[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\
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    \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.
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    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.
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      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.
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      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.
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    \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.
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    \8\ Public Law 111-148, 124 Stat. 119.
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       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.
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    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.
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    \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.
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    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.
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    \11\ Public Law 111-5, 123 Stat. 115.
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    $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.
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    \12\ Public Law 111-147, 124 Stat. 71.
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    $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.
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  --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.
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  --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.
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   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).
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    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.
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    \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).
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    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.
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    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).
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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\
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    \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.
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    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.
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    \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.
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    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.
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    \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).
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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\
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    \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).
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      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\
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    \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).
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    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\
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    \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\
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    \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).
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      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\
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    \25\ IRS, Joint Operations Center, Weekly Enterprise Adjustments 
Inventory Report (weeks ending September 29, 2007 and September 25, 
2010, respectively).
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      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).
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      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.
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    \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.
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      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\
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    \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.
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      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).
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      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\
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    \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\
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    \34\ IRS, Integrated Financial System, Status of Available Funds 
Report (FY 2010).
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      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.
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    \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.
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    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\
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    \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.''
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    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

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