quality workforce.......         $20,000
                                                            ----------------
    Infrastructure initiatives.............................        $177,434
                                                            ================
    BSM initiative: continue migration from aging tax        ...............
     administration system.................................
    Continue migration from aging tax administration system  ...............
                                                            ================
    Health Insurance Tax Credit Administration.............  ...............
                                                            ----------------
          Total Oversight Board budget.....................     $13,342,483
                                                            ================
    President's fiscal year 2012 budget....................     $13,283,907
                                                            ================
    Increase over President's budget.......................         $58,576
                                                            ================
    Percentage increase over President's budget............             0.4
    ------------------------------------------------------------------------

                                          TABLE 2.--IRS OVERSIGHT BOARD RECOMMENDED FISCAL YEAR 2012 BUDGET BY ACCOUNT
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                 Health
                                                            Taxpayer                         Operations                      Insurance Tax
                                                            service        Enforcement        support            BSM             Credit           Total
                                                                                                                             Administration
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    Fiscal year 2010 enacted budget...................      $2,278,830       $5,504,000       $4,083,884         $263,897          $15,512      $12,146,123
                                                       =====================================================================================================
    Fiscal year 2011 annualized continuing resolution       $2,278,830       $5,504,000       $4,083,884         $263,897          $15,512      $12,146,123
     level............................................
                                                       =====================================================================================================
    Maintaining current levels........................         $12,908          $30,691          $41,755             $168             $232          $85,754
    Efficiencies/savings..............................        ($41,333)        ($21,996)       ($124,440)         ($1,026)         ($1,162)       ($189,957)
    Base reinvestment: consolidate submission                   $1,486   ...............  ...............  ...............  ...............          $1,486
     processing Atlanta...............................
    Adjustment fiscal year 2011 President's policy             $23,254         $242,275          $10,128         $122,561           $3,447         $401,665
     level............................................
                                                       =====================================================================================================
    Taxpayer service initiatives......................         $44,078   ...............         $70,229   ...............  ...............        $114,307
                                                       -----------------------------------------------------------------------------------------------------
    Improve taxpayer service..........................         $44,078   ...............         $37,229   ...............  ...............         $81,307
    IRS.gov improvements..............................  ...............  ...............         $33,000   ...............  ...............         $33,000
                                                       =====================================================================================================
    Enforcement initiatives...........................         $25,910         $209,668         $370,093   ...............  ...............        $605,671
                                                       -----------------------------------------------------------------------------------------------------
    Increase international service and enforcement....  ...............         $48,363          $24,233   ...............  ...............         $72,596
    Increase collection coverage......................          $2,201          $30,275          $19,524   ...............  ...............         $52,000
    Implement merchant card and basis reporting.......         $10,475          $17,495           $7,760   ...............  ...............         $35,730
    Increase coverage to address tax law changes and            $7,229          $33,936          $55,553   ...............  ...............         $96,718
     other compliance issues..........................
    Ensure accurate delivery of tax credits...........          $4,946          $49,083         $206,264   ...............  ...............        $260,293
    Administer new statutory reporting requirements...          $1,059           $5,061          $52,385   ...............  ...............         $58,505
    Leverage return preparer..........................  ...............         $14,240           $2,360   ...............  ...............         $16,600
    Address appeals workload growth...................          $7,450           $1,650           $9,100
    Implement UTP reporting requirements..............  ...............          $3,765             $364   ...............  ...............          $4,129
                                                       =====================================================================================================
    Infrastructure initiatives........................            $500           $7,911         $169,023   ...............  ...............        $177,434
                                                       -----------------------------------------------------------------------------------------------------
    Enhance security and disaster recovery............  ...............  ...............         $35,000   ...............  ...............         $35,000
    Update integrated financial system................  ...............  ...............         $27,500   ...............  ...............         $27,500
    Leveraging data to improve compliance.............  ...............  ...............          $1,400   ...............  ...............          $1,400
    Enhance physical security for employees...........  ...............          $3,911          $27,146   ...............  ...............         $31,057
    Implement individual coverage requirement and       ...............  ...............         $62,477   ...............  ...............         $62,477
     employer responsibility payments.................
    Attract, retain, and develop a quality workforce..            $500           $4,000          $15,500   ...............  ...............         $20,000
                                                       =====================================================================================================
    BSM initiative: continue migration from aging tax   ...............  ...............         $52,000         ($52,000)  ...............  ...............
     administration system............................
                                                       =====================================================================================================
    HITCA.............................................  ...............  ...............  ...............  ...............  ...............  ...............
                                                       -----------------------------------------------------------------------------------------------------
          Total.......................................      $2,345,633       $5,972,549       $4,672,672         $333,600          $18,029      $13,342,483
    --------------------------------------------------------------------------------------------------------------------------------------------------------

        Appendix 1, taken from the Board's Annual Report to Congress 2010,
    provides a summary of major legislative and administrative tax
    provisions enacted in recent years and the challenges that each
    presented to tax administration during the 2007 through 2010 filing
    seasons. In addition to describing the impacts associated with
    implementing these provisions, the appendix provides a short assessment
    of the IRS' performance in implementing many of them made by either the
    Government Accountability Office (GAO) or the Treasury Inspector
    General for Tax Administration (TIGTA).
        The appendix highlights the many challenges the IRS faced in
    implementing new tax provisions that affected the last four filing
    seasons. Expanding taxpayer service and enforcement programs to ensure
    these provisions were understood and being claimed properly by
    taxpayers put a significant demand on IRS resources.
        The Board's IRS budget recommendation also acknowledges the wide
    range of new responsibilities under the ACA, such as the administration
    of new tax credits and additional information reporting.
    Resources Needed To Implement the ACA
        The detail in Table 3 makes the fiscal year 2012 budget needs for
    implementing the ACA fully transparent. The IRS has been tasked with a
    wide range of new responsibilities under the ACA, including the
    requirements that it:
      --Administer new tax credits for individuals and businesses;
      --Collect a new excise tax on tanning services and a new fee on
            certain businesses engaged in the manufacturing and importing
            of prescription drugs;
      --Implement expanded exemption requirements on charitable hospitals;
            and
      --Gather, process, and share additional information reports.\1\
    ---------------------------------------------------------------------------
        \1\ Enactment of Public Law 112-9 on April 14, 2011 repeals certain
    information reporting required by the ACA and reduces the funding
    needed for ACA implementation by $23.3 million and lowers the entire
    request by that amount.
    ---------------------------------------------------------------------------
        The Board concurs with the President's budget request as to what
    the IRS funding needs are in fiscal year 2012 to responsibly implement
    the ACA as currently enacted. As shown in Table 3, the fiscal year 2012
    funding needed to implement the ACA is $473 million with a staffing
    level of 1,269 full-time equivalents (FTEs). The Board's budget
    recommendation identifies the funds the IRS needs to provide the
    necessary assistance, enforcement presence, and supporting systems
    infrastructure to carry out the ACA requirements in an effective
    manner.
        Of the total dollar funding needed in fiscal year 2012 for the ACA,
    nearly 83 percent is in the operations support account, much of which
    is for IRS staff, contractors, hardware, and software needed to build
    new IT systems and to modify existing tax processing systems to
    accommodate the new ACA provisions.
                      oversight board's budget priorities
        The Board's budget recommendation for fiscal year 2012 is
    approximately $59 million higher than the President's request of
    $13.284 billion, a difference of 0.4 percent. The Board firmly believes
    that its fiscal year 2012 IRS budget recommendation is the minimum
    imperative for strong and responsible tax administration. The Board's
    recommendation calls for an overall IRS appropriation in fiscal year
    2012 of $2.35 billion for the taxpayer service account; $5.97 billion
    for the Enforcement account; $4.67 billion for the operations support
    account; $333.6 million for the BSM account; and $18 million for the
    Health Insurance Tax Credit Administration (HITCA) account.
        In the view of the Board, its budget recommendation reflects a
    proper balance between taxpayer service and tax law enforcement, funds
    strategic investments to reduce the tax gap and replace antiquated IRS
    tax processing systems, and furthers other strategic objectives of tax
    administration such as greater leveraging of Internet capabilities.

                                                                           TABLE 3.--ACA-RELATED FUNDING AND FTE BY INITIATIVE
                                                                                         [Dollars in thousands]
    ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                             Taxpayer service                   Enforcement                 Operations support                     Total
                                                                     -------------------------------------------------------------------------------------------------------------------------------
                                                                          Amount            FTE           Amount            FTE           Amount            FTE           Amount            FTE
    ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
    Taxpayer service initiatives:
        Improve taxpayer service....................................         $20,725             150         $30,582          51,307            $150  ..............  ..............  ..............
                                                                     -------------------------------------------------------------------------------------------------------------------------------
          Subtotal, taxpayer service initiatives....................         $20,725             150         $30,582          51,307            $150  ..............  ..............  ..............
                                                                     -------------------------------------------------------------------------------------------------------------------------------
    Enforcement initiatives:
        Increase coverage to address tax law changes and other                $4,904              46         $22,784             174         $45,927             143         $73,615             363
         compliance issues..........................................
        Ensure accurate delivery of tax credits.....................          $4,946              49         $23,015             233        $199,535             222        $227,496             504
        Administer new statutory reporting requirements.............          $1,059               7          $5,061              48         $52,385             132         $58,505             187
                                                                     -------------------------------------------------------------------------------------------------------------------------------
          Subtotal, Enforcement initiatives.........................         $10,909             102         $50,860             455        $297,847             497        $359,616           1,054
                                                                     -------------------------------------------------------------------------------------------------------------------------------
    Infrastructure Initiatives:
        Implement individual coverage requirement and employer        ..............  ..............  ..............  ..............         $62,477              65         $62,477              65
         responsibility payments....................................
                                                                     -------------------------------------------------------------------------------------------------------------------------------
            Subtotal, Infrastructure initiatives....................  ..............  ..............  ..............  ..............         $62,477              65         $62,477              65
                                                                     ===============================================================================================================================
            Total, fiscal year 2012 ACA initiatives.................         $31,634             252         $50,860             455        $390,906             562        $473,400           1,269
    ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

        Moreover, the Board's foremost priority within its fiscal year 2012
    budget recommendation is the $333.6 million in total funding
    recommended for the BSM account, along with an associated $52 million
    within the operations support account for information technology
    infrastructure to support the ongoing maintenance of BSM components
    that have been successfully implemented. This level of funding for BSM
    is imperative and requires a $122.6 million increase in fiscal year
    2011 in the base BSM account to achieve the President's policy level--a
    proposed adjustment contained in both the Board's recommendation and
    the President's budget request.
        The Board assigns top budget priority to BSM funding primarily
    because of the critical role these resources will play in modernizing
    the core taxpayer account system for individual taxpayers under the
    Customer Account Data Engine 2 (CADE 2) program. With the recommended
    funding, the CADE 2 program is poised to deliver daily account
    processing by the 2012 filing season, a major milestone in the IRS BSM
    effort that will yield tangible benefits, such as quicker refunds, to
    tens of millions of taxpayers. The Board's recommended investments in
    BSM also lay the necessary technological foundation for other major
    advancements in IRS efficiency, taxpayer service, and enforcement for
    years to come--thereby helping to achieve the strategic goals of the
    agency. Both the TIGTA and the GAO agree that modernizing the IRS'
    antiquated computer systems, for which CADE 2 is instrumental, is
    critical to providing improved and expanded service to taxpayers.
        The Board's second-highest priority is funding of taxpayer service
    that allows for the restoration of an 80 percent LOS on IRS toll-free
    telephone lines during fiscal year 2012. Achieving this LOS requires
    both the $23.3 million increase in fiscal year 2011 to reach the
    President's policy level and the $81.3 million initiative in fiscal
    year 2012 to improve taxpayer service. Recent experience shows that
    tens of millions of taxpayers still depend on the IRS toll-free
    telephone operations for assistance in understanding their tax
    obligations, their eligibility for various tax credits and other tax
    provisions, or to resolve their account balances. However, major
    changes to the tax laws in recent years have contributed to a
    substantial increase in the number of calls to the IRS and a
    corresponding drop in the LOS into the low 70 percent range. In
    addition, as more of the provisions of the ACA become effective in
    2012, the Board believes that demand for IRS toll-free assistance will
    grow. Thus, the Board sees it as imperative that the IRS provides
    taxpayers with an adequate level of telephone assistance in the coming
    fiscal year; a level the Board believes should be no less than 80
    percent. Increased telephone demand, driven by a proliferation of new
    tax provisions, has prevented the IRS from reaching this level, last
    achieved in 2007, and the Board believes taxpayers deserve no less in
    such a complex tax environment.
        The IRS has also been tasked with a wide range of new
    responsibilities under the ACA, such as the administration of new tax
    credits for individuals and businesses, and additional information
    reporting. These new responsibilities must be afforded budget priority
    as well to enable the IRS to properly implement the law. Both the
    Board's recommendation and the President's budget make transparent the
    resources in fiscal year 2012 needed to implement the ACA. These ACA
    funding requirements total $473 million with a staffing level of 1,269
    FTEs. Of the total dollar funding recommended, nearly 83 percent is in
    the operations support account--much of it for IRS staff, contractors,
    hardware, and software needed to build new IT systems and to modify
    existing tax processing systems to accommodate the new ACA provisions.
     comparison of oversight board's and president's budget recommendations
        The Board's budget recommendations are largely consistent with the
    President's budget request in many categories. In particular, inflation
    adjustments, savings, and reinvestments are identical in both budgets.
    To facilitate a direct comparison of the Board's recommendations to the
    President's budget, the Board's budget mirrors the upward adjustments
    to the fiscal year 2011 base funding to reach the President's policy
    level. However, it is important to note that these adjustments to
    achieve the President's policy levels essentially reflect proposed
    increases to the base IRS budget in fiscal year 2011; increases which
    had not been enacted at the time the Board and the President prepared
    their fiscal year 2012 IRS budget recommendations, and which may or may
    not be realized.
        As shown in Figure 1, for its first and second funding priorities,
    BSM and taxpayer service, the Board recommended budget and the
    President's budget request are the same. The proposed enforcement
    budgets, as well as the ACA-related funding, are also the same in both
    budgets, as is the Heath Insurance Tax Credit Administration.

        The $58.6 million difference between the Board's fiscal year 2012
    IRS funding recommendation and the President's budget request occurs in
    three areas. The Board believes that more resources are needed in the
    area of IRS security and applauds the President's budget request for
    including two valuable initiatives in these areas:
      --to improve IRS system security and disaster recovery capabilities;
            and
      -- another to improve physical security at IRS facilities.
        The Board notes that TIGTA has identified security as the top
    management challenge facing IRS. The Board recommends higher funding
    levels in both areas. The Board is also recommending an additional
    initiative not contained in the President's request, which accounts for
    the third area of difference.
        Specifically, the Oversight Board recommends that:
      --an additional $23 million be added to the infrastructure initiative
            in the President's budget to enhance security and disaster
            recovery systems capability;
      --an additional $15.6 million be added to the infrastructure
            initiative in the President's budget to enhance physical
            security for Federal employees; and
      --an additional infrastructure initiative be approved for $20 million
            to attract, retain, and develop a highly engaged workforce.
        All the budget recommendations by the Oversight Board are driven by
    the need to support the IRS Strategic Plan 2009-2013. As the Oversight
    Board has emphasized in its 2009 annual report to the Congress, IRS has
    a strategic plan that addresses two serious weaknesses of the tax
    administration system: the tax gap and IRS' archaic information
    technology systems. The need to overcome these weaknesses, as well as
    effectively implementing the new tax-related provisions of the ACA
    drives the Board's IRS budget recommendations.
          goal 1: improve service to make voluntary compliance easier
        The President's policy level adjustment and the two taxpayer
    service initiatives contained in the President's budget request and
    listed in Table 4. The Board considers its support of the $23.3 million
    fiscal year 2011 policy level adjustment for taxpayer service and the
    $81.3 million fiscal year 2012 initiative to improve taxpayer service
    particularly important to America's taxpayers, and has identified them
    as its second-highest funding priority.

    TABLE 4.--TAXPAYER SERVICE ADJUSTMENT AND INITIATIVES RECOMMENDED BY THE
                        OVERSIGHT BOARD AND THE PRESIDENT
                            [In thousands of dollars]
    ------------------------------------------------------------------------
                                                              Portion due to
                                                  Amount          the ACA
                                                              implementation
    ------------------------------------------------------------------------
    President's policy level adjustment.....          23,254  ..............
                                             ===============================
    Taxpayer service initiatives:
        Improve taxpayer service............          81,307          51,307
        IRS.gov Improvements................          33,000  ..............
                                             -------------------------------
          Initiative total..................         114,307          51,307
    ------------------------------------------------------------------------

        Data from the IRS Oversight Board 2010 taxpayer attitude survey
    attests to the value taxpayers place on the IRS taxpayer assistance
    programs and the IRS toll-free telephone assistance operation in
    particular. As shown in Figure 2, more than 80 percent of the public
    say it is either very or somewhat important that the IRS provide
    assistance on certain key service channels including assistance via
    toll-free telephone lines, an IRS Web site, and IRS office locations
    for walk-in assistance. In most instances, a sizable majority say it is
    ``very important.''

        Source.--IRS Oversight Board 2010 Taxpayer Attitude Survey.

        The Board's survey further shows an increase in recent years in the
    percentage of the public who say that an IRS representative is a ``very
    valuable'' source for tax advice. As depicted in Figure 3, that upward
    trend, beginning in 2008, coincides with the start of major tax law
    changes designed to spur the economy. Clearly, taxpayers see a growing
    importance for the assistance the IRS provides through its service
    programs.

        Source.--IRS Oversight Board Taxpayer Attitude Survey.

        The Board believes that quality IRS assistance is critical to
    maintaining and ultimately improving voluntary compliance. Both the
    fiscal year 2011 adjustment to achieve the President's policy level and
    the fiscal year 2012 initiative to improve taxpayer service are needed
    to provide an 80 percent level of service in fiscal year 2012 on the
    IRS toll-free telephone operations, while maintaining an answer
    accuracy rate above 92 percent. In the view of the Board, the IRS
    should be equipped with the resources to deliver no less than an 80
    percent telephone level of service. However, the IRS has fallen short
    of that standard in recent years. Should the Congress and the President
    agree on an IRS funding level for the rest of fiscal year 2011 that
    does not include the policy level adjustment, an additional $23.3
    million will need to be added to the fiscal year 2012 initiative to
    improve taxpayer service.
        As indicated in Figure 4, during the 3-year period prior to 2008,
    the IRS was receiving just under 60 million calls per year on its toll-
    free assistance lines and delivering a LOS of just more than 80
    percent. However, due primarily to major tax law changes, such as those
    relating to economic stimulus payments, recovery rebate credits, and
    several other special tax provisions, the number of calls the IRS
    received rose sharply starting in 2008 and is now nearly 80 million
    calls per year. This increase in call volume has resulted in a
    corresponding drop in LOS, which now stands in the low 70 percent
    range. In looking forward to 2012, the Board seeks to ensure that
    taxpayers once again receive a minimum 80 percent level of service,
    addressing not only the slippage that has occurred since 2008, but also
    the increased call volume that will surely ensue as provisions of the
    ACA become effective.
        The Board also views as an important investment the Expand Online
    Options Through IRS.gov Improvements initiative to upgrade and expand
    IRS Internet services. The resources recommended for the IRS.gov Web
    site reflect a strategic investment that is key to providing
    substantially better service to greater and greater numbers of
    taxpayers in the years to come. This initiative furthers one of the
    guiding principles articulated in the IRS Taxpayer Assistance
    Blueprint, which calls for the IRS to enhance its Web site so that it
    becomes the first choice of more taxpayers for obtaining the
    information and services needed to comply with tax obligations. It also
    advances one of the core objectives in the IRS Strategic Plan 2009-2013
    to deploy advanced information technology tools to improve IRS
    efficiency and productivity, and to expand online services that improve
    service and enforcement. In 2010, the IRS recorded more than 304
    million page visits on IRS.gov, up from around 268 million visits in
    2009, and roughly double the volume experienced in 2004.

        Source.--IRS and GAO.

        There is little doubt that IRS Internet applications for both
    internal and external customers are foundational to the success of tax
    administration. However, the IRS needs to replace its aging and
    outdated Internet portal environment to improve security and the
    quality of its Web services. The critical upgrades and expansion of the
    IRS Web site funded by this initiative are key to achieving the long-
    term vision for electronic tax administration inspired by the IRS
    Restructuring and Reform Act of 1998; a vision in which the vast
    majority of taxpayer interaction with the tax administration system are
    handled electronically. Moreover, taxpayer services delivered over the
    Internet are considerably less expensive than telephone service. Also,
    investing in an improved Internet capability that eventually lessens
    telephone volume will result in future savings. In addition, because
    the Internet is available to taxpayers 24 hours a day, it overcomes a
    limitation of IRS telephone service.
     goal 2: enforce the law to ensure everyone meets their obligation to
                                   pay taxes
        The IRS Oversight Board supports the fiscal year 2011 adjustment
    and nine enforcement initiatives that are contained in the President's
    budget and listed in Table 5.
        The Oversight Board supports the President's proposed increases in
    the enforcement area in part because they continue a funding pattern in
    more recent years that has enabled the realistic and steady growth in
    enforcement resources; a pattern the Board has consistently
    recommended. For example, the IRS reports that staffing for its key
    enforcement occupations of Revenue Officers, Revenue Agents, and
    Special Agents, has grown from 20,113 in fiscal year 2002, to 21,185 in
    fiscal year 2006, to 22,710 in fiscal year 2010.

       TABLE 5.--ENFORCEMENT ADJUSTMENT AND INITIATIVES RECOMMENDED BY THE
                        OVERSIGHT BOARD AND THE PRESIDENT
                            [In thousands of dollars]
    ------------------------------------------------------------------------
                                                              Portion due to
                                                  Amount          the ACA
                                                              implementation
    ------------------------------------------------------------------------
    President's policy level adjustment.....         242,275  ..............
                                             ===============================
    Initiatives:
        Increase international service and            72,596  ..............
         enforcement........................
        Increase collection coverage........          52,000  ..............
        Implement merchant card and basis             35,730  ..............
         reporting..........................
        Increase coverage to address tax law          96,718          73,615
         changes and other compliance issues
        Ensure accurate delivery of tax              260,293         227,496
         credits............................
        Administer new statutory reporting            58,505          58,505
         requirements.......................
        Leverage return preparer............          16,600  ..............
        Address appeals workload growth.....           9,100  ..............
        Implement UTP reporting requirements           4,129  ..............
                                             -------------------------------
          Initiative total..................         605,671         359,616
    ------------------------------------------------------------------------

        The gradual growth in enforcement resources has allowed the IRS to
    increase its enforcement presence among both business and individual
    taxpayers, and is generally reflected in the IRS enforcement revenue
    results, which totaled $57.6 billion in fiscal year 2010. The value of
    IRS enforcement programs is more than just direct revenue, and year-to-
    year fluctuations in IRS enforcement revenue occur for various reasons,
    such as the final resolution of large dollar cases worked over several
    years. Nevertheless, the clear upward trend in direct enforcement
    revenue attributed to IRS compliance programs since 2002, as shown in
    Figure 5, illustrates one tangible result from funding a greater IRS
    enforcement presence in more recent years.

        In the view of the Board, the recommended fiscal year 2011 policy
    adjustment and fiscal year 2012 initiatives also bolster IRS
    enforcement operations in a manner consistent with the IRS strategy to
    reduce the tax gap. In particular, the Board's and the President's
    recommended funding for enforcement initiatives combines a focus on:
      --expanded IRS global enforcement presence relative to business and
            individual taxpayers with international economic activity;
      --efforts to improve the accuracy of return submissions provided
            through paid tax preparers;
      --implementation and leveraging of various new information reporting
            requirements;
      --improved technology tools and increased enforcement staffing to
            detect fraud and other noncompliance with a myriad of new and
            existing tax credits, several involving rather substantial
            amounts; and
      --with attention to workload growth in appeals to ensure taxpayer
            rights are protected.
        The Board also notes that more than 40 percent of the total
    requested amounts for the fiscal year 2011 policy level adjustment and
    these fiscal year 2012 initiatives are directed toward the
    implementation of the ACA--most of which are for the investment in new
    technology and related infrastructure to administer the new tax
    credits. Among these new credits are those for small businesses to help
    them provide healthcare coverage for their employees and the new
    premium credit designed to help millions of other Americans purchase
    individual health coverage. The Board strongly believes that a balanced
    approach to the implementation of the ACA requires a proper degree of
    compliance activity, in addition to taxpayer assistance efforts, to
    deter noncompliance and fraud.
        The Board further notes that while IRS enforcement efforts produce
    direct revenue, their indirect contributions to voluntary compliance
    are likely even greater. IRS enforcement presence helps improve
    voluntary compliance by discouraging noncompliance by those who might
    otherwise be tempted to under-report their taxes and by giving
    compliant taxpayers confidence in the tax system and the fairness with
    which the IRS is administering the tax laws.
        To provide further context to the value of improved voluntary
    compliance, the Board notes that a 1 percentage point improvement in
    the voluntary compliance rate translates into an additional $21 billion
    per year in timely paid Federal taxes, based on estimates for tax year
    2001 developed from the IRS National Research program. Some signs of
    potentially improved voluntary compliance from IRS enforcement efforts
    can be found in the Board's 2010 taxpayer attitude survey. Respondents
    who had received an IRS-initiated contact in the prior year, such as a
    math error notice, were less likely to agree that it is acceptable to
    cheat on one's taxes (either ``a little here and there'' or ``as much
    as possible'') than were respondents who had not been contacted by the
    IRS, i.e., 8 percent of the former versus 12 percent for the latter.
       strategic foundations: invest for high performance in people and
                                   technology
        Strategic foundations comprise two accounts in the IRS budget: BSM
    and operations support.
    BSM
        The IRS Oversight Board supports the total fiscal year 2012 budget
    of $333.6 million for the BSM account as contained in the President's
    budget request and summarized in Table 6. The Board considers its
    funding recommendation for BSM as its highest priority because it
    reflects a strategic investment, which is crucial to rectifying one of
    the fundamental weaknesses in the current tax administration
    environment, i.e., archaic IRS tax processing systems.
        Embedded in the President's request and the Board's recommendation
    for BSM is an fiscal year 2011 adjustment (increase) of $122.6 million
    to achieve the President's policy level. Because the Board considers
    BSM funding its highest priority, it further emphasizes that if the IRS
    does not receive the $122.6 million increase in fiscal year 2011 to
    achieve the President's policy level, then this amount should be viewed
    as a Board-recommended fiscal year 2012 initiative for BSM.

       TABLE 6.--TOTAL PROPOSED FISCAL YEAR 2012 BUDGET FOR BSM BY PROJECT
          ACTIVITY RECOMMENDED BY THE OVERSIGHT BOARD AND THE PRESIDENT
                            [In thousands of dollars]
    ------------------------------------------------------------------------
                                                                Fiscal year
                    BSM projects/initiatives                    2012 budget
    ------------------------------------------------------------------------
    Application migration to CADE 2 (taxpayer account                156,800
     database)..............................................
    Current CADE............................................          19,000
    Modernized e-File.......................................          20,500
    Core infrastructure.....................................          37,700
    Architecture, integration, and management...............          27,645
    Management reserve......................................           2,622
                                                             ---------------
          Subtotal, capital investment......................         264,267
                                                             ---------------
    BSM labor...............................................          69,333
                                                             ---------------
          Total, BSM........................................         333,600
    ------------------------------------------------------------------------

        The President's request and the Board's recommendations for BSM
    also include a proposed shift in fiscal year 2012 of $52 million
    (following the President's requested policy level increase for BSM in
    fiscal year 2011) from the BSM account to the operations support
    account. This shift recognizes that as major components of IRS' aging
    computer technology are modernized through successful BSM efforts, the
    ongoing operation and maintenance needs of these components can best be
    met in the future as part of the funding for existing IT infrastructure
    within the operations support account.
        The information in Table 6 reflects the BSM budget for fiscal year
    2012 by project activity, assuming the Board's recommendations and
    President's request for BSM are enacted. Most of the total BSM budget,
    including nearly 60 percent of the portion devoted to capital
    investments, reflect the funds needed for the CADE 2 program. By the
    2012 filing season, CADE 2 will provide a modern relational database
    and daily updating capability for the core tax processing system for
    individual accounts. The IRS refers to this important milestone as
    ``Transition State 1.''
        Achievement of Transition State 1 under the CADE 2 program will
    have immediate benefits to taxpayers, including more timely account
    balance information to better serve taxpayers and the issuance of
    quicker refunds to the roughly 109 million individual refund filers
    each year--a major leap forward from the much smaller pool of about 41
    million taxpayers receiving daily account processing today under the
    more limited ``current'' CADE system. The CADE 2 funding also enables
    the IRS to build on its new relational database foundation and begin
    the work on Transition State 2, which will help address long-standing
    financial material weaknesses identified by the GAO, and begin the
    replacement of current service and enforcement applications, based on
    antiquated computer code, with state-of-the-art, Internet-centric
    modular applications using modern programming languages.
        The annual assessment of the BSM program by TIGTA lends further
    support to the merits of the requested BSM funds for CADE 2. As TIGTA
    stated in their assessment issued in September 2010,

        ``The IRS has refocused the BSM program to deliver the modernized
    systems sooner. TIGTA is encouraged by the actions planned and taken to
    refocus the BSM program, especially related to the retooling of the
    CADE program, known as CADE 2. When successful, the CADE 2 program will
    provide a significant boost to the IRS' ability to move away from its
    antiquated tax return processing systems and provide improved service
    to taxpayers.'' \2\
    ---------------------------------------------------------------------------
        \2\ Treasury Inspector General for Tax Administration, Annual
    Assessment of the Business Systems Modernization Program, Reference
    Number 2010-2094, September 23, 2010.

        The Board's recommended funding for BSM will help the IRS advance
    technologically on other fronts as well, such as enabling the IRS to
    continue further expansion of its successful Modernized e-File (MeF)
    applications to include the employment series tax returns such as the
    Form 941, Employer's Quarterly Federal Tax Return. Extending MeF
    capabilities to employment tax returns is particularly strategic, for
    as was emphasized in the Board's recent 2010 report to the Congress on
    electronic filing, achieving the IRS long-term goal of an 80 percent e-
    file rate for all major tax returns will require effective strategies
    to substantially increase the volume of electronically filed employment
    tax returns, particularly the Form 941.
        The modern relational database to be achieved through the CADE 2
    program and the Internet-filing capabilities achieved through the
    expanding universe of MeF systems, provide the necessary foundations
    for a new generation of tools and Internet applications that can
    dramatically improve IRS service and enforcement programs. That is why
    it so important, in the view of the Board, that policymakers provide
    the needed BSM funding requested by the President. Indeed, in
    designating the IRS BSM program as one of the Government programs on
    its ``High-Risk Series'' list, GAO has emphasized that the development
    and delivery of the modernized tax administration and internal
    management systems are

        ``. . . critical to providing improved and expanded service to
    taxpayers and internal business efficiencies for IRS and providing
    reliable and timely financial management information needed to better
    enable IRS to justify its resource allocation decisions and
    congressional budgetary requests.'' \3\
    ---------------------------------------------------------------------------
        \3\ The United States Government Accountability Office, High-Risk
    Series: An Update, GAO-11-278, February 2011.
    ---------------------------------------------------------------------------
    Operations Support
        The IRS Oversight Board supports the fiscal year 2011 adjustment in
    the operations support account and the six infrastructure initiatives
    contained in the President's budget request, but also believes more
    funding is needed. In particular, the infrastructure funding requested
    by the President and supported by the Board is vital to sensible tax
    administration including resources needed to improve security for IRS
    systems and staff; provide for a long-overdue upgrade to the IRS'
    obsolete financial management system that currently prevents the agency
    from meeting Federal accounting standards; and enable the development
    of the technology and other infrastructure components to implement
    major provisions of the ACA including new information reporting
    requirements.
        However, while the Board applauds the President's budget request
    for including initiatives to enhance IRS computer systems security and
    disaster recovery capabilities, and to enhance physical security at IRS
    facilities, the Board believes more resources are warranted. In
    addition, the Board is also proposing a new initiative not in the
    President's budget, which supports a long-term strategic goal for the
    IRS to be one of the best places to work in the Federal Government. The
    Board's recommendations for infrastructure initiatives are presented in
    Table 7.

     TABLE 7.--OPERATIONS SUPPORT ADJUSTMENT AND INFRASTRUCTURE INITIATIVES
                       RECOMMENDED BY THE OVERSIGHT BOARD
                            [In thousands of dollars]
    ------------------------------------------------------------------------
                                                              Portion due to
                                                  Amount          the ACA
                                                              implementation
    ------------------------------------------------------------------------
    President's policy level adjustment.....          10,128  ..............
                                             ===============================
    Infrastructure initiatives:
        Enhance security and disaster                 35,000  ..............
         recovery...........................
        Update integrated financial system..          27,500  ..............
        Leveraging data to improve                     1,400  ..............
         compliance.........................
        Enhance physical security for                 31,057  ..............
         employees..........................
        Implement individual coverage                 62,477          62,477
         requirement and employer
         responsibility payments............
        Attract, retain, and develop a                20,000  ..............
         quality workforce..................
                                             -------------------------------
          Initiative total..................         177,434          62,477
    ------------------------------------------------------------------------

        In relation to the areas where the Board believes more funding is
    needed for infrastructure initiatives than the President has requested,
    the Board is recommending an additional $23 million for the initiative
    to enhance IRS system security and disaster recovery capabilities
    (bringing the total initiative request to $35 million) and an
    additional $15.6 million for the initiative to enhance the physical
    security for IRS employees and taxpayers at IRS office locations
    (bringing that total to $31.1 million). The Board is also recommending
    an initiative of $20 million to further develop a highly engaged IRS
    workforce.
    Enhance Security and Disaster Recovery Systems Capability
        The Board views its two recommendations around enhanced systems
    security/disaster recovery and enhanced physical security at IRS office
    locations as highly important to a more robust IRS enterprise risk
    management strategy. As recent events demonstrate, both natural and
    manmade catastrophes do occur, so the IRS needs to be prepared-given
    the critical role tax administration plays in the economic health of
    this country. Indeed, Homeland Security Presidential Memorandum has
    designated several core IRS tax processing systems as part of the
    Critical Infrastructure Protection (CIP) program. In a similar vein,
    TIGTA in its most recent report to the Treasury Secretary on the top 10
    management and performance challenges facing the IRS elevated
    ``security'' to the top challenge, in recognition of the difficult task
    the IRS faces in safeguarding a vast amount of sensitive financial and
    personal data and also protecting approximately 100,000 employees and
    more than 700 facilities.
        The infrastructure initiative to enhance security and disaster
    recovery systems capability would address the IRS' need to provide
    resiliency of four critical tax systems:
      --Processing remittances;
      --Processing tax returns;
      --Processing refunds; and
      --Responding to taxpayer inquiries.
        The intent of this initiative is to move the IRS closer to its goal
    of having a disaster recovery time that does not exceed 12 to 36 hours,
    dependent upon the system disabled. The IRS' current disaster recovery
    capability could leave some systems out of operation for days or even
    weeks at a time.
    Enhance Physical Security for Federal Employees
        This initiative will fund guard services for the IRS TACs during
    the filing season, a period when the IRS employees and taxpayers
    receiving assistance may be exposed to greater risk of dangerous
    situations. The initiative will also enable the purchase and
    installation of security equipment--cameras, screening equipment, and
    surveillance devices--as another strategy to address areas of
    vulnerability identified through a thorough security reassessment of
    all IRS facilities. This initiative will also support the IRS' full
    participation on the Joint Terrorism Task Forces (JTTFs) and the
    Attorney General's Advisory Counsels (AGACs). It will also train and
    develop agents to carry out assignments and rapidly follow-up on leads
    developed by the Garden City Counterterrorism Lead Development Center.
    Attract, Retain, and Develop a Highly Engaged Workforce
        The Board has approved a long-term strategic goal for the IRS to be
    one of the best places to work in Government, and will evaluate the
    IRS' success in achieving this goal by comparing its employee
    engagement score, as measured by the Office of Personnel Management's
    annual employee survey, to other Federal agencies. Successful
    achievement of the goal requires the IRS to be in the top quartile
    among the 14 largest Federal agencies by 2012, based on that employee
    engagement index score.
        The Board believes that it is imperative that the IRS workforce be
    among the most highly engaged of all large Federal agencies for several
    reasons:
      --The agency is vital to the Nation's economic security.
      --More Americans interact with the IRS than virtually any other
            Federal agency, and the performance of the IRS' employees will
            have a direct bearing on whether taxpayers' transactions with
            the IRS are satisfactory.
      --Studies have demonstrated that highly engaged employees are the
            most productive, and increased productivity will be asked of
            all Federal agencies.
      --More productive employees will also lower taxpayer burden through
            improved timeliness, which studies have shown is a key factor
            in taxpayer satisfaction with IRS transactions.
        Additionally, in the last 2 years, the IRS has hired a number of
    new employees to replace the growing number of retirees and to increase
    its enforcement staff. It has successfully recruited highly qualified
    employees, aided in part by higher unemployment. Retirement rates are
    expected to remain high in the future, so the IRS will need to continue
    to recruit highly qualified new employees to replace retired employees,
    and it must retain those employees it has hired and trained in the last
    several years. Improving economic conditions will make both these
    objectives more difficult.
        Specific findings by a major IRS operating division indicate that
    there is a significant benefit associated with high employee
    satisfaction, all indicating a high degree of efficiency and
    productivity. Also, attrition by resignation for highly satisfied new
    employees is significantly lower than for the overall division
    population.
        The proposed initiative will be used to fund activities that have a
    direct link to increasing and maintaining high levels of employee
    engagement for front line employees, especially those in mission-
    critical occupations who deal with taxpayers on a regular basis.
    Effective first-line management is a critical factor in developing a
    highly engaged workforce.
        The Board is concerned with two issues that relate to developing
    effective front line managers. First, many highly qualified technical
    employees are reluctant to move into management. Second, although
    qualified employees may be highly skilled in their chosen area, they
    often lack the skills needed to be effective managers and to
    effectively develop and engage the employees they supervise.
        Approval of this initiative would enable the IRS to:
      --Eliminate the backlog of untrained front line managers;
      --Ensure enough capacity to train new managers upon selection in all
            business units;
      --Improve and expand readiness programs to provide a cadre of
            candidates to step into management positions;
      --Revise the management curriculum to incorporate more e-learning and
            promote continuous learning; and
      --Evaluate the effectiveness and impact of the IRS' leadership
            programs.

      APPENDIX 1.--SELECTED MAJOR LEGISLATIVE AND ADMINISTRATIVE PROVISIONS THAT CREATED SIGNIFICANT CHALLENGES FOR
                                   THE IRS DURING THE 2007 THROUGH 2010 FILING SEASONS
                                                   2007 FILING SEASON
    ----------------------------------------------------------------------------------------------------------------
    Legislation/provision and impact(s) on filing
                        season                                   Some related GAO/TIGTA audit findings
    ----------------------------------------------------------------------------------------------------------------
    Tax Relief and Health Care Act of 2006
    Legislation extended certain existing tax      IRS improved most filing season services during 2007: electronic
     deductions such as those relating to           filing grew and several IRS Web site measures improved such as
     deductions for State and local sales taxes.    customer satisfaction; meanwhile, access to IRS telephone
    This late-passed legislation forced             assistance and the associated IRS response accuracy were
     approximately 1 million taxpayers to delay     comparable to the prior year (GAO-08-38).
     their return filing and any associated        Overall, the IRS correctly implemented the key tax law and
     refund claim for about 3 weeks while IRS       administrative changes with no significant delays in returns
     finalized its system programs and testing.     processing during the 2007 filing season (TIGTA report: 2007-40-
    Required taxpayers to make, and IRS to          187).
     process, unique annotations on paper tax      The IRS provided taxpayers with effective access to telephone
     returns to claim certain deductions.           service; however, the quality and level of service for Spanish
                                                    applications were lower than those in English (TIGTA report:
                                                    2007-40-160).
                                                   There were some areas in which taxpayers did not take full
                                                    advantage of the benefits the tax law and administrative changes
                                                    provided (TIGTA report: 2007-40-187).
    Telephone Excise Tax Refund (TETR)
    Allowed for a one-time refund on income tax    The IRS received fewer TETR requests from individuals than
     returns applicable to all who paid telephone   expected; early data showed minimal impact on returns processing
     excise tax, regardless of obligation to file   and taxpayer service (GAO-07-695).
     a tax return.                                 With some exceptions, the IRS successfully planned and
                                                    implemented the TETR program for individuals and businesses;
                                                    this includes revising forms, developing strategies to educate
                                                    taxpayers, and developing methods for taxpayers to estimate
                                                    their TETR claim without burden of obtaining years of telephone
                                                    bills (TIGTA reports: 2007-30-178 and 2008-30-091).
                                                   Despite IRS efforts, much of the over-collected tax went
                                                    unclaimed and unrefunded (TIGTA reports 2007-30-178 and 2008-30-
                                                    091).
                                                   The IRS did not scrutinize many questionable TETR claims by
                                                    individuals because of competing priorities to examine other
                                                    issues on returns (TIGTA report: 2007-30-178).
                                                   The IRS effort to identify overstated TETR claims by businesses
                                                    were ambitious; however, minimum selection criteria for some
                                                    businesses were inconsistently applied (TIGTA report: 2008-30-
                                                    091).
                                                   A TIGTA survey indicated that 27 percent of preparers who did not
                                                    compute the TETR claim for their business clients due to cost
                                                    involved were not aware that the IRS had offered a simplified
                                                    method to estimate the refund (TIGTA report: 2008-30-175).
    ----------------------------------------------------------------------------------------------------------------

                                                   2008 FILING SEASON
    ----------------------------------------------------------------------------------------------------------------
    Legislation/provision and impact(s) on filing
                        season                                   Some related GAO/TIGTA audit findings
    ----------------------------------------------------------------------------------------------------------------
    Tax Increase Prevention Act of 2007
    Legislation extended Alternative Minimum Tax   Overall, the IRS correctly implemented the tax law changes
     (AMT) ``patch'' and certain AMT credit         enacted late in the year with no significant delays in the
     offsets.                                       processing of tax returns (TIGTA report: 2008-40-183).
    This late-passed legislation forced            The IRS did not achieve its toll-free assistance and level of
     approximately 3 to 4 million taxpayers to      service performance goals because of the high volume of calls
     delay their return filing and any associated   regarding the economic stimulus payments (TIGTA report: 2008-40-
     refund claim for about 4 weeks, while the      168).
     IRS finalized its system programs and
     testing.
    Mortgage Forgiveness Debt Relief Act of 2007
    Allowed taxpayers to generally exclude from    The amount of forgiven mortgage debt excluded from income could
     income forgiven mortgage debt used to buy or   be significant (GAO-10-997).
     improve principal residence.                  The IRS faced several compliance challenges in administering this
                                                    complicated tax provision, including limited information on
                                                    current IRS forms, and return on investment considerations on
                                                    whether to devote limited IRS enforcement resources to enforce
                                                    this provision (GAO-10-997).
    Economic Stimulus Act of 2008
    Mandated that the IRS send stimulus payments   As of June 13, 2008, the IRS had generated 129 million economic
     to more than 100 million households based on   stimulus payments, totaling more than $89 billion with an
     who filed a tax year 2007 during the 2008      accuracy rate of 99.6 percent (TIGTA report: 2008-40-174).
     filing season.                                The first stimulus payments were issued via direct deposit on
    Congressional passage occurred approximate 3    April 28, 2008 (TIGTA report: 2009-40-069).
     weeks after the start of the 2008 filing      The IRS made significant efforts to ensure eligible taxpayers
     season.                                        received their stimulus payment such as sending advance
                                                    information notices to more than 130 million taxpayers who filed
                                                    a tax year 2006 return, initiating outreach efforts to retired
                                                    individuals and veterans who normally have no need to file a tax
                                                    return, and initiating outreach efforts to individuals whose
                                                    stimulus payments were returned as undeliverable (TIGTA reports:
                                                    2009-40-069 and 2008-40-100).
                                                   Demand for telephone assistance related to the economic stimulus
                                                    legislation was unprecedented and led to a significant reduction
                                                    in IRS telephone service (GAO-08-916T).
                                                   The IRS decision to reallocate hundreds of IRS collections staff
                                                    to help address large telephone call demand resulting from
                                                    economic stimulus legislation resulted in up to $565 million in
                                                    foregone enforcement revenue (GAO-08-916T).
                                                   TIGTA identified $1.2 million in false stimulus payments that
                                                    were issued by the IRS in 2008 and another $138 million that
                                                    could be potentially released erroneously in 2009 unless the IRS
                                                    made improvements in its fraud referral process (TIGTA report:
                                                    2009-10-049).
    ----------------------------------------------------------------------------------------------------------------

                                                   2009 FILING SEASON
    ----------------------------------------------------------------------------------------------------------------
    Legislation/provision and impact(s) on filing
                        season                                   Some related GAO/TIGTA audit findings
    ----------------------------------------------------------------------------------------------------------------
    Economic Stimulus Act of 2008
    Allowed taxpayers who did not receive the      Overall, the IRS successfully planned the implementation of the
     full stimulus payment during the 2008 filing   Recovery Rebate Credit and issued approximately $8.5 billion in
     season to receive the unpaid portion on        credits to approximately 21 million taxpayers (TIGTA report:
     their tax year 2008 return as a Recovery       2009-40-129).
     Rebate Credit during the 2009 filing season.  Taxpayers had difficulty determining whether they qualified for
                                                    this credit and early in the filing season the IRS had already
                                                    identified more than 5 million tax returns with Recovery Rebate
                                                    Credit errors (TIGTA report 2009-40-058).
                                                   TIGTA found the IRS calculation errors in less than 1 percent of
                                                    the cases but also identified a programming error, which the IRS
                                                    took immediate action to correct, that could have potentially
                                                    allowed almost 6 million taxpayers to erroneously claim nearly
                                                    $1.6 billion in credits (TIGTA report: 2009-40-129).
                                                   Legislation did not provide the IRS with math error authority to
                                                    prevent individuals without valid SSNs from receiving the credit
                                                    at the time the returns were processed, and as a result the IRS
                                                    provided more than $27 million in credits to taxpayers without a
                                                    valid SSN (TIGTA report: 2009-40-129).
    Housing and Economic Recovery Act of 2008
     (HERA)                                        The IRS met many of its processing goals during the 2009 filing
    Provided taxpayers a First Time Homebuyer       season, but telephone access remained low, due in part to calls
     (FTHB) credit of up to $7,500 on purchase of   about tax law changes; despite the heavy call volume, IRS
     home, but required them to repay the credit    accuracy remained above 90 percent (GAO-10-225).
     over 15 years starting in 2011 filing         The IRS had a successful 2009 filing season despite the unique
     season.                                        challenges it faced (TIGTA report 2009-40-142).
    While the FTHB credit was initially contained  The varied FTHB credit provisions within the HERA versus the
     in the HERA, it was subsequently expanded,     American Recovery and Reinvestment Act may have confused
     and the repayment provision eliminated in      taxpayers and also presented the IRS with significant challenges
     most instances, under the American Recovery    to ensure the credit was used correctly as authorized. (TIGTA
     and Reinvestment Act of 2009.                  report 2010-41-069).
    American Recovery and Reinvestment Act of
     2009 (Recovery Act)                           The 2009 filing season provided challenges for the IRS due to the
    Congressional passage occurred approximately    two significant tax laws that provided a new FTHB credit, and a
     4 weeks after start of the 2009 filing         massive bailout and tax relief package, which entailed 116
     season.                                        different tax provisions (TIGTA report: 2009-40-058).
    Provided taxpayers a revised credit of up to   The Recovery Act posed significant implementation challenges for
     $8,000 on the purchase of home with need to    the IRS because it had more than 50 provisions, many of which
     repay only if home is resold or ceases to be   were immediate or retroactive and had to be implemented during
     primary residence within 3 years.              the 2009 filing season (GAO-10-349).
    Allowed small businesses to apply certain      The IRS responded quickly to the implementation challenges of the
     2008 net operating losses against tax          Recovery Act; however, that quick response entailed tradeoffs,
     liabilities from the previous 5 years.         such as not making some computer changes to collect data (GAO-10-
    Provided Federal subsidies for State and        349).
     local bonds, including Build America Bonds    Nearly 50,000 taxpayers may not have claimed the full amount of
     (BAB), through certain credit provisions.      the FTHB credit to which they were entitled; the IRS agreed to
                                                    contact the applicable taxpayers to inform them (TIGTA report:
                                                    2009-41-144).
                                                   Despite the fact that the Recovery Act was enacted during the
                                                    filing season, the IRS issued timely and clear guidance that
                                                    helped foster compliance with the new NOL provisions; by the end
                                                    of 2009, the IRS processed approximately 44,000 NOL claims
                                                    totaling more than $3 billion (TIGTA report: 2010-41-070).
                                                   The initial guidance on bonds published by the IRS was quick,
                                                    complete, accurate, and consistent with the requirements of the
                                                    Recovery Act (TIGTA report: 2010-11-035).
                                                   Generally, all complete requests for payment of Build America
                                                    Bonds (BAB) Federal subsidies were processed accurately and
                                                    timely by the IRS, and without indications of fraudulent or
                                                    erroneous disbursements; as of September 2009, State and local
                                                    governments received almost $26.4 billion in funding through 315
                                                    BAB issuances (TIGTA report: 2010-11-083).
    ----------------------------------------------------------------------------------------------------------------

                                                   2010 FILING SEASON
    ----------------------------------------------------------------------------------------------------------------
    Legislation/provision and impact(s) on filing
                        season                                   Some related GAO/TIGTA audit findings
    ----------------------------------------------------------------------------------------------------------------
    American Recovery and Reinvestment Act of
     2009 (Recovery Act)                           The IRS dealt with a number of challenges during the 2010 filing
    Provided a Making Work Pay (MWP) credit to      season, including significant tax law changes such as the MWP
     working individuals.                           credit (GAO-11-111).
    Increased allowable credit amount for          The IRS balanced its resources across filing season activities
     homeowners who make certain energy             with improvements in some areas but fluctuations in others:
     efficiency improvements.                       electronic filing and IRS Web site visits increased, level of
                                                    service to callers seeking live IRS assistance improved compared
                                                    to 2009, and the accuracy of answers remained high; however,
                                                    average wait time for telephone service increased compared to
                                                    2009, and millions of taxpayer refunds were delayed primarily
                                                    because of the time needed to correct taxpayer errors associated
                                                    with the MWP credit (GAO-11-111).
                                                   The IRS implemented the MWP credit in accordance with the consent
                                                    of the Congress by advancing it to taxpayers through a decrease
                                                    in Federal income tax withholding rates (TIGTA report: 2011-41-
                                                    002).
                                                   The IRS initiated a significant outreach program to inform
                                                    taxpayers about the change in withholding associated with the
                                                    MWP credit and its potential to leave certain taxpayers
                                                    underwithheld and owing taxes at the time they are due (TIGTA
                                                    report: 2011-41-002).
                                                   Despite IRS outreach actions, more than 13 million taxpayers were
                                                    or will be negatively affected by the MWP credit withholding
                                                    rate changes, including more than 1 million who may face an
                                                    increase in their Estimated Tax Penalty amount (TIGTA report:
                                                    2011-41-002).
                                                   A survey of taxpayers who appeared to be negatively impacted by
                                                    the MWP credit withholding changes indicated that most were not
                                                    aware of the credit or its effect on their taxes (TIGTA report:
                                                    2011-41-002).
    Worker, Homeownership, and Business
     Assistance Act of 2009                        As of early 2010, the IRS still did not have the ability to
    Extended FTHB credit another 5 months (to       identify individuals who received the FTHB credit but who would
     April 30, 2010) and allowed a credit up to     have some repayment requirements because the home ceased to be
     $6,500 for certain long-time homeowners        their main residence; the IRS was, however, developing a
     purchasing new homes.                          comprehensive strategy to address this issue (TIGTA report: 2010-
    Provided the IRS with ``math error              41-086).
     authority'' to deny erroneous FTHB credit     In May 2009, the IRS implemented a number of controls to prevent
     claims upfront during the IRS return           inappropriate FTHB credits claims from being issued before the
     processing phase.                              claims were processed; however, follow-up action by the IRS was
    Expanded and extended the NOL carry back        still needed on fraudulent and questionable claims processed
     provisions for businesses.                     before the controls were implemented (TIGTA report: 2010-41-
                                                    069).
                                                   The IRS timely implementing procedures to identify and reject
                                                    extended NOL claims inappropriately submitted by Troubled Asset
                                                    Relief program recipients, but was somewhat late in implementing
                                                    controls to apply a limit on the amount of the loss carried back
                                                    to the fifth year (TIGTA report: 2010-41-070).
                                                   The IRS received millions of calls related to the MWP and the
                                                    FTHB; approximately 9 percent of all calls received (GAO-11-
                                                    111).
    ----------------------------------------------------------------------------------------------------------------

                                     ______

     Prepared Statement of Colleen M. Kelley, National President, National
                            Treasury Employees Union
        Chairman Durbin, Ranking Member Moran, and distinguished members of
    the subcommittee, I would like to thank you for allowing me to provide
    comments on the administration's fiscal year 2012 budget request for
    the Internal Revenue Service (IRS). As president of the National
    Treasury Employees Union (NTEU), I have the honor of representing more
    than 150,000 Federal workers in 31 agencies, including the men and
    women at the IRS.
                      irs fiscal year 2012 budget request
        Mr. Chairman, the NTEU strongly supports the administration's
    fiscal year 2012 budget request of $13.2 billion for the IRS, a 9
    percent increase of $1.1 billion more than the current fiscal year 2010
    enacted level. We believe that the President's request will allow the
    IRS to continue helping taxpayers meet their tax obligations, improve
    enforcement of the tax law and generate much needed revenue for the
    Federal Government.
        We are particularly pleased the administration's budget request
    would provide critical increases for IRS enforcement and taxpayer
    service activities, and would allow the IRS to continue rebuilding its
    workforce which remains well below mid-1990 levels.
        As in previous years, the NTEU also supports the budget
    recommendations proposed by the IRS Oversight Board which have
    generally called for additional funding above that requested by the
    administration. For fiscal year 2012, the Oversight Board has
    recommended $13.5 billion in funding for the IRS. We would be inclined
    to support providing additional funding for the IRS above the
    administration's request and look forward to reviewing the details of
    the Board's recommendation.
                               taxpayer services
        Providing quality customer service to the taxpayer is an important
    part of IRS efforts to help the taxpaying public understand their tax
    obligations while making it easier to participate in the tax system.
    Through a variety of channels, the IRS is able to provide year-round
    assistance to millions of taxpayers, including outreach and education
    programs, issuance of tax forms and publications, rulings and
    regulations, toll-free call centers, the IRS.gov Web site, Taxpayer
    Assistance Centers (TACs), Volunteer Income Tax Assistance (VITA)
    sites, and Tax Counseling for the Elderly (TCE) sites. These efforts
    have enabled the IRS continue raising the standard of service to
    America's taxpayers and assisted in efforts to improve voluntary
    compliance.
        In fiscal year 2010, these efforts helped the IRS meet or exceed 83
    percent of the taxpayer service performance targets. In addition, IRS
    taxpayer service activities were critical to its ability to deliver a
    successful 2010 filing season during which IRS employees processed more
    than 141 million individual returns and issued 109 million refunds,
    totaling $366 billion and answered almost 36 million calls from
    taxpayers requesting information on new credits available to them. In
    addition, the IRS also provided in-person service at its 401 Taxpayer
    Assistance Centers (TACs) located around the country, for taxpayers to
    resolve tax issues and receive help to prepare their tax returns. In
    2010, 6.4 million taxpayers visited a TAC, 3 percent more than in 2009.
    Walk-in service at TACs remains popular among elderly taxpayers, those
    with limited English and computer proficiency, and taxpayers without
    Internet access.
        In addition, during the 2010 filing season, the IRS expanded hours
    of service at 16 geographically dispersed TACs, and seven were open
    every Saturday. In 27 locations, low-income taxpayers took advantage of
    IRS help in the preparation of both their State and Federal tax
    returns. The IRS held Open House events at 200 TACs and partner sites
    nationwide to help taxpayers prepare their returns and resolve their
    tax issues. As a result, more than 31,400 taxpayers were served and
    more than 7,700 returns were prepared at these events.
        The delivery of a successful 2010 filing season by the IRS is all
    the more impressive as employees delivered these numbers while also
    being confronted by a variety of challenges presented by implementation
    of provisions in the American Reinvestment and Recovery Act of 2009,
    the Worker, Homeownership, and Business Assistance Act of 2009, and
    increased telephone demand for Economic Recovery Payment inquiries.
        We were glad to see the administration's request of $2.3 billion
    for taxpayer services acknowledges the good service that IRS employees
    provided to taxpayers in fiscal year 2010 while also recognizing that
    additional progress can be made. In particular, we strongly support the
    proposed additional funding to improve telephone level of service,
    improve the IRS Web site and provide a variety of new online services.
        In fiscal year 2012, the IRS plans to increase the telephone level
    of service by adding resources to meet the ever-increasing demand and
    continuing to make efficiency improvements such as automated self-
    service applications that allow taxpayers to obtain information on less
    complex issues such as refund inquiries. These improvements will free
    up staff to deal with the more complex tax law issues stemming from the
    passage of new legislation. In addition, the IRS continues to study the
    effects of services it offers to taxpayers on the Internet, at walk-in
    sites, and on its toll-free telephone lines as well as exploring the
    relationships between taxpayer errors and unclear correspondence to aid
    in the development of new approaches to service.
        The NTEU strongly believes providing quality services to taxpayers
    is an important part of any overall strategy to improve compliance and
    that the President's request for taxpayer services will enable the IRS
    to deliver another successful filing season, improve the responsiveness
    and accuracy of taxpayer service, and support IRS efforts to enhance
    taxpayer compliance.
                                  enforcement
        Mr. Chairman, the NTEU believes a strong enforcement program that
    respects taxpayer rights, and minimizes taxpayer burden, plays a
    critical role in the IRS' efforts to enhance voluntary compliance,
    narrow the tax gap and reduce the deficit. In fiscal year 2010, the IRS
    enforcement efforts brought in almost $58 billion in enforcement
    revenue, an 18 percent increase more than fiscal year 2009. In
    addition, other key IRS enforcement programs continued to show progress
    over fiscal year 2009. These include a 6 percent increase in collection
    case closures, a 20 percent increase in Automated Under Reporter (AUR)
    contact closures, an 8 percent increase in large corporate audits and
    an 11 percent increase in the number of individual return examinations.
        That is why the NTEU was happy to see the administration's budget
    request would provide a $462 million increase in funding for the IRS
    tax enforcement above the current fiscal year 2010 enacted level,
    including additional resources made available through a program
    integrity cap adjustment.
        This increased funding will enable the IRS to continue
    strengthening current IRS compliance programs designed to close the tax
    gap in several areas, including: increasing compliance by addressing
    offshore tax evasion through more examinations and full implementation
    of the Foreign Account Tax Compliance Act (FACTA); implementing
    information reporting requirements approved by the Congress in 2008 to
    validate income reported by businesses by reconciling their income with
    their payment card receipts and third-party transactions; and improving
    tax debt collection coverage and collection processes. The proposal
    will also allow the IRS to continue to focus on compliance issues and
    new responsibilities arising from recent tax law changes included in
    major legislation, including the American Recovery and Reinvestment Act
    and the Affordable Care Act.
        These investments in IRS enforcement programs are expected to
    generate $1.3 billion in additional annual enforcement revenue,
    resulting in a return on investment (ROI) of 6.4 to 1, once new hires
    reach full potential in fiscal year 2014. In addition, investment in
    new enforcement initiatives will also encourage voluntary compliance,
    further increasing revenue. According to the IRS, the deterrence value
    of these investments and other IRS enforcement programs on voluntary
    compliance is conservatively estimated to be at least three times the
    direct revenue impact.
        The NTEU strongly supports targeting additional resources to
    programs that would help close the tax gap, including new initiatives
    that deepen and broaden the IRS' focus on international tax compliance
    of high-net-worth individuals and entities. The IRS has demonstrated
    that targeted compliance resources more than pay for themselves through
    increased revenues, which has motivated past Congresses to target
    additional funds to these enforcement activities. In addition to
    generating additional revenue for the Federal Government, reducing the
    tax gap will help strengthen public trust in the fairness of the tax
    system which will positively impact voluntary compliance with tax laws.
                               physical security
        Mr. Chairman, as you know, last February, in what authorities
    believe was an intentional attack, a pilot crashed his small plane into
    a building housing almost 200 IRS employees in Austin, Texas, killing 1
    employee and seriously injuring several others. This brazen and
    cowardly attack, serves as a grim reminder of the great risk that the
    men and women of the IRS face each and every day in service of this
    country.
        As one of the most public faces of the U.S. Government, the IRS and
    its employees often bear the brunt of anti-Government rhetoric and
    threats. According to the Treasury Inspector General for Tax
    Administration (TIGTA) which is charged with investigating threats and
    assaults against IRS personnel, more than 1,200 threat and assault
    cases were referred to TIGTA for investigation between 2001 and 2008.
    The cases resulted in more than 167 indictments and at least 195
    convictions.
        That is why the NTEU was happy to see that the administration
    proposed $15 million to enhance physical security for IRS employees.
    This includes $10 million to expand guard serve at Taxpayer Assistance
    Centers (TACs) during filing season, $1.5 million to improve security
    at IRS facilities around the country, and $3.9 million to provide
    additional resources to identify and investigate individuals or
    entities whose anti-Government or anti-tax rhetoric exhibit behavioral
    traits associated with domestic terrorism.
        The NTEU believes these critical investments will enhance the
    overall security of IRS employees in the work place, while maintaining
    open access for the taxpayers that they serve.
                                contracting out
        Mr. Chairman, the NTEU recognizes that in the current fiscal
    crisis, it is critical that the Federal Government look for ways to
    maximize its resources and to root out waste, fraud, and abuse wherever
    they find it. One way in which the NTEU believes that the Federal
    Government can best accomplish this is to reform the broken competitive
    sourcing process, and bring contracted work back in-house. By ensuring
    Federal employees are able to compete for work with contractors on an
    even playing field, and identifying areas in which the Government could
    perform this work more effectively and efficiently, the Federal
    Government will be better able to provide high-quality services and
    will save taxpayer dollars. The administration has already begun to
    reform Federal contracting by requiring Federal agencies to cut
    wasteful contract spending, reduce over-reliance on contractors, and
    improve oversight and accountability. These efforts are expected to
    result in $40 billion in annual savings by the end of 2011 which could
    be used to ensure agencies have the necessary resources and staffing.
        In recent years, the Congress has acknowledged the inherent flaws
    in the competitive sourcing process and has included language in year-
    end spending bills that prohibit the use of funds to begin new public-
    private Circular A-76 competitions for another year. The NTEU strongly
    believes the current A-76 competition moratorium should be continued
    for another year until further steps are taken to reform the broken
    competitive sourcing process that has eroded the ability of agencies to
    perform many critical functions, and has led to contractors performing
    work that should be performed solely by Federal employees.
        In addition, we would strongly encourage the Congress to continue
    the current prohibition on the use of funds for private collection
    agencies through fiscal year 2012. The use of private collection
    agencies to collect tax debts has repeatedly been shown to be a waste
    of taxpayer dollars and lead to taxpayer abuse. The 2006 initiative
    resulted in widespread taxpayer abuse and a loss of almost $5 million
    to the Federal Government, after subtracting program administration
    costs and commissions payable to the PCAs. While the IRS ended the
    private tax collection program in 2009, it still retains the statutory
    authority to revive the program in the future.
                                   conclusion
        Mr. Chairman, thank you again for allowing the NTEU to provide our
    thoughts on the administration's fiscal year 2012 budget request for
    the IRS. We strongly believe that by investing in demonstrably
    effective enforcement and taxpayer service programs, the
    administration's request will allow the IRS to provide taxpayers with
    top-quality service, enhance voluntary compliance, narrow the tax gap,
    and reduce the deficit.

        Senator Durbin. Thank you very much.
        As I mentioned in my opening statement, the IRS deals with
    a huge volume, processing more than 230 million tax returns and
    issuing more than 109 million refunds. It's an indication of
    the challenge that you face, and your people that you work with
    face, on a regular basis. And, of course, there are going to be
    cases where people set out to defraud or cheat the Government
    in terms of filing these tax returns.
        I'd like to call your attention to one that's received some
    attention over the last year or so. This is the providing of
    refunds to people who are serving in prisons across the United
    States. The Treasury Inspector General for Tax Administration
    reported that erroneous prisoner refund claims are on the
    rise--up of 44,944 claiming refunds of $295.1 million in the
    year 2009.
        Even though the IRS has been able to prevent large amounts
    of these refunds from being issued--256 million were rejected
    in 2009, this year of the study--the amount of false refunds
    issued still hit a high of $39.1 million. Since 2004, when
    18,103 false tax returns were filed, nearly $123 million in
    fraudulent refunds have been issued to those serving in prison.
        Now, I can think of a situation where someone serving in
    prison may be eligible for a refund. It could happen. But
    clearly, in this case we're dealing with those ineligible to
    receive refunds who are trying to defraud the Government. They
    aren't satisfied with being punished by sitting in prison. They
    are dreaming up new crimes--at the taxpayers' expense here--to
    try to defraud the Government.
        And so let me ask you at the outset--I understand you've
    spoken to the U.S. Bureau of Prisons to try to make sure that
    we can have identification of those prisoners filing these
    returns. But I also understand that, when it comes to the State
    prison systems, that your authority to have this kind of
    information transferred will expire at the end of this year.
        Can you tell me what's being done to stop these false
    claims by prisoners, and what more we can do to protect the
    taxpayers and the Treasury?

                                PRISONER CLAIMS

        Mr. Shulman. Mr. Chairman, it's an issue we take very
    seriously and we've been focused on. The bottom line is, when
    we have the name of a prisoner, we can stop the refund from
    going out, and we do.
        The problem is getting the data. And we signed last year a
    memorandum of understanding with the Federal Bureau of Prisons,
    so we'll get the data in a format we need so we can put screens
    in place to block the refund.
        I sent letters out to the Governors of the 10 States that
    have the highest prison populations and the biggest problems
    here. We've since that time signed memorandums of understanding
    with seven of those States to get the information. We're in
    discussions with 17 other States. So, we've seen some progress
    with States getting us the information so we can block it.
        We have a bigger problem with big counties and
    municipalities, because we need to get information from them.
    They've got budget constraints; and we need to get the
    information in a format we can use in December, so we can load
    it into our system, so that we can put blocks in place for the
    filing seasons.
        What I would tell you--and I think the Inspector General
    recognized this in the last report--is, we're stopping more,
    we're detecting more, and we're screening more now.
        Senator Durbin. Are we prosecuting those who file false
    returns?
        Mr. Shulman. The biggest hammer that we have is sending
    someone to jail. And these people are already in jail. And so,
    what we've been doing in these memorandums with States and the
    Federal Government--and this is authority you talked about--is
    sharing tax data, which generally we can't do under 6103 of the
    tax laws, so that officials can do things like have additional
    punishment in prisons. Wardens can put a prisoner in solitary
    confinement and things of that like. Because the people we
    generally block are people who are there for life. As you
    mentioned, there's a lot of prisoners who are married, filing
    jointly, who are due a refund. So, what we need to do is screen
    the return and make sure we're not hurting the spouse of a
    prisoner.
        I think we've made a lot of progress. This year we've
    actually processed and done screens and follow-ups of 100,000
    more returns. I added resources to the unit that does the
    screening. And so, all of this is moving in the right
    direction. And as long as we get the information, we can
    properly block these refunds.

                                IMPROPER CLAIMS

        Senator Durbin. In the infinite wisdom of a Member of
    Congress, we dream up new tax deductions and tax credits for
    perfectly valid reasons--at least in our opinion. And then it's
    up to you to try to make it work. And one of them related to
    tax credits for energy efficient windows, doors and insulation
    and geothermal heat pumps and solar water heaters. I probably
    voted for it. I would have if it were a separate vote. It
    sounded like a good idea.
        For tax year 2009, taxpayers claimed more than $5.8 billion
    of the energy credits which were included in the 2009 Economic
    Stimulus Recovery Act. Based on a review of a statistically
    valid sample of 150 tax returns, the Treasury Inspector General
    for Tax Administration was unable to confirm home ownership for
    30 percent of that sample--45 of the taxpayers--which, of
    course, is required to claim the credit. So, there is, at
    least, a question mark going forward as to whether these 30
    percent of the people who claimed this money were eligible for
    it.
        In addition, the Inspector General identified 362
    ineligible individuals who were allowed to erroneously claim
    $404,578 in residential energy credits on their tax returns.
    These individuals included 262 prisoners--here they are again,
    now claiming that they deserve a tax credit for energy
    efficient windows in their prison cells, I guess--and 100
    individuals under the age of 18 who were ineligible to file.
        So, how do we get to the bottom of this--once again, with
    the prisoners, and, again, with those who are ineligible--to
    try to police the ranks and make sure that people aren't filing
    and claiming credits that they're not entitled to?
        Mr. Shulman. I think there's a couple of things. This is a
    worldwide phenomenon. When people wanted to give incentives to
    spend when there was a major economic meltdown across the
    globe, people quickly used the tax system to push a lot of
    money out to help stabilize economies. The tax system is
    efficient, and there's already an annual interaction that
    happens every year with most Americans.
        When we have time, we can properly set up filters, think
    this process through, engage with the industry, find out where
    there's potential leakage, find out what data we can get in,
    find out what data we can get through on our electronically
    filed returns, and then set up screens and filters. And we do
    that. For instance, in the report you referenced, we
    generally--this law happened very quickly, when we were trying
    to do some things--set up a set of filters. Our Inspector
    General--who provides incredibly valuable service, and we learn
    along the way, I think, both of us, as we go--recommended we
    put more filters in place while we were having dialogue on that
    report.
        Some leakage occurred. We'd like to have zero leakage.
    There's going to be some leakage with any credits, because
    we're only going to be able to screen and follow up with a
    certain amount. But we do follow-up. And so, when things happen
    very quickly, sometimes more refunds go out the door that are
    questionable. Then we have an audit program where we can go
    audit, find out what's there, do follow-up, and close. If we
    have a lot more lead time, with more developed credits, we can
    set up the screens ahead of time.
        But make no mistake--I think we're getting better at this,
    and we've a lot of sophisticated filters, and we stop the vast
    majority of fraudulent returns from going out. But if you're
    going to use the tax system, which is built on voluntary
    compliance, to achieve these goals we've got to get this
    balance right between getting refunds to people who are due
    them and rely on them, and blocking the bad ones, there's going
    to be some leakage. Our goal is to get that balance right--to
    narrow the leakage as much as we can.
        Senator Durbin. If--Senator Moran, just bear with me. I
    want to ask two questions to close this line here.
        In the most egregious cases, when someone is claiming
    they're a homeowner and entitled to these credits and, in fact,
    they're not----
        Mr. Shulman. Yes.
        Senator Durbin [continuing]. So, they are just clearly
    misrepresenting their eligibility for the program. It's not a
    math error. It's a clear misrepresentation. In those cases,
    when you detect them, is there follow-up in terms of penalties,
    fines, prosecution?

                              PENALTIES AND FINES

        Mr. Shulman. Penalties, yes. Fines, yes. We have limited
    prosecutorial resources. We try to spend those resources on the
    places that are going to create the most long-term deterrence.
    Our Criminal Investigation Division is balancing things around
    money laundering, terrorist financing, preparer fraud, identity
    theft fraud, and very specific tax fraud. We try to allocate
    the resources appropriately.
        So the answer is ``Yes''. And a lot of times, you'll see a
    scheme where one person puts a bunch of false claims in, files
    a return, comes back. An individual who claims $1,000 credit
    for himself fraudulently usually will be fined in more of a
    civil context than a criminal context. But the bigger the
    crime, the more prosecution is likely to happen. And as you
    know, it's a partnership with the Justice Department and local
    U.S. Attorneys.

                                IMPROPER CLAIMS

        Senator Durbin. So, we talked about these jail-cell
    taxpayers, and I've talked about this specific credit. If you
    could--the last question here--if you could take a look at the
    overall landscape, where do we find the most fraud--the most
    cheating going on in terms of people claiming what they are not
    entitled to under our tax code?
        Mr. Shulman. You know, the tax code is incredibly complex.
    There's a fair amount of noncompliance. Some of it is
    confusion; some of it's fraud. The places we focus, which is
    where we think the most leverage is for the tax system to make
    sure we protect the fisc, is overseas and offshore tax
    evasion--people just parking assets overseas. I would say,
    where there's complexity is where people hide money and push
    the envelope.
        We've been focused around preparer fraud, because we think
    it's a big point of leverage. If one preparer gets 1,000
    taxpayers and encourages them to do something fraudulent, a lot
    of times the taxpayer is unsuspecting. If we can lock that
    down, it's a big link in the system.
        And then refundable credits. In places where you can get a
    large tax credit, you find fraud. So, we did a lot of focus on
    the First-time Home Buyer Credit, where there was a big
    refundable credit that was temporary, that was quick. Earned
    Income Tax Credit--we put a lot of effort there, doing both
    civil and criminal follow-up. And then, this set of credits
    that you talked about, is where we put a lot of effort.
        Senator Durbin. Thank you.
        Thank you, Senator Moran, for your patience.
        Senator Moran. Mr. Chairman, thank you.

                                FRAUD DETECTION

        Commissioner, following that line of questioning, how often
    is it that the IRS finds the fraud, as compared to an Inspector
    General's report, or a GAO report requested by the Congress?
    How actively engaged and how successful are you in ferreting
    out the problem with some, without some other agency pointing
    out the fraud or the challenge?
        Mr. Shulman. Every tax return goes through a screen. We
    call it the Electronic Fraud Detection System (EFDS). It's our
    fraud filters. And it looks for, for example, returns that have
    the same address--100 returns that have the same address; big
    changes in income; not having the proper documentation attached
    or not including information in the return. We set filters and
    tolerances, frankly, based on resources. A lot of these are an
    indication that we need to follow up.
        And so, we have civil units that call employers and say,
    ``Was this person employed? Is this income accurate?'' And then
    it kicks out to criminal, who develop schemes, and that feeds
    our criminal prosecutions.
        What I would say is the GAO, our Inspector General,
    Congressional oversight all really help us by focusing on
    places where they think we've had too much leakage. I don't
    think there's been an instance--at least since I have been
    there--where people have found more fraud in their
    investigation than we've actually blocked.
        And so just to give you a sense of magnitude, our EFDS
    filters, screen filters, kick out between 1 and 2 million tax
    returns a year that we do follow-up on. We block every year and
    reject 2 million returns who have duplicate SSNs of either
    dependents or individuals. And sometimes it's a transcription
    error, but sometimes it's somebody trying to defraud the
    system. In EITC alone we protect $4 billion annually through
    our enforcement efforts and blocking refunds.
        We've got an incredibly active program there. But then it's
    very helpful to have people overseeing the program, finding
    where they think there's too much leakage, and we tighten--you
    know, it's a continual evolution and tightening up. Frankly,
    the real fraudsters, they're always testing our tolerances,
    sending things in to our systems. And so, we always have to be
    one step ahead.

                                PRISONER CLAIMS

        Senator Moran. Well, the two examples that Chairman Durbin
    indicated--the prisoner example--that's something you would
    have known before we read about it in the paper?
        Mr. Shulman. Well, sure, we've had extensive conversations.
    Look, it's counterintuitive to your average American that a
    prisoner could get a tax refund, right? So it's going to be in
    the paper.
        Senator Moran. It makes a story.
        Mr. Shulman. I think the reality is, some prisoners can get
    tax refunds. We can't just reject everyone. So we need to do
    screening.
        If you look at the reports that say there's been more, they
    also show that we've been screening more and blocking more and
    identifying more. It's just the volume's grown, so the gross
    volume of refunds were higher this year. The numbers, the
    percentages that we caught, the amount we caught and filtered,
    also grew exponentially. So, we were protecting a lot more
    money for the Federal Government. But, as a fraction, more was
    going out.
        Senator Moran. Okay.

                                    E-FILING

        You talked about e-filing and the savings that come from
    that successful program. Your sentiment--first of all, how much
    more potential is there for savings? Is there more, opportunity
    for more e-filing expected? And then second, you talk about the
    $190 million in efficiency savings, reductions and nonrecurring
    activities. What does that mean in the budget and
    appropriations process?
        Mr. Shulman. Sure. So, on e-file, just to tell you what
    we've done, we've shut down 5 of our 10 processing centers over
    the last 6 years. It hasn't been popular with folks where those
    processing centers were. But, we've been very clearly reaping
    the savings of e-filing. Right now, we plan to get to 80
    percent of returns e-filed. We're at 75 percent. But,
    certainly, we're going to look to reap more savings. So, we're
    at 75 percent individuals e-filing.
        Twenty years from now, my guess is the IRS won't take any
    paper. We still take some paper. I am hoping that percentage is
    just going to keep going up, and that's been a great success.
    Really working with the private sector, with individuals, to
    help them to understand, we take data security very seriously,
    so nobody will be worried with those 1 billion returns that
    there's going to be any leakage.
        Since I came here, and for every budget for the last 3
    years that I've submitted, we've always included substantial
    savings. Because I believe, as the head of a big hundred-
    thousand-person agency, that you can always find efficiencies.
    You've always got to be looking at core operations, stopping
    operations that don't make sense so you can keep investing in
    the future and positioning yourself for the future.
        This year, the $190 million is some savings from e-file.
    We're just reaping the benefits and cutting down our processing
    operations; reducing IT infrastructure. We've been going
    through a process called Capability Maturity Models, which is
    pretty standard practice in the private sector, where I came
    from--I used to be involved in helping to run stock markets and
    run big computer systems--where you standardize your processes
    across your whole IT infrastructure. So you have standard ways
    of documenting IT, standard ways of developing requirements.
    You bring in an outsider to observe--there's a thing called the
    Software Engineering Institute that will come in and do random
    audits to see where it is. And we've been promising and reaping
    benefits, for the last 3 years, $75 million a year by being
    more efficient and more standardized. And my Chief Technology
    Officer has signed up to those savings. And as long as I am
    here, you're just going to expect it, and we say we're just
    going to keep doing savings and adjusting core operations. It
    actually increases efficiency, while saving money.
        And then we made some tough choices. This year we didn't
    automatically send out any paper 1040 forms. E-filing crossed a
    threshold. We just said, even in the past, if you filed a paper
    1040, we didn't send you a paper 1040. I thought that was a
    self-fulfilling prophecy. So what we did instead this year, we
    sent you a postcard and said, if you really want your 1040,
    give us a call and we'll send it to you, but we're not going to
    spend $10 million printing and sending out those.
        We've cut contracts. I mean, this is just a series of
    issues. And to be honest, as the chairman said, we've been
    under a continuing resolution. Because there's inflation in
    things like rent and other things, it's an effective cut, and
    we've been doing aggressive cost cutting this year as well,
    beyond the things we listed in our 2011 budget as cost savings.
        Senator Moran. So, you would be requesting $190 million
    more in your appropriations request in your budget request, but
    for those savings?
        Mr. Shulman. Correct.

                                 FILING METHODS

        Senator Moran. Okay. What percentage of American
    individuals file their return with the assistance of a
    professional preparer?
        Mr. Shulman. About 60 percent last year. That number is
    actually going up. And then, another 20 percent use prepackaged
    software. So, 80 percent of people are using someone in the
    professional realm to help them with their tax return.
        Senator Moran. And if you use someone in the professional
    realm, is that an automatic e-file, or are there professional
    preparers who are still filing paper?
        Mr. Shulman. One of the things that, if you come out to one
    of our processing centers you will see--which drives me crazy--
    is someone who clearly printed, had developed their tax return
    on a computer, printed it and sent it to us. And I have got
    people there typing it back into the system after it had
    already been typed in once. And there's 10 percent error. We've
    been reducing it, but that is how you have transcription
    errors, and it's just incredibly inefficient.
        And so last year, the Congress passed an e-file mandate for
    preparers. We started, we've been phasing it in. It gave us
    authority to have any preparer who files 10 returns, to e-file.
    This year we started with preparers with 100 returns.
        The good thing about e-file, and I think we did this right
    over the years, is we only got to a mandate once we really had
    momentum and almost everyone that we could convince voluntarily
    to send in electronically had gone in voluntarily. And so, over
    the years we've really increased e-file. And, now there's a
    mandate that says if you're a professional preparer and you're
    using software, you're going to need to e-file--unless you get
    a waiver from your client who really wants to send it in----
        Senator Moran. Thank you.
        Mr. Shulman [continuing]. On paper.
        Senator Moran. Chairman, I have other questions, but I
    assume you do, too.
        Senator Durbin. Thanks a lot, Senator Moran.

                                    TAX GAP

        So we're in this debate here about our deficit and how we
    can come up with a savings of $4 trillion over 10 years, or
    roughly $400 billion a year, either in cutting spending or
    raising revenue. So, that is, kind of, the standard we're
    using--save $400 billion.
        It's estimated that $345 billion of Federal taxes go
    uncollected each year--a noncompliance rate of 16.3 percent.
    This gross tax gap problem illustrates an enormous untapped
    resource of Federal revenue which can go a long way to dealing
    with our shortfalls and our deficit.
        Most of the tax gap--$285 billion out of $345 billion, or
    82 percent--is attributable to under-reporting tax liability,
    $197 billion of that from individual income tax payers. Under-
    reporting can be the result of understated, or, can be
    understated income, improper deductions, overstated expenses,
    and erroneously claimed credits.
        So, we went through a little exercise here on the
    Affordable Health Care Act and decided that one way we could
    capture some of these uncollected tax revenues when it came to
    small businesses was to have more reporting from them, more
    1099s reflecting their business activity. Well, naturally,
    there was huge push-back from the business community saying,
    ``More paperwork? Thank you, Washington. That is just what we
    need.'' And so we back-tracked and walked away from that and
    said okay, we won't tighten up the system at the expense of
    more paperwork.
        So I want to ask you a pretty obvious question--with a
    pretty obvious answer, I am sure. Is there a way to address
    this tax gap without more reporting, more regulation, and more
    disclosure?
        Mr. Shulman. Our statistics basically show, when you have
    information reporting and withholding--like the average
    American's paycheck, where it's withheld and the employer sends
    in the taxes and they get a refund--you have more than 99
    percent compliance. Where you have some information reporting--
    mortgage interest deduction, 1099 reporting for interest on
    bank accounts that kind of thing--you've got 95, 96 percent
    compliance.
        Where you have no information reporting--cash economies,
    think about cash businesses--the compliance drops. It's hard to
    do these compliance studies. I mean, they're by their nature
    inaccurate, because what you don't get, you don't know. But we
    go out and we do research. We do some statistically selected
    samples, et cetera--you get 50 percent, 60 percent compliance,
    70 percent compliance, etc.
        And so the real answer, and the place where there's
    leverage, is information reporting. But as you said, we set up
    our tax system as a voluntary tax system, where you're supposed
    to be fully forthcoming with the Government, report what you
    know, and then we keep an eye on things. The way that we can
    have broad coverage and keep an eye on things is having a third
    party do information reporting. It's the only efficient way to
    really go at the tax gap. But because it affects a lot of
    people with the tax code, it becomes pretty politically
    unpopular, like you said, for example with the 1099 reporting.
        So that would have helped with the tax gap, but I fully
    understand both the politics and the reality around small
    businesses and what people are trying to do. And so, it's very
    tough.
        There was an economist who's spent a lot of time in tax,
    who said the thing to remember about the tax gap is, it's like
    a deep shale oil reserve. This is not just money sitting there
    that's easily tapped. I mean, we've in many ways tapped the
    easy money. We actually have a very high tax compliance rate in
    this country. There's only five countries who study the tax
    gap, and we're as high as any of them. And the real way to go
    at the tax gap is better information reporting, but it brings
    with it some burden.
        I do think there's some hope, though, as we get better at
    information technology, as information becomes more ubiquitous,
    it's lower cost and easier for people to do reporting. A great
    example is, this year we're implementing the credit card
    reporting, where we will get from credit card processors and
    people like PayPal, gross receipts that were paid into
    businesses. That's not a direct match, because some industries
    have high credit card receipts, some industries have lower
    credit card receipts. We'll look at those statistics, and it
    will be another factor we use in our audit selection and our
    compliance selection. And what we try to do with our compliance
    selection is spend time on noncompliant taxpayers and leave
    compliant taxpayers alone.

                             INFORMATION REPORTING

        Senator Durbin. So, I think you answered--I was going to
    ask a question, if other countries do it more effectively than
    we do, and I think what you said, we're in the top five in
    terms of compliance. So I, if there is an example of another
    country that has figured out how to do this with greater
    efficiency in terms of collecting taxes owed, I would
    appreciate you sharing it.
        The second part of it, though, I think you've alluded to.
    As, we started off with the premise, I receive a W-2 and my
    1040 form from the IRS, sit down and dutifully fill it out,
    sign it, mail it back, and some human being receives this paper
    and goes through it to see if I'm telling the truth, or it
    looks presentable--that whole system is starting to change and
    become paperless. And information is flowing back and forth out
    without the traditional paper form.
        So, are we looking, would you say, looking to a
    transformation in information gathering, as you just described
    with credit cards, that may make compliance easier? Where we
    may not be burdening local businesses so much with filing
    forms, but rather, having some basic flow-through of
    information that tells us what we need to know to assume, or,
    to assert tax liability?
        Mr. Shulman. I think there's a couple of possibilities. I
    laid out kind of a long-term vision. We're still quite a ways
    away from there, because we've got to get some of our core
    technology done. We're trying to get W2s, 1099s loaded into our
    system before filing. Right now, the way that all the reporting
    happens is, those don't get loaded in the system until after
    people file. We can't use those as screens and blocks. And in
    some ways, it's back to this refundable credit question.
        So I laid out a concept which basically asked if we could
    figure out a way to front-load the issue--could we potentially
    work with the private sector and make that information
    available to people? So rather than people scrambling around
    and trying to look through their files for those envelopes that
    say, ``Important tax return information,'' and opening it up
    and sending it to their accountant or keeping a file of it, we
    could have a database that would have that.
        When people filed, if there was a mismatch, we'd ask them
    to correct it. It would come in to us. We think we'd have a lot
    better compliance on the front end, and we'd create a lot less
    hassle for taxpayers. Right now, if you file and you get it
    wrong 6 months later you get a letter from us. You then have
    got to scramble to get your records, go back to your
    accountant, pay them again, and go through a second loop with
    us, which is probably unnecessary. So, I think that's one thing
    we can potentially do.
        Second is, I actually started an office, reporting directly
    to me, on compliance data analytics, which is looking at our
    databases and trying to make sure we're really smart about the
    information we have, and that we're applying appropriate
    treatment streams. So, for instance, we're looking at things
    like, rather than sending out the standard four letters to
    taxpayers, which they get over time, making a call to a
    taxpayer immediately when they have a tax liability, to try to
    sort things out immediately, much like a credit card company.
    We are continually looking at data analytics to get better.
        I think on the flow-through issue, it's more of a
    conceptual conversation, and one that we'd have to have a full
    vetting with the Congress. Because as the 1099 issue showed,
    people are very sensitive about burden, but people are also
    sensitive about the voluntary nature of our tax system and the
    government not knowing too much about people. And so in our
    compliance job we want to get as much information as we can,
    again, so we spend time with noncompliant taxpayers and don't
    spend time with compliant taxpayers.
        I just think in the world there's a lot more information
    available that can move around a lot quicker. And so, there
    could be less burdensome ways to get that information.

                                IT CAPABILITIES

        Senator Durbin. My last question is, do you have the
    information technology capability and the staff capability to
    develop what we've just discussed--a new generation of thinking
    about collecting and processing information that doesn't rely
    on the transfer of paper?
        Mr. Shulman. Well we've had this conversation. I think we
    have the staff capability. I would put my IT leadership team
    that we've recruited up against anybody else in the Government
    or the private sector. We brought in a CTO who had been head of
    technology for Boeing, then EDS, then Visa International. He's
    built an incredibly strong team. And that's why we're able,
    even under tough budget circumstances, to finally finish this
    20-year modernization of our account database.
        With that said, where I came from, building big technology
    and the benchmarks in financial service are, you spend
    somewhere between 10 and 20 percent of your budget on capital
    investment in the future and technology, because you're all
    about processing money, getting information, serving people--
    which is a very similar model to ours.
        Our capital investment, this President had asked to almost
    double it from 1.5 percent of our budget to about just under 3
    percent of our budget. And so my objective view is that this
    agency, for 20 years, has been underfunded in investing in
    technology for the future, and we're just getting there. And we
    recognize the constraints that we're under. And I'm not going
    to come and make a request for a 10 percent increase in our
    technology budget, or 10 percent of our budget be technology
    investment. But I do think the future of running the Nation's
    tax system is all about investment in technology, investment in
    information, dealing with information well. And we're going to
    need to keep investing.
        Senator Durbin. Thank you.
        Senator Moran.
        Senator Moran. Mr. Chairman, thank you again.

                                  1099 REPEAL

        The IRS 1099 issue that Chairman Durbin just talked about,
    as I understand, your budget request included $23.3 million and
    82 full-time employees attributed to that healthcare law's
    provisions. In light of its repeal, the IRS's request is
    reduced by that $23.3 million, and a change in the 180, or, I
    am sorry, in the 82 full-time employees?
        Mr. Shulman. Yes. Well, we've--that's dropped.
        Senator Moran. Good. That's the correct answer.
        Mr. Shulman. We just saved some money.

                           SECURITY OF TAXPAYER DATA

        Senator Moran. And then, what Chairman Durbin was talking
    about caused me to want to inquire about the security. You
    mentioned about the voluntary nature, the concern by Americans
    about information, the Federal Government having information
    about them. How secure of a system do we have in place that
    protects taxpayer information from those who would want to
    either damage, harm the system, or steal the information for
    their own use?
        Mr. Shulman. It is very secure and locked down. I always
    tell everybody when I was sworn in, I came back to the office,
    and the first briefing I had as IRS Commissioner was about
    protection of taxpayer data and data security. It's really
    built into the DNA of the IRS. There's laws that prohibit any
    of our individual employees from sharing information about any
    individual taxpayer with anyone, and we prosecute aggressively
    when anything happens.
        From the just pure data security infrastructure, we've got
    extensive perimeter infrastructure around the Web, and we're
    continually monitoring that. We coordinate with all of the
    Federal and national securities agencies around this issue to
    make sure our infrastructure is protected.
        And then for internal security, we have logs monitoring
    lockdown. And one of the things that I committed to when I came
    in, is that any new technology we put online is going to have
    100 percent lockdown data security. You have to make choices
    about what you're going to do, but we're never going to make a
    choice around data security. So, we take this very seriously
    and we will stay focused on it.

                               ACA IMPLEMENTATION

        Senator Moran. One of the reasons--I'll shift topics--but,
    one of the reasons you would request more money and more
    personnel is the passage of the ACA. Its constitutionality is
    being tested and, I assume, ultimately will be decided by the
    United States Supreme Court.
        In light of whatever the uncertainty is, whatever the
    magnitude of that uncertainty is, is the IRS operating as if it
    is constitutional and going to be fully implemented? Is there a
    middle-of-the-road approach? I assume that you've not, or,
    you're not sitting there waiting for the constitutionality to
    be determined. But are you behaving any differently in the
    expenditure of money, the use of personnel, the focus of
    resources because of the constitutional challenge?
        Mr. Shulman. Our job is to administer the laws that are on
    the books. And there's lots of tax laws that are in different
    places in the courts. This is obviously a high-profile one.
        Just to be clear, our responsibility regarding the ACA is
    to administer traditional tax laws, issue refundable credits,
    and collect some of the revenues for that. And we are
    implementing the law on the books. We're in the process of
    implementing the ACA. If, obviously, if something happens and
    changes, we'll move. Similar to the 1099 issue that was in
    there, we would have been prepared to implement that. We had
    started to do a small amount of planning. It got repealed, we
    stopped. But, we move forward with the laws that are on the
    books.
        Senator Moran. Timeframe wise, for implementation of ACA,
    what happens incrementally between now and 2014, or, its full
    implementation? Is there a series of additional use of
    resources, personnel and tax collections and enforcement?
        Mr. Shulman. Yes. So, you can really break up the work that
    we're going to need to do on the ACA into the technology
    infrastructure, largely around the refundable credits, and
    connecting with the State exchanges. And that's our biggest
    lift between now and 2014. Technology and operations are 82
    percent of the request in the 2012 budget. It's building the
    infrastructure to hook up with all the State exchanges, so when
    people are registering, they can find out their eligibility for
    tax credits, can sign up for tax credits, and then we have the
    information flows and the money flows with the insurance
    companies to be paying those on a regular basis.
        And then there's some very bespoke tax law in the ACA that
    we need to implement immediately. There's a lot of immediately
    effective provisions, such as an excise tax on tanning salons,
    which was implemented. And right now we're doing outreach to
    them. There's 2,500 who have never had an excise tax. And so,
    we're doing outreach, education, and then we'll have a
    compliance program.
        There's a credit for small businesses to help them buy
    insurance, or, I mean, to help them buy insurance for their
    employees. There's a tax on branded pharmaceuticals, which
    right now we've sent out the initial bills to the branded
    pharmaceutical companies for that. They're verifying the data.
    It's actually based on Government purchases. And so there's
    that kind of work, but that is a very small amount of the work.
        So between now and 2014, there'll be the immediately
    implemented tax provisions and the work that has to happen
    there. But the big lift is building the technology
    infrastructure to be ready to interface with the State
    exchanges and the insurance companies around the refundable,
    the $400 billion of refundable credits.
        Senator Moran. And that's required by, in 2014?
        Mr. Shulman. Yes. The open enrollment will happen sometime
    in 2013. And if you scope a systems build, you basically need
    to lock down requirements, then do your build, and then do your
    testing. So, there's a huge lift in 2012 around requirements
    and build, because by 2013 you should be testing the systems.
        Senator Moran. Mr. Chairman, I think perhaps my last
    question is related to Nina E. Olson, the National Taxpayer
    Advocate's, testimony. And she raised a couple of issues for me
    talking about, really, customer service, taxpayer service.

                           TAXPAYER SERVICE MEASURES

        The IRS's fiscal year 2010 management discussion analysis
    included the GAO's financial audit of the IRS. Collection
    related to enforcement activities totaled $57.6 billion--a 34
    percent increase more than 2004. By contrast, the Taxpayer
    Advocate noted that the IRS answered 74 percent of all calls
    from taxpayers seeking to speak with a telephone assister in
    2010, as compared to 87 percent in 2004. So, a decline of 13
    percent--13 percentage points--or 15 percent. So, less access
    to the person, the live person on the phone, I think, is the
    point that's being made here.
        And then, also, this sentence that, ``the backlog of
    taxpayer correspondence and the tax adjustments inventory has
    jumped by 76 percent. The percentage of `uncontrolled'
    correspondence received''--I don't know exactly what the word
    uncontrolled means, but it's in quotes--`` `uncontrolled'
    correspondence received but not yet entered into the IRS
    computer system has increased by 134 percent. And the
    percentage of taxpayer correspondence classified as `overreach'
    ''--again in quotes--``has increased by 135 percent.''
        What are we being told, and what does that mean?
        Mr. Shulman. As I mentioned at the beginning, I take very
    seriously that the vast majority of Americans are wrestling
    with a very complex tax code. Their interaction with us every
    year is: file a return and get a refund. And that's the last
    they hear of us. And I think about it, and I talk about it
    internally at the IRS, as we're a big financial service
    operation. We need to answer the phones, have a Web site that
    works, process paper, do all the things that you need to do to
    serve the American people.
        The reality is, we're right now operating with about 1,200
    less people than we were at the end of the last fiscal year
    because we were under a continuing resolution, and our budget
    was slightly reduced. We have allocations to taxpayer service
    and we have allocations to enforcement, and those enforcement
    allocations have a ring around them because they have a direct
    revenue-producing effect.
        The reality, in my mind, is our taxpayer service operations
    also bring in revenue. When we answer a tax law question, help
    them get it right, help them e-file, or build computer systems
    so that we can do matching--all of those actually help get the
    $2.3 trillion in revenue.
        And we're trying to get a mix of investments.
        The phone calls--I think we're actually doing okay. We
    actually need more people to answer more phone calls. We didn't
    get the request last year for 2011, and we've put the request
    in again for 2012, which will bring up that level of service.
        I would point out, because we use this thing we call the
    level of service. That is not: ``Is a taxpayer satisfied with
    the service?'' We actually have a 96 percent customer
    satisfaction rating on our phone calls.
        We've introduced a few things, which has dropped our level
    of service, but we think it increased satisfaction, like wait
    time. So, if a taxpayer calls and hangs up, that counts as a
    negative. So, that's not in the 74 percent. But we tell them,
    it's a 12-minute wait and you might want to call back at a less
    busy time.
        Our paper inventory has been growing because we've had less
    people processing paper. We either put people on the phones or
    put people on paper. The way we try to balance it is, during
    March and April we try to make sure we answer all the phone
    calls we can, and so paper gets backed up, and then we catch up
    with paper as we go.
        This request asks for more customer service folks because I
    mean, this, you've got to just process mail. You need people to
    process it, open it up, look at it, make decisions about where
    it goes. Things fall out and into error. And so, that's gone
    down.
        I've always leaned and said, around priorities, we want to
    make sure--technology is the key, and we need to make sure we
    invest in technology. Phones and paper and the Web--because we
    can move people off of paper and the phones if we can do more
    transactions on the Web--have to be invested in. And, frankly,
    the conversation that ends up happening with people who spend
    time with the budget is, there's always a tendency to put money
    into enforcement. And so, we really need--I think you're
    pointing out and the Taxpayer Advocate's pointed out--we need
    to keep an eye on a balanced program.
        I think the President's budget is very balanced and will
    get us--will boost those numbers, and so we'll be serving
    people better. But make no mistake about it. In tough budget
    times, there's going to be longer wait times; we're going to
    answer less phone calls; paper is going to take longer.

                                  IRS WORKLOAD

        Senator Moran. Are there more inquiries over time? More
    taxpayers are calling asking for help? Or less?
        Mr. Shulman. It spikes based on different kinds of
    provisions. We had a huge spike in 2008, when we sent out the
    stimulus checks to every American. People were, ``Where's my
    stimulus check? Am I going to get one?'' et cetera. And phone
    call volume spiked and our level of service plummeted.
        We've had kind of steady--and a lot of it depends on tax
    law, what's going to happen. If you look at our ACA request--
    just back to what you were talking about--technology and
    service, and making sure people understand how the rules work,
    what they're eligible for, is really the bulk of the request.
        Senator Moran. Thank you, Commissioner.
        Thank you, Mr. Chairman.
        Senator Durbin. Thank you.
        Senator Kirk.
        Senator Kirk. Mr. Chairman, you, I, none of us have been
    accused of ever being in a tanning booth, so I think you can go
    forward with your outreach without us being affected.

                                 TAX COMPLEXITY

        I want to ask about, the Taxpayer Advocate has estimated
    that it takes Americans about 6 billion man-hours a year to
    comply with Federal taxes, which, when you divide it out by a
    full-time equivalent employee, is 3 million jobs, just
    complying with Federal law. When we look at how people then
    comply with this law, in a practical way, about 60 percent of
    the individuals are hiring someone else, about 29 percent of
    people are interacting with software. It's a hidden tax on
    Americans of, on average, about $250 a year. And it's really an
    extra tax on top of the tax that you pay to comply with Federal
    law.
        Have you thought about a way--it seems to be unreasonable
    to take 3 million Americans in a country of 300 million to
    comply with Federal law. Have you thought about a way to
    develop metrics and then, through software, get it down to 1
    million Americans? Maybe just 2 billion hours to comply with
    taxes, instead of 6 billion? This is an incredible drag on the
    economy.
        Mr. Shulman. As you know, the Congress has the prerogative
    of passing the tax laws. Our job is to administer whatever laws
    the Congress passes and the President signs.
        Senator Kirk. But let me interrupt you on that. There are
    two ways in the 21st century we can handle complexity. The
    ideal way, for me, is a flatter, fairer tax, like what the Gang
    of Six may come up with to lower the rate to 28 percent. But,
    you know, we'll see.
        The other way is entirely in your hands--that an American
    doesn't pay TurboTax, doesn't pay H&R Block, simply logs onto
    the IRS Web site and fills out their taxes in an accurate,
    complete way in which the software is handling all of the
    complexity. And the amount of time spent complying with Federal
    law drops like a rock, which is entirely within your purview.
        Mr. Shulman. We were talking earlier about my view, in
    looking at the metrics, that we've under-invested in IRS
    technology for more than 20 years--not in recent history. I
    will tell you frankly, we don't have the capability. We need to
    build some things like our core account database, and get that
    off of a 30-year platform, which we're finishing this year. And
    so, we need to build some core infrastructure.
        We do have available forms that calculate, that people can
    go in and file online directly with us.
        I think there's a big discussion about the IRS having
    software. And, frankly, it's an administrative discussion. But,
    it's also a political discussion about----
        Senator Kirk. Your total budget is how much?
        Mr. Shulman. Our total budget is about $12 billion.

                                DIRECT E-FILING

        Senator Kirk. About $12 billion.
        And, Mr. Chairman, I think something we might work on--
    because I think Americans would love not to pay TurboTax, and
    not to pay someone else, just, my guess, correct me if I am
    wrong--to develop a software package might be a $20- to $30-
    million job? And then put it up on the Web for free to
    Americans?
        Mr. Shulman. I mean we've taken some looks at this. I don't
    think it's quite that simple. And I think there are choices----
        Senator Kirk. Actually----
        Mr. Shulman [continuing]. And I can show you some----
        Senator Kirk. I would just disagree. It might actually be
    even more simple. Because the software companies have to make
    software calls based on checking with you. Whereas, you
    actually own all the rules and could be setting up the decision
    matrix, because you're the authority.
        Mr. Shulman. I would love, Senator, to talk to you about
    this further, and I'm happy to talk about it here. I've got
    lots of letters on both sides of these issues about, should we
    be in the business of the sets of choices that are embedded in
    software, or shouldn't we?
        What I would tell you is, we've got a very full plate right
    now of technology investments that we need to get done. That
    would build the basic infrastructure to start talking about
    those things, and I would welcome a full-ranging discussion
    about it.
        Senator Kirk. Chairman, I think it might be something that
    we can work together on.
        Because it should--it shouldn't be a theological discussion
    for you. Your mission should be to make it as easy as possible
    to comply with Federal law. So, this argument inside your shop
    should end, like, in an hour.
        And then you say, how do we then deploy software in a 21st
    century context so that an American gets on, puts in their
    basic data, files, doesn't pay anybody, and, you know, sort of
    like the E-Verify program--we're making it as easy as possible
    through an Internet 21st century solution to comply with
    Federal law.
        Thank you, Mr. Chairman.
        Senator Durbin. Thank you, Senator Kirk.
        Oh, a call from H&R Block.
        Thank you very much for, thanks for--and I don't think
    that's, I think it's a valid question.
        Mr. Shulman. Oh, I do too. I totally agree.

                                 TAX COMPLEXITY

        Senator Durbin. If we can eliminate the middleman, the
    middleman will hate it, but it may save taxpayers money. And
    if, I'm looking for ease of filing, to be, put another idea on
    the table--which will never pass as a law--I may have mentioned
    to you that about 15 years ago my accountant died in
    Springfield. And I said, come on. I'm a lawyer. I'm a Senator.
    My tax return is not that complicated. I'll do it myself.
        Every Member of Congress should be required to do their own
    personal income tax return. I guarantee, we'd have tax
    simplification overnight. Because I struggled with it for hours
    thinking, why is this so hard? You know? Because I don't do it.
    And I didn't have a computer program to work with. I was just
    using my wits. And it didn't turn out to be that impressive.
        But the point I am getting to is that the complexity of the
    system, I think you would agree, needs to be continually
    reviewed, so that we can make it within the grasp of ordinary
    Americans to understand how their taxes are being calculated.
    If there's a mystery associated with it, there is a sense of
    injustice that I'm paying, and he isn't. You know, that sort of
    notion. And it is expensive as heck to get some of these tax
    preparers to do some pretty basic returns. So, I don't think
    Senator Kirk's off base that, and I want to follow through with
    it. Let's see what we can do about that.
        Senator Moran, do you have anything more?
        Senator Moran. I do not.

                         ADDITIONAL COMMITTEE QUESTIONS

        Senator Durbin. Thanks for coming. I appreciate it,
    Commissioner Shulman. We'll have some written questions for
    you, and maybe some other colleagues will send some along. I'd
    appreciate it if you'd take a look at them. Thanks.
        Mr. Shulman. Thank you very much.
        Senator Durbin. Thank you.
        [The following questions were not asked at the hearing, but
    were submitted to the Department for response subsequent to the
    hearing:]
                Questions Submitted by Senator Richard J. Durbin
                        regulating federal tax preparers
        Question. Every year, more than one-half of all taxpayers pay
    someone else to prepare their Federal income tax returns. In calendar
    year 2009, the Internal Revenue Service (IRS) processed approximately
    83.1 million individual Federal income tax returns prepared by paid
    preparers.
        Last year, the IRS launched an oversight program to regulate paid
    tax return preparers. The purpose of this initiative is to improve the
    accuracy and quality of filed tax returns and to heighten awareness of
    preparer responsibilities.
        All preparers must now obtain a preparer tax identification number
    (PTIN) and pass a tax compliance check. Additionally, over the next
    several years, the IRS plans to establish competency testing and
    continuing education requirements for preparers.
        The fiscal year 2012 budget request for the IRS includes nearly $17
    million to increase oversight of tax return preparers. Among the
    efforts planned are ensuring that all tax practitioners, tax preparers,
    and other third parties in the tax system adhere to professional
    standards and follow the law. In addition, the IRS will develop a
    public database so that the public can ensure that their tax return
    preparer is registered with the IRS.
        How is the paid tax preparer registration initiative progressing?
        Answer. Since September 28, 2010, more than 708,000 individuals
    have obtained or renewed their PTINs in the IRS Tax Professional PTIN
    System. The IRS processed approximately 95 percent of the applications
    online and 5 percent on paper. Per newly implemented user fee
    regulations, applicants must pay $64.25 annually for PTINs, consisting
    of $50 to recover IRS costs and $14.25 for third-party vendor costs.
        On June 3, 2011 (scheduled to be effective on August 2, 2011) the
    IRS published the final regulations that amended Treasury Department
    Circular No. 230 (Circular 230).\1\  Some of these significant changes
    include creation of a new registered tax return preparer designation,
    extension of Circular 230 ethical rules to all paid preparers, creation
    of new rules applicable to continuing education providers, expansion of
    the definition of practice to include return preparation, and numerous
    other revisions.
    ---------------------------------------------------------------------------
        \1\ Regulations Governing Practice Before the Internal Revenue
    Service.
    ---------------------------------------------------------------------------
        In April 2011, the IRS selected two vendors to develop/administer
    the competency testing and fingerprinting programs. Planning is
    underway for a projected fourth quarter 2011 launch of both programs.
        In preparation for the launch of a new 15-hour annual continuing
    education requirement for certain preparers, the IRS is gathering
    information to help revamp the education provider approval process. The
    IRS is targeting the new continuing education requirement to begin
    January 2012.
        Question. To what extent is the IRS identifying and weeding-out
    unscrupulous or unqualified tax preparers?
        Answer. The IRS is developing a competency test for return
    preparers. Additionally, we will begin fingerprinting return preparers
    in order to conduct a suitability check. Fingerprinting will help to
    insure that those who are entrusted with taxpayer information do not
    have a criminal history of violations.
        The IRS continues to develop and enhance various internal filtering
    tools to detect egregious behavior and inaccurate return preparation.
    These tools will enable the IRS to look at aggregate individual return
    information and extract unique characteristics, identifying likely
    questionable issues with a return preparer.
        We are developing a comprehensive database to house all preparer
    information, with the goal of detecting unscrupulous return preparers
    and intervene early. This central database will enable the IRS to track
    preparers who try to avoid detection through changes in location and
    varying customers. The IRS is also designing a referral system to
    investigate and timely address taxpayer and stakeholder complaints
    surrounding return preparers. The IRS is also developing an aggressive
    and dynamic identification system for preparers who are being
    compensated to prepare returns, but who are not properly identifying
    themselves.
        Additionally, the IRS is taking steps to address preparer
    compliance. Beginning in July, we will begin contacting more than
    100,000 preparers who prepared returns in 2011, but failed to follow
    the new requirements. These preparers either used outdated PTINs or
    Social Security Numbers as identifying numbers on the returns they
    prepared. Also, we have identified more than 1 million returns that
    appear to have been prepared by someone other than the taxpayer, and
    later this year we will begin to contact those taxpayers to determine
    who actually prepared these returns.
        These initial efforts are part of a comprehensive effort to improve
    both the way in which the IRS identifies problematic preparers and the
    methods used to bring them into compliance. Unscrupulous preparers may
    attempt to elude the new requirements by not signing the returns they
    prepare. With better data and stronger analytical and historical
    knowledge, our goal is to ensure all preparers comply with the rules
    and that unscrupulous or unethical preparers do not continue to prey on
    taxpayers and the tax system.
        Question. To what extent does the IRS plan to assess the impact of
    tax preparer registration on compliance?
        Answer. The IRS has developed a Service-wide preparer compliance
    strategy to ensure return preparers adhere to the newly implemented
    registration requirements. The scope of the strategy is to review
    return preparer compliance with return filings, and includes e-file
    visitations, return preparer visitations, ghost preparer visitations,
    and preparer action cases.
        This integrated strategy allows for a consistent implementation of
    the program and assessment of sanctions and/or penalties, and
    identifies the potential noncompliant/questionable paid return
    preparers. Through this strategy the IRS will identify the population
    of return preparers who may have chosen to ignore the new tax preparer
    registration requirements.
        The IRS is also developing a proposed set of long-term strategic
    measures that will enable the agency to assess the effect of the
    program on tax compliance. To do this assessment, the newly established
    IRS Return Preparer Office (RPO) is working with Research, Analysis and
    Statistics and the Office of Compliance Analytics. The IRS plans to
    establish a baseline for the measures in 2012 and to track progress
    from that point.
        Additionally, the IRS is developing a proposed set of short and
    long-term strategic measures that will enable the agency to assess the
    effect of the program. Short-term measures that could be used to assess
    program performance using current compliance metrics include the
    Discriminate Function (DIF) score,\2\ the Dependent Database (DDB) Rule
    Breaks,\3\ Risk Scores,\4\ and accuracy measures.\5\ With the exception
    of the risk scores, the IRS designed all of the other preceding metrics
    for purposes other than measuring preparer compliance. The newly
    established IRS RPO is working with the Office of Research, Analysis,
    and Statistics and the Office of Compliance Analytics to develop
    longer-term strategic measures. The IRS plans to establish a baseline
    for the measures in 2012 and to track progress from that point. The RPO
    will develop this more customized means for measuring the impact of the
    preparer program over the next 2 to 3 years.
    ---------------------------------------------------------------------------
        \2\ The DIF is a mathematical technique used to classify income tax
    returns as to examination potential. Under this concept, formulas are
    developed based on available data and are programmed into the computer
    to classify returns by assigning weights to certain basic return
    characteristics. These weights are added together to obtain a composite
    score for each return processed. This score is used to rank the returns
    in numerical sequence (highest to lowest). The higher the score, the
    higher the probability of significant tax change.
        \3\ DDB Rule Breaks are used to verify eligibility for the Earned
    Income Tax Credit by determining if a taxpayer is eligible to claim
    dependents.
        \4\ The IRS developed a risk-based scoring tool to identify high-
    risk preparers based on filters that look at volumes and ratios of
    certain deductions from various schedules.
        \5\ By using data collected ruing tax administration processes
    (math errors, Automated Underreporter (AUR), and the Examination
    Operational Automation Database), it may be possible to develop a
    limited accuracy/error rate for individual preparers as well as groups
    of preparers.
    ---------------------------------------------------------------------------
        Question. What performance indicators will be used to measure the
    impact of regulating paid preparers?
        Answer. As noted above, the IRS is evaluating current compliance
    metrics to assess the near-term effect (6-18 months) of the program.
    Over time, the IRS will develop a more comprehensive measure of
    compliance that can be more directly tied to the specific education,
    service, and compliance initiatives of the program.
        In the meantime, the IRS is developing indicators to measure the
    impact of regulating paid preparers. The IRS is still developing the
    suite of indicators. Indicators may include, for example:
      --Number of tax preparers who apply for a PTIN;
      --Number of applicants who pass/fail a background check;
      --Number of applicants who pass/fail a personal tax compliance check;
            and
      --Incidence of paid preparers misrepresenting professional credential
            to the IRS and the public.
        The above indicators are a small representation of those the IRS is
    developing. However, such indicators focus on outputs rather than on
    outcomes. The development of outcome measures requires additional time
    and experience.
        The IRS has also developed a Service-wide preparer compliance
    strategy to ensure return preparers adhere to the newly implemented
    registration requirements. The scope of the strategy is to review
    return preparer compliance with return filings, and includes e-file
    visitations, return preparer visitations, identification of
    unregistered preparers, and visitations and preparer action cases.
    Measures are included for each of the strategy's components, which
    include letters and visits to high-risk preparers, program compliance
    checks, and identification of nonsigning return preparers.
        This integrated strategy allows for a consistent implementation of
    the program and assessment of sanctions and/or penalties, and
    identifies the potential noncompliant/questionable paid return
    preparers. Through this strategy the IRS will identify the population
    of return preparers who may have chosen to ignore the new tax preparer
    registration requirements.
        Question. Does the IRS expect to be able to cover the costs for the
    entire registration program with user fees or will you need to depend
    on existing compliance funds to support the program?
        Answer. The user fees are necessary to recover the costs to the IRS
    that are associated with administering the PTIN application and renewal
    program, undertaking the fingerprinting and testing requirements, and
    providing the special benefits that are associated with obtaining a
    PTIN. The costs to the Government include:
      --the development and maintenance of the IRS information technology
            system that interfaces with the prime contractor's systems;
      --the development and maintenance of internal applications;
      --IRS customer service support activities, which include development
            and maintenance of an IRS Web site and call center staffing;
            and
      --personnel, administrative, and management support needed to
            evaluate and address tax compliance issues, investigate and
            address conduct and suitability issues, and otherwise support
            and enforce the programs that require individuals to apply for
            or renew a PTIN.
        User fees do not support traditional compliance activities. In
    fiscal year 2012 the IRS requested funding for initiatives that focus
    on preparer activities and utilize traditional enforcement actions
    currently conducted by IRS personnel.
              budget constraints and forecast in the face of cuts
        Question. In the final continuing resolution enacted for fiscal
    year 2011, funding for the IRS was maintained at the fiscal year 2010
    enacted level, which was $487 million below the requested level.
        What initiatives planned for fiscal year 2011 were put on the back-
    burner as a result of the reduced level?
        What are the consequences of deferring or not being able to address
    the resource needs contemplated in your fiscal year 2011 funding
    request?
        Answer. Due to the reduced funding in fiscal year 2011, the IRS
    will not realize the projected new hires who would have reached full
    performance potential by fiscal year 2013; therefore, the IRS will
    collect $1.9 billion less in Federal revenues per year due to a
    diminished ability to fairly enforce tax law. As a rule of thumb, for
    every $1 spent on additional enforcement initiatives, the IRS would
    have collected about $7 in revenue or more at full performance, so
    these cuts actually add to our Federal deficit. American taxpayers will
    also see a diminished level of telephone service as a result of these
    cuts. Specifically, the following initiatives were put on the back-
    burner as a result of the reduced level:
          International.--Without the funding to hire additional staff, the
            IRS estimates that it will not collect an additional $812.2
            million in enforcement revenue that would have been collected
            once the new fiscal year 2011 hires reached full potential in
            fiscal year 2013. Furthermore, the IRS was unable to increase
            data capture from certain paper returns that would have
            improved identification of abusive transactions using complex
            enterprise structures, and was unable to increase the capacity
            to support law enforcement efforts to investigate and address
            multi-jurisdictional tax evasions.
          Examination.--Without the additional planned staff in field
            examination, specialty tax (matters that involve the excise,
            estate and gift and employment tax programs), correspondence
            examination and Automated Underreporter, the IRS estimates that
            it will not collect an additional $659.6 million in enforcement
            revenue that would have been collected once the new fiscal year
            2011 hires reach full potential in fiscal year 2013.
          Collection.--Without the additional staff the IRS planned to hire
            in field collection and the Automated Collection System (ACS),
            the IRS estimates that it will not collect an additional $474.4
            million in enforcement revenue that would have been collected
            once the new fiscal year 2011 hires reached full potential in
            fiscal year 2013.
          Increase Telephone Level of Service (LOS).--Without the
            additional funding, the IRS will deliver a 71 percent LOS in
            fiscal year 2011, instead of the 74 percent LOS achieved in
            fiscal year 2010.
        Question. The IRS has outlined a handful of ambitious high-priority
    performance goals for fiscal year 2012. These include achieving 4.5
    million document matching closures (where the IRS information does not
    match taxpayer reported information), ensuring 80 percent of individual
    taxpayers receive refunds on a 5-day cycle in the new customer account
    engine database; attaining an individual income tax filers' American
    Customer Satisfaction Index score of 70 percent; improving telephone
    level of service to 80 percent; and raising the individual e-File rate
    to 76 percent.
        How might these goals and your proposed IRS priorities for fiscal
    year 2012 be impacted and IRS operations affected if the additional
    resources you seek aren't addressed given the austere fiscal
    projections?
        Answer. Without the funding requested in fiscal year 2011 and
    fiscal year 2012, the IRS will have to delay/reduce program priorities,
    identify alternative funding sources, and/or decrease base resources in
    other programs to implement mandatory legislation, such as the Foreign
    Account Tax Compliance Act, Merchant Card and Basis Reporting, Tax
    Return Preparer, and the Affordable Care Act. Furthermore, the IRS may
    be unable to:
      --Deliver an 80 percent telephone LOS;
      --Replace the outdated Web portal environment and provide additional
            online services to taxpayers;
      --Expand global high-wealth coverage, and further its global presence
            and pursuit of offshore tax and financial crimes;
      --Increase coverage in ACS and Offers in Compromise collection
            programs;
      --Develop a comprehensive and integrated compliance strategy for
            administering refundable credits and addressing refund schemes;
      --Address increasing workloads in Appeals and Counsel;
      --Enhance security and disaster recovery systems capability;
      --Upgrade the Integrated Financial System;
      --Improve compliance by leveraging data;
      --Enhance physical security for employees; and
      --Continue migration from an aging tax administration system.
                          capturing additional savings
        Question. The IRS found $75 million in savings for 2012 through
    reductions in information technology (IT) infrastructure. These savings
    were identified through a systematic process to which several staff
    were dedicated.
        Can the IRS apply this systematic approach agency-wide to identify
    more savings?
        Answer. The IRS uses a variety of approaches to identify savings,
    including soliciting ideas from front-line employees, establishing task
    forces of agency subject-matter experts, conducting analysis of
    existing programs, streamlining existing processes, and directing
    detailed analysis to determine the need and the effectiveness of each
    program. In addition to the approaches listed above, in the annual
    internal instructions and guidance for the budget submission, the IRS
    will continue to look to the business units to identify specific and
    achievable savings and efficiencies.
        Question. What is your reaction to the suggestions by the
    Government Accountability Office (GAO) that the IRS may be missing
    savings opportunities and that the costs of conducting periodic reviews
    on other select aspects of the budget, targeting areas with high
    potential for savings and efficiencies, could be offset by the savings
    that are identified?
        Answer. The IRS remains committed to exploring additional areas for
    savings and efficiencies as is evidenced by the identification of $190
    million in savings and efficiencies in both the fiscal year 2011 and
    fiscal year 2012 budgets, and will continue to employ new approaches to
    identify opportunities for further savings, balancing the cost with the
    expected benefits.
            improved utility of budget request: gao recommendations
        Question. Because of the size of the IRS's budget and the
    importance of its service and compliance programs for all taxpayers,
    the subcommittee requested that the GAO to review the fiscal year 2012
    budget justification for the IRS.
        In its April 11 report (GAO-11-547), the GAO stresses that several
    of the open matters for the Congress or recommendations to the IRS have
    the potential to increase revenue or savings if implemented.
        To improve the usefulness of the budget request for the IRS, the
    GAO recommends that the IRS take the following four actions:
      --further expand efforts to systematically identify savings and
            efficiencies as part of its budget development process on a
            periodic, but not necessarily annual, basis;
      --report in its budget justification how savings beyond projections
            were used. The amount of explanation provided should correspond
            to the amount of the savings;
      --provide cost estimates for individual legislative proposals in
            future budget justifications; and
      --include measures of cost and schedule performance for major IT
            systems in Operations Support, such as it does for Business
            Systems Modernization (BSM).
        What is the IRS's reaction to the findings and recommendations of
    the GAO?
        Answer. The IRS appreciates and agrees with many of the GAO
    recommendations. The IRS agrees to the following:
      --Continue to expand efforts to systematically identify savings and
            efficiencies throughout the budget process;
      --Include in future budget submissions actual savings and to identify
            how additional savings beyond projections are utilized;
      --Provide costs for individual legislative proposals in future budget
            submissions for those proposals received in sufficient time to
            prepare the cost estimates; and
      --Provide cost and schedule performance for major IT systems in
            Operations Support in future budget submissions.
        Question. Are the GAO's proposals for enhancing your budget
    presentation reasonable ones and worthwhile for inclusion in your
    fiscal year 2013 budget submission?
        Answer. The GAO's proposals for enhancing the IRS budget
    presentation appear reasonable and the IRS will strive to include them
    as a part of the fiscal year 2013 and future budget submissions.
                                 measuring roi
        Question. In this year's congressional budget justification, the
    IRS estimates the ROI for six proposed new enforcement initiatives.
        The fiscal year 2012 budget includes $339 million in new IRS
    enforcement initiatives, which raise $1.3 billion in revenue annually
    at full performance. This is a ROI of 4.5 to 1 when new hires reach
    full potential in fiscal year 2014.
        The GAO has consistently recommended that the IRS compile actual
    ROI outcome data that could be compared to the original projections.
        How much progress has been made developing actual ROI's to measure
    the effectiveness and success of initiatives previously funded to
    determine if the anticipated revenue was reaped, exceeded, or fell
    short of projections?
        Answer. The IRS has made progress in measuring the effectiveness
    and success of the fiscal year 2009 and fiscal year 2010 initiatives.
    The IRS is able to compare the actual revenue collected (adjusted for
    the late hiring of the fiscal year 2009 and fiscal year 2010 initiative
    staff) to the projected revenue expected from the initiatives' hires in
    the three major enforcement functions--Examination, Collection and AUR.
    As the table below shows, in fiscal year 2010, the enforcement revenue
    collected exceeded fiscal year 2009 collections by $8.7 billion, or
    $7.5 billion once initiative revenue is removed. The large increase in
    fiscal year 2010 can be attributed to several factors--new initiative
    hires, closing of several large cases, and continued implementation of
    better case selection and case analysis tools.

                                                                    [In millions of dollars]
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                            Additional
                                                                             revenue                                                             Revenue
        Actual enforcement revenue       Fiscal year      Fiscal year       collected       Fiscal year      Fiscal year        Revenue         collected
                collected                    2009             2010         (fiscal year         2009             2010        projected from    above/below
                                                                           2010-fiscal                                      initiatives \1\     prior year
                                                                            year 2009)                                                            level
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    Examination......................           17,446           23,563            6,117            179.5            414.7            594.2          5,522.8
    Collection.......................           26,871           29,105            2,234             58.7            258.9            317.6          1,916.4
    AUR..............................            4,569            4,924              355             47.4            239.8            287.5             67.5
                                      ----------------------------------------------------------------------------------------------------------------------
          Total......................           48,886           57,592            8,706            285.9            913.4          1,119.3          7,506.7
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    \1\ Adjusted for staggered on-board of hires.

        Question. The IRS is currently developing a methodology to compare
    actual costs to projected costs so that a ROI can be calculated for the
    three major enforcement functions.
        Would it not be prudent and helpful to determine the extent to
    which your revenue forecasts were accurate and the yield was realized?
        Answer. The IRS agrees it would be ideal if the IRS could determine
    the exact accuracy for its revenue forecasts.
        It is important to recognize the actual revenue collected is
    affected by many external and internal factors such as the economy,
    implementation of new legislative proposals, enforcement resources,
    changing priorities, and implementation of new case selection and case
    analysis tools.
        Question. Assuming that the Congress is able to provide these
    resources as requested and that the IRS proceeds with the initiatives
    as planned, how will we know whether this was a wise investment?
        Answer. The specific answer depends on the initiative. Some
    initiatives relate to short-term revenue-producing activities, which
    can be measured by program performance and compliance results. Others
    are longer-term and strategic, with a larger payback in the long-run,
    but are more difficult to measure in the early years. In either case,
    the IRS articulates, for each initiative, suggested measures or
    indicators for what the initiatives will deliver, which can serve as
    the basis for evaluating these initiatives after the fact.
                   it funding: cost and schedule information
        Question. The IRS seeks $2.67 billion for IT funding in fiscal year
    2012, of which $333.6 million (12.5 percent) is for BSM and the $2.3
    billion (87.5 percent) is for Operations Support.
        The IRS funds 155 IT systems. Of these, about 31 are considered
    ``major,'' each having an overall life-cycle cost of greater than $50
    million or an annual budget of greater than $5 million. The other 124
    systems are ``non-major.''
        The GAO's review of the systems funding justification notes the
    lack of cost and schedule performance information for the bulk of the
    IT funding.
        Can the IRS undertake the formulation and submission of better
    estimates for at least some of the major systems?
        Answer. The IRS plans to provide cost and schedule performance for
    major IT systems in Operations Support in future budget submissions. A
    Treasury and OMB reporting system for all major IT investments already
    contains the cost and schedule data. In the future, the IRS will
    utilize an extract to provide the information for the congressional
    justification.
        Question. What factors or circumstances hamper the IRS's ability to
    develop such estimates?
        Answer. As part of budget formulation process, the IRS currently
    develops high-level estimates of cost and schedule for each major and
    nonmajor IT investment. Once the Congress enacts the fiscal year
    appropriations bill, the IRS completes the process by developing the
    more detailed cost and schedule plans. The timing and resources
    required hinder the IRS's ability to develop more detailed estimates
    before the enactment of appropriations.
        During the initial design stage, the IRS uses a tool to produces a
    Rough Order of Magnitude (ROM) estimate. After that ROM exercise, the
    IRS follows-up with a rigorous estimation analysis, updated during the
    passback cycle. On average, a full costing exercise takes 55 business
    days, three full-time equivalents and participation of multiple IRS
    business unit representatives. This analysis can be completed prior to
    the enactment of the appropriation, but generally would not be captured
    in time for inclusion with the budget submission.
        Each year the IRS identifies in the internal budget formulation
    process new IT investments required to implement legislation and other
    IRS strategic priorities that become part of the President's budget
    request. The IRS submits proposals and develops cost estimates based on
    past experience with similar projects. The IRS includes cost estimates
    by major category (i.e., labor, contractor costs, equipment, software,
    etc.) in the cost tables that are part of each initiative justification
        Once the Congress appropriates funding for the new IT projects, the
    IRS develops detailed requirements, cost and schedule information. This
    information is available at ITDashboard.gov.
             volunteer income tax assistance (vita) scope expansion
        Question. Almost all businesses (more than 90 percent) start as a
    sole proprietorship or self-employed businesses. Unless incorporated or
    part of a partnership, self-employed business income is subject to
    taxation through calculations performed on ``Schedule C'' (or C-EZ).
    Each year, approximately 20 million self-employed businesses file a
    Schedule C or C-EZ.
        In August 2010, the IRS, in partnership with the National Community
    Tax Coalition and Self-Employed Tax initiative, launched the Schedule C
    VITA Pilot for the 2011 tax season.
        The pilot is designed to determine the feasibility of restructuring
    IRS policies governing self-employment tax preparation at VITA sites.
    The 12 VITA sites involved in the pilot are exploring the expansion of
    service delivery to low-income, self-employed individuals.
        What are the preliminary results of the Schedule C VITA pilots?
        Answer. There are 24 sites participating in the Schedule C VITA
    pilot. Preliminary results indicate a total of 3,216 Schedule C returns
    filed at those 24 pilot sites from January 1 to June 6, 2011.
        Question. When will a complete assessment be available?
        Answer. IRS will share the complete assessment with participating
    stakeholder partnerships, education, and communication partners by July
    31, 2011. Additionally, IRS will have a summary of the results by mid-
    August.
        Question. Does IRS plan to extend and expand the pilot more broadly
    to other VITA sites to expand the program reach to small businesses?
        Answer. IRS is still waiting for the final report results.

                             CONCLUSION OF HEARINGS

        Senator Durbin. This will conclude the hearings for this
    fiscal year and the subcommittee will stand in recess.
        [Whereupon, at 11:34 a.m., Wednesday, June 8, the hearings
    were concluded, and the subcommittee was recessed, to reconvene
    subject to the call of the Chair.]

           LIST OF WITNESSES, COMMUNICATIONS, AND PREPARED STATEMENTS

                                  ----------
                                                                       Page

    Cherecwich, Jr., Paul, Chairman, IRS Oversight Board, Department
      of the Treasury, Prepared Statement of.........................   194
    Cochran, Senator Thad, U.S. Senator From Missouri, Questions
      Submitted by...................................................   116
    Community Development Bankers Association, Prepared Statement of
      the............................................................   161
    Cruz, Warner, President, J.C. Restoration, Statement of..........   148

    Durbin, Senator Richard J., U.S. Senator From Illinois:
        Opening Statements of...............................1, 45, 125, 165
        Prepared Statements of...................................3, 47, 166
        Questions Submitted by........................30, 84, 104, 159, 233

    Enterprise Compliance International, Prepared Statement of.......   121

    Gambrell, Donna J., Director, Community Development Financial
      Institutions Fund, Department of the Treasury..................   133
        Prepared Statement of........................................   134
        Questions Submitted to.......................................   159
    Geithner, Hon. Timothy F., Secretary, Department of the Treasury.     1
        Prepared Statement of........................................     7
        Summary Statement of.........................................     5
    Gensler, Hon. Gary, Chairman, Commodity Futures Trading
      Commission.....................................................    45
        Prepared Statement of........................................    55
        Questions Submitted to.......................................    84
        Summary Statement of.........................................    53
    George, J. Russell, Inspector General for Tax Administration,
      Department of the Treasury, Prepared Statement of..............   175

    Holmes, Calvin, President, Chicago Community Loan Fund, Statement
      of.............................................................   149
    Hutchison, Senator Kay Bailey, U.S. Senator From Texas, Questions
      Submitted by...................................................   118

    Investment Company Institute, Prepared Statement of the..........   121

    Kelley, Colleen M., National President, National Treasury
      Employees Union, Prepared Statements of.......................70, 214
    Kirk, Senator Mark, U.S. Senator From Illinois, Questions
      Submitted by..................................................37, 120

    Lautenberg, Senator Frank R., U.S. Senator From New Jersey:
        Opening Statements of........................................10, 52
        Prepared Statement of........................................    53

    Mills, Hon. Karen G., Administrator, Small Business
      Administration.................................................   125
        Prepared Statement of........................................   131
        Summary Statement of.........................................   130
    Moncrief, Ray, Executive Vice President and Chief Operating
      Officer, Kentucky Highlands Investment Corporation, Statement
      of.............................................................   151
    Moran, Senator Jerry, U.S. Senator From Kansas:
        Opening Statements of...............................4, 49, 129, 168
        Prepared Statement of........................................    51
        Questions Submitted by.......................................36, 99

    Nelson, Senator Ben, U.S. Senator From Nebraska, Questions
      Submitted by..............................................33, 98, 114

    Olson, Nina E., National Taxpayer Advocate, Internal Revenue
      Service, Department of the Treasury, Prepared Statement of.....   181

    Schapiro, Hon. Mary L., Chairman, Securities and Exchange
      Commission.....................................................    61
        Prepared Statement of........................................    62
        Questions Submitted to.......................................   104
    Shulman, Hon. Douglas H., Commissioner, Internal Revenue Service,
      Department of the Treasury.....................................   165
        Prepared Statement of........................................   170
        Summary Statement of.........................................   169

    Women Impacting Public Policy, Letter From.......................   162

                                 SUBJECT INDEX

                                  ----------

                      COMMODITY FUTURES TRADING COMMISSION

                                                                       Page

    Adapting Operations to Expanded Responsibilities.................    84
    Additional Committee Questions...................................    84
    Audit Frequency..................................................    95
    Budgetary Needs..................................................    47
    CFTC:
        Mission......................................................46, 55
        Reorganization...............................................    86
        Scope........................................................    55
    Checklist of Commodity Futures Trading Commission Cost-cutting
      Initia-
      tives..........................................................    82
    Convert Software Licenses to Enterprise Agreements...............    83
    Cost of Unregulated Derivatives..................................    72
    Cost-benefit Analysis Issue......................................    96
    Critical Market Oversight........................................    45
    Detailed Funding Request.........................................    58
    Enforcement: Preserving Market Integrity and Protecting Market
      Users..........................................................    94
    Fiscal Year 2012 Budget Request..................................    56
    Gasoline Prices..................................................    78
    Implementing the Dodd-Frank Act..................................    56
    Inspector General Report.........................................    72
    Leverage NASA Government-wide Acquisition Contract...............    82
    Margins..........................................................    79
    Negotiate Cost Reductions on Active Contracts....................    82
    Phase in.........................................................    74
    Position:
        Limit Requirements and Oil Speculation Task Force............    93
        Limits and Core Principles...................................    75
    Promoting Market Transparency Thorough Publicized Information....    97
    Renegotiate:
        On-line Legal Research Service Rates.........................    82
        Space Leases.................................................    82
    Rule-writing Timetable...........................................    71
    Rulemaking.......................................................    92
    Savings..........................................................    80
    Technology.......................................................    73
        Modernization Investments....................................    91
    User Fees........................................................    83
    Working With Swap Execution Facilities...........................    98

                           DEPARTMENT OF THE TREASURY

               Community Development Financial Institutions Fund

    Additional Committee Questions...................................
      159............................................................
    CDFI Healthy Foods...............................................
      146............................................................
    CDFIs in Rural America...........................................
      142............................................................
    Forclosure Crisis and Development Opportunities..................
      152............................................................
    Grocery Stores and Community Development.........................
      154............................................................
    Impact of:
        CDFIs........................................................
          137........................................................
        Regulations on Community Banks...............................
          155........................................................
    Public-Private Partnerships in CDFI Projects.....................
      153............................................................
    The:
        CDFI Fund's Role.............................................
          135........................................................
        President's Fiscal Year 2012 Budget Request..................
          137........................................................

                            Internal Revenue Service

    ACA..............................................................   173
        Implementation...............................................   227
    Accomplishments of the IRS.......................................   167
    Additional Committee Questions...................................   232
    Analysis of the Requested Fiscal Year 2012 Budget Increase.......   178
    Budget Constraints and Forecast in the Face of Cuts..............   235
    Capturing Additional Savings.....................................   236
    Comparison of Oversight Board's and President's Budget
      Recommendations................................................   200
    Contracting Out..................................................   216
    Direct E-filing..................................................   231
    E-filing.........................................................   221
    Enforcement......................................................   215
    Filing Methods...................................................   222
    Fiscal Year 2012 IRS Budget Recommendations Summary..............   194
    Fraud Detection..................................................   220
    Goal 1: Improve Service To Make Voluntary Compliance Easier......   201
    Goal 2: Enforce the Law To Ensure Everyone Meets Their Obligation
      To Pay Taxes...................................................   204
    Improper Claims................................................218, 220
    Improved Utility of Budget Request: GAO Recommendations..........   236
    Information Reporting............................................   224
    IRS Fiscal Year 2012 Budget Request..............................   214
        Workload.....................................................   230
    IT:
        Capabilities.................................................   226
        Funding: Cost and Schedule Information.......................   239
    Measuring ROI....................................................   237
    Oversight Board's Budget Priorities..............................   198
    Overview of the IRS's Fiscal Year 2012 Budget Request............   175
    Penalties and Fines..............................................   219
    Physical Security................................................   215
    Prisoner Claims................................................217, 221
    Regulating Federal Tax Preparers.................................   233
    Security of Taxpayer Data........................................   227
    Strategic Foundations: Invest for High Performance in People and
      Technology.....................................................   206
    Tax Complexity.................................................230, 232
        Gap..........................................................   223
    Taxpayer:
        Services.....................................................   214
        Service Measures.............................................   228
    1099 Repeal......................................................   226
    The Budget Request...............................................   167
    Volunteer Income Tax Assistance Scope Expansion..................   239

                            Office of the Secretary

    Additional Committee Questions...................................    30
    Assisting Homeowners and Repairing the Housing Market............     8
    Banking Regulations..............................................    24
    Bush's Tax Cuts..................................................    16
    Consumer Financial Protection Bureau.............................    37
    Corporate Tax Holiday............................................    28
    Debt Ceiling and Economic Consequences...........................    13
    Deficit Reduction................................................    18
    Domestic Finance.............................................33, 36, 37
    Economic Consequences of a Government Shutdown...................    16
    Federal Debt and Economic Crisis.................................    20
    Financial:.......................................................
        Crimes Enforcement Network...................................    29
        Management During Budget Uncertainty.........................    11
    Foreclosure Crisis...............................................    22
    Funding:
        For:
            The CFPB.................................................    28
            Treasury's International Programs........................    18
            Wall Street Reform.......................................    17
        To Fight Illegal Tobacco Trafficking.........................    26
    Improving the Efficiency of Government Services..................     9
    Infrastructure Bank Proposal.....................................    27
    Iran Sanctions...................................................    30
    Promoting U.S. Economic and National Security Interests Globally.     9
    Repair and Reform of the Financial System........................     8
    Sanctions on Libya...............................................    17
    Strengthening Economic Growth....................................     8
    Tax Reform.......................................................     9
        And CFPB Funding and Structure...............................    14
    Wall Street Reform...............................................    21

                       SECURITIES AND EXCHANGE COMMISSION

    Broker Dealer and Investment Advisers Standards of Conduct.......   114
    Circuit Breaker Rules in Response to May 2010 Flash Crash........   109
    Clearly Erroneous Pilot Program..................................   110
    Corporate Compensation...........................................    78
    Credit Rating Agencies...........................................   104
    Critical Market Oversight........................................    45
    Enforcing the Law................................................    63
    Fiscal Year:
        2011 Budget..................................................    67
        2012 Request.................................................    68
    Impact of Reduced Funding........................................    76
    Importance of a Well-funded and Effective Securities Regulator...   122
    Improvements in the Use of Available Resources...................   122
    Improving Market Structure.......................................    65
    IT Weaknesses....................................................   112
    Key Rulemaking...................................................    66
    Madoff Scam and Other Ponzi Schemes..............................    77
    Market Maker Quoting Obligations.................................   110
    New Leadership, Organizational Reform, and Expertise.............    63
    Responsiveness to Tips, Complaints, and Referrals................   106
    Rule-writing Timetable...........................................    71
    SEC:
        Mission......................................................    46
        Organizational Structure Study...............................   105
        Resources....................................................    67
    Staffing and Dodd-Frank Implementation...........................   122
    Strengthening:
        Exams and Oversight--Frequency of Reviews....................   107
        Oversight....................................................    64
    Tackling Material Weaknesses in Internal Controls................   113

                         SMALL BUSINESS ADMINISTRATION

    Additional Committee Questions...................................   159
    Attracting Investment by Major Retailers.........................   157
    Bank on USA Proposal.............................................   139
    Banking Regulations and Small Business Lending...................   142
    Budgeting for Disasters..........................................   138
    Cost of Small Business Lending...................................   139
    Family-owned Small Business and SBA Lending......................   158
    Loan Servicing...................................................   144
    SBA:
        Disaster Loans...............................................   143
        Loan Processing..............................................   156
        Microloans...................................................   145