    [Senate Hearing 112-734]
    [From the U.S. Government Publishing Office]

                                                            S. Hrg. 112-734

      FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR FISCAL
                                   YEAR 2013

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

                                    HEARINGS

                                    before a

                              SUBCOMMITTEE OF THE

                COMMITTEE ON APPROPRIATIONS UNITED STATES SENATE

                          ONE HUNDRED TWELFTH CONGRESS

                                 SECOND SESSION

                                       on

                               H.R. 6020/S. 3301

        AN ACT MAKING APPROPRIATIONS FOR FINANCIAL SERVICES AND GENERAL
    GOVERNMENT FOR THE FISCAL YEAR ENDING SEPTEMBER 30, 2013, AND FOR OTHER
                                    PURPOSES

                                   __________

                      Commodity Futures Trading Commission
                           Department of the Treasury
                       Federal Communications Commission
                       General Services Administration
                       Consumer Product Safety Commission
                            Federal Trade Commission
                         Office of Personnel Management
                         United States Postal Service

                                   __________

             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

                                  ----------

                           Wednesday, March 21, 2012

                                                                       Page

    Commodity Futures Trading Commission.............................     1

                           Wednesday, March 28, 2012

    Department of the Treasury: Office of the Secretary..............    33

                           Wednesday, April 18, 2012

    General Services Adminstration...................................    65
    Material Submitted Subsequent to the Hearing.....................   113

                             Wednesday, May 9, 2012

    Federal Communications Commission.....................115 deg.

      FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR FISCAL
                                   YEAR 2013

                                  ----------

                           WEDNESDAY, MARCH 21, 2012

                                           U.S. Senate,
               Subcommittee of the Committee on Appropriations,
                                                        Washington, DC.
        The subcommittee met at 2:54 p.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 afternoon. I am pleased to convene
    this kick-off hearing of the Senate Appropriations Subcommittee
    on Financial Services and General Government.
        Let me extend my apology to my colleagues first, the
    chairman, and those in attendance. This is an historic day in
    the United States Senate. Senator Barbara A. Mikulski surpasses
    the length of service in the Senate of any woman before her.
        And tributes are being given on the floor, and I joined in
    those. It took a little longer than I thought it might, and I
    hope you understand, this doesn't happen often. But we are
    honored to serve with her and joined on the floor on a
    bipartisan basis to say so. So that's the reason I'm late.
        Today, we're going to be focusing on the resource needs of
    Commodity Futures Trading Commission (CFTC). I welcome Senator
    Jerry Moran, my distinguished Ranking Member, Senator
    Lautenberg, and those others who may join us.
        Honorable Gary Gensler, Chairman of the CFTC, is joining us
    today. I've asked him to share how his agency is investing the
    $205 million in resources this fiscal year, and the challenges
    he faces in years to come.

                               prepared statement

        I'm going to ask consent that my opening statement be made
    part of the record, and I'm going to turn at this point to
    Senator Moran, and see if he has an opening statement.
        [The statement follows:]

                Prepared Statement of Senator Richard J. Durbin

        Good afternoon. I am pleased to convene this kick-off hearing as we
    evaluate the fiscal year 2013 funding requests of the agencies within
    the jurisdiction of the appropriations Subcommittee on Financial
    Services and General Government. Today, we will be focusing on the
    resource needs of the Commodity Futures Trading Commission (CFTC).
        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 is the Honorable Gary Gensler, Chairman of the
    CFTC. I have invited him to share how the agency is investing the $205
    million in resources provided in fiscal year 2012 and the challenges
    CFTC faces in handling its tremendously expanded responsibilities under
    tight budgetary circumstances. Chairman Gensler will also explain the
    details and rationale for CFTC's $308 million funding request for
    fiscal year 2013.
        CFTC occupies a pivotal position at the forefront of stimulating
    and sustaining economic growth and prosperity in our country--while
    protecting the marketplace from fraud and manipulation.
        CFTC carries out market surveillance, compliance, and enforcement
    programs in the futures arena. CFTC detects, deters, and punishes
    abusive trading activity and manipulation of commodity prices, which
    could have negative impacts on consumers and the economy.
        Futures market users (farmers, ranchers, and producers), financial
    investors, and the U.S. economy rely on vigilant oversight by CFTC in
    today's rapid-paced, evolving, and often volatile global marketplace.
        Adding to the challenge of CFTC's mission is a significantly
    transformed, globalized, round-the-clock, and highly diversified
    marketplace. Rapid, electronic, algorithmic trading platforms are
    replacing the traditional open-outcry trading floors.
        And with the enactment of Dodd-Frank Act financial regulatory
    reform nearly 2 years ago, 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 CFTC's oversight responsibilities, it is
    useful to consider that the long-regulated U.S. futures marketplace
    historically policed by CFTC has a notional value of approximately $37
    trillion. That's enormous, by anyone's calculation.
        But it pales in comparison to the more complex and unregulated OTC
    swaps marketplace now coming under CFTC's purview--with a notional
    value estimated at $300 trillion--eight times the notional amount of
    the regulated futures markets.
        I am pleased that over the past several years, even with reduced
    allocations, this subcommittee has been able to substantially boost the
    funding approved for CFTC to help address pressing resource needs.
        In terms of resources in recent years, funding for CFTC has
    increased from $97.981 million in 2007 to the $205.3 million enacted
    level for fiscal year 2012. That growth represents a 110 percent hike
    in funding over 5 years. Despite the funding boosts, I acknowledge that
    this year has been particularly challenging for the CFTC, given the
    demands and timetable of Dodd-Frank Act implementation.
        Looking ahead, for fiscal year 2013, the President seeks funding of
    $308 million, an increase of nearly $103 million, or a 50 percent hike,
    more than the current year funding. This increase will support 1,015
    full-time equivalents (FTE), an additional 305 FTE, or a 43 percent
    increase in staffing, compared to the 710 current FTE level.
        I commend CFTC's initiative to organize and present its budgetary
    justification materials for fiscal year 2013 by mission activity. This
    helpful display provides a clearer window into how additional resources
    that may be made available will build upon foundational baselines of
    current spending by function. It also allows for a better assessment of
    how the performance of various activities conducted by CFTC--from exams
    to product and rules reviews, from economic analysis to registrations--
    may be enhanced with the infusion of additional budget authority.
        Oversight of agencies and programs through the appropriations
    process, including public hearings like this, are an opportunity for an
    annual check-up and review of operations and spending.
        I look forward to hearing more about what CFTC has accomplished
    since our hearing last May, what resource gaps remain to be filled so
    CFTC may be a more robust and responsive regulator, and how we can help
    CFTC better perform its mission amid growing deficits and spending cut
    sentiments.
        And before turning to Senator Moran for his remarks, I would ask
    that the record reflect that, like other cyclical rites of spring--
    pitchers and catchers reporting, the March Madness basketball
    tournament, and the scent of cherry blossoms in the air--we are again
    experiencing escalating gasoline prices.
        Yes, gas prices are rising. In Illinois, prices are more than $4.40
    per gallon in some areas. It's the same story every year: right before
    the summer, gas prices skyrocket. However, this year, high gas prices
    may harm our economic recovery as families needing to spend more of
    their incomes on gas have less to spend on other necessities.
        I support the President's energy policy to reduce our reliance on
    foreign sources of energy, including oil. But what can we do to ensure
    excessive speculation is not contributing to the high cost of gas in
    the short-term?
        In October 2011, CFTC adopted a rule on position limits for 28
    commodities including oil that will go into effect 60 days after CFTC
    and the Securities and Exchange Commission define the term ``swap''--an
    action CFTC expects to take in April--and after 1 year of data
    collection which should be completed in August.
        However, August is near the end of summer, so I will appreciate
    hearing about other actions CFTC can take in its oversight role of the
    oil futures market to ensure that excessive speculation is not harming
    families at the gas pump.

                        STATEMENT OF SENATOR JERRY MORAN

        Senator Moran. Mr. Chairman, I very much appreciate you
    conducting this hearing. I look forward to the Chairman's
    testimony, and I'll submit mine for purposes of speeding up the
    process, I'll submit my opening statement for the record.
        [The statement follows:]

                   Prepared Statement of Senator Jerry Moran

        Chairman Durbin, thank you for calling this hearing to consider the
    fiscal year 2013 budget request for the Commodity Futures Trading
    Commission (CFTC). Welcome Chairman Gensler.
        As we review the budget submission for CFTC, I look forward to
    hearing the details of your request, your plan to carry out your core
    mission, and your efforts 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 create the rules of the road necessary to the
    efficiency of 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. While the financial crisis
    highlighted the need for better regulation of our financial markets, we
    must ensure that the significant cost and complexity of regulations you
    and other regulators are crafting, don't have the unintended effect of
    hampering the ability of market participants to hedge risk in a cost-
    effective manner and ultimately drive capital and jobs away from the
    United States to overseas markets.
        We continue to hear concerns about the inadequacy of the cost-
    benefit analysis in proposed and final rulemakings. The cost-benefit
    and application of rules must be carefully considered. Speed should not
    be valued over deliberation.
        Given the significant impact these rules will have across the
    financial industry and our economy, the rules must be justified and
    workable. Lack of sound cost-benefit analysis may also result in legal
    challenge which will lead to further uncertainty.
        The need for transparency and accountability in our financial
    markets also extends to those who regulate them. There is still a need
    for more clarity in the sequencing of the rules. Without a clearly
    understood roadmap for implementation, rather than a random mosaic of
    rules, it will be more difficult for us to be on path to a fair and
    orderly marketplace and difficult to establish appropriation
    priorities.
        This call for a roadmap is intended to foster transparency and
    broaden understanding. 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.
        The credibility of any regulatory framework is also critical to
    ensuring its success. I continue to be concerned by the lack of answers
    from government regulators and from MF Global about how the shortfall
    in customer funds occurred and when Kansas farmers and ranchers will be
    able to recover all of their money. There is a crisis of confidence now
    and I will continue to do what I can to ensure that the bankruptcy
    process moves as fairly and expeditiously as possible so that Kansans
    receive both answers and their money.
        Chairman Gensler, I understand that CFTC is faced with significant
    challenges in carrying out its core mission and implementing the Dodd-
    Frank Act. Innovations in the financial services arena present
    regulators with increasingly complex markets to regulate. Technological
    solutions will continue to be necessary to drive cost savings and keep
    up with trading platforms and systems that operate at a record-breaking
    pace.
        However, at a time when our national debt stands at more than $15
    trillion, we cannot afford to ignore our country's fiscal reality by
    failing to make difficult decisions to address our debt and deficit
    problem. We cannot continue to address our problems by instituting new
    taxes, increasing spending, and increasing our already record debt.
        As Members of Congress, and particularly as members of the Senate
    Appropriations Committee, we have a responsibility to work to get our
    fiscal house in order. This requires us to balance important needs and
    priorities across the Government--from investing in critical medical
    research that not only saves lives but also helps create thousands of
    jobs and drives economic growth--to protecting investors, who turn to
    markets to help secure their retirements, pay for homes, and send their
    children to college.
        In accordance with the Budget Control Act signed into law last
    year, these priorities must be considered in the context of statutory
    caps on discretionary spending.
        In this environment, all Federal agencies must redouble efforts to
    achieve cost savings, work more efficiently, and make careful and
    prudent decisions based on demonstrated need as to how to best allocate
    scarce resources.
        Staffing must be managed to prevent growth to unsustainable levels.
    Agencies must make decisions on resource allocations based on CFTC's
    mission responsibilities, but also grounded in budget reality. Simply
    increasing funding does not ensure that an agency can successfully
    achieve its mission and frankly is not a realistic option given current
    fiscal constraints.
        Mr. Chairman, thank you again for calling this hearing. I look
    forward to working with you as we consider the fiscal year 2013 budget
    request of CFTC and other agencies within this subcommittee's
    jurisdiction.

        Senator Durbin. Thank you, Senator Moran. Senator
    Lautenberg, I understand you would like to make a few remarks.

                    STATEMENT OF SENATOR FRANK R. LAUTENBERG

        Senator Lautenberg. Thank you, I will submit my statement
    for the record.
        [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.
        A cornerstone of this effort is the 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. The law also brings the
    derivatives market out of the shadows and into the sunlight.
        Unfortunately, big Wall Street banks have again persuaded some in
    the Congress that the financial industry can regulate itself.
        And now 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 our top priority must be making sure our economy is never again
    threatened by the risky bets of Wall Street gamblers.
        So I look forward to hearing from Chairman Gensler 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 Durbin. Thank you, Senator Lautenberg. Chairman
    Gensler, please proceed with your testimony.

                       SUMMARY STATEMENT OF GARY GENSLER

        Mr. Gensler. Thank you, Chairman Durbin, Ranking Member
    Moran, and Senator Lautenberg.
        I'm honored to be at this hearing today that my
    distinguished Senator--Barbara A. Mikulski--is the chairman of.
    She's my Senator from Maryland and she's a terrific Senator.
        I thank you for letting me chat about CFTC's funding for
    2013. CFTC is a good investment of taxpayer dollars because it
    supports the farmers, ranchers, producers, and commercial
    companies in each of your States that rely on the futures and
    swaps markets to lock in a price and lower their risk.
        Senator Lautenberg asked as we were just about to convene,
    what is a derivative? It's basically that. It allows a
    commercial company to lock in a price so they can focus on
    something else. It used to be the locking in of the price of
    corn and wheat many, many years ago, but now it's much more
    complex, and it's locking in the interest rate.
        And as these commercial end-users in the real economy, the
    nonfinancial side, provide 94 percent of the private sector
    jobs, it's all that more important that these markets work for
    them.
        The futures and swaps markets are where commercial end-
    users meet financial firms and speculators. But the producers
    and merchants that rely on these products generally make up a
    small slice of the market.
        In the oil markets, for instance, they only make up 15 to
    20 percent of the market. In the corn and wheat markets, it's
    closer to 30 percent of the market. But the other part of the
    market, the 70 to 85 percent of the market, are financial
    actors and speculators in the market.
        Same is true in the swaps market, except even more
    exaggerated. In the swaps market, worldwide statistics hold
    that about 10 percent of the market is with what we call end-
    users and the other 90 percent is financial actors and the
    like.
        CFTC's role is to ensure that these markets are transparent
    and competitive and work for all market participants, but most
    importantly, it's about making sure it works for that 10, 15,
    or 30 percent which are the producers and merchants and the
    folks that are investing in our economy.
        These markets are important to another group of your
    constituents, the Americans who rely on pension funds and
    mutual funds, and community banks, and insurance companies. Why
    is this? Because of all of those use swaps and futures to hedge
    a risk or enhance an investment return in that mutual fund or
    pension fund, and the like.
        So it's crucial that CFTC is well-funded to ensure that
    Wall Street doesn't have an information advantage over the
    farmers, ranchers, and producers and other companies in your
    communities.
        I think it's also crucial that we're well-funded to lower
    the risk that Wall Street's problems will travel to your States
    and become your constituents' problems as we unfortunately
    clearly saw in 2008.
        I also think it's important that CFTC is well-funded though
    we're not a price-setting agency, and I find I'm saying that
    more often recently. Rising energy prices, once again, remind
    us of why it's crucial that there's an effective cop on the
    beat to protect against fraud, manipulation, and other abuses.
        Let me just put our funding request in context. We
    currently oversee a $37 trillion futures market. And, yet, our
    staff is just about 10 percent larger than we were in the
    1990s. The Congress has asked us to now also oversee a $300
    trillion swaps marketplace, or eight times the size of our
    futures market.
        And, if I can use an analogy of the National Football
    League (NFL), imagine if the NFL were expanded eight times. And
    there were not the number of games that we have today, but 100
    games every weekend.
        I could have used basketball, Senator Moran, but there are
    only three referees in basketball, so bear with me with a
    football analogy. If the seven referees all of a sudden didn't
    have to just referee one football game, but they had to cover
    eight football games, you can imagine what would happen on the
    field of play.
        The referees on the field do more than just call penalties
    and watch out for violations, they really protect the players,
    promote fair competition, and ultimately ensure the integrity
    of the game.
        That's very similar to what CFTC is about, in a sense.
    We're not requesting eight times the referees, but just to put
    some startling numbers in front of you. The clearinghouses,
    trading platforms, and data platforms that we currently
    oversee, total about 32. One of them, the Kansas City Board of
    Trade, we've talked about in the past.
        That total, we estimate, will grow to about 100, or three-
    fold. We currently oversee about 130 to 140 futures commission
    merchants. And something called retail foreign exchange
    dealers, we envision that they'll be somewhat in that vicinity,
    swap dealers, that will come in.
        So, we're doubling the number of intermediaries. We're
    probably tripling the number of trading platforms, and the
    like.
        So our request of $308 million, a 50 percent increase,
    represents about 56 percent for technology increase, and 43
    percent for staff. So we're trying to make the balancing right.
    And, I know this $103 million increase might seem bold, but I
    believe it's really not so bold in comparison to the 8 million
    jobs that were lost as a result of the financial crisis.
        And, if I could use the football analogy one more time, if
    the football games were expanded eight-fold, leaving just one
    referee per game, and in some cases, no referees, and if it was
    basketball, then five of the games wouldn't have anybody,
    imagine the mayhem on the field, the resulting injuries to the
    players, and the loss of confidence in the game itself.

                               PREPARED STATEMENT

        So, in 2012, CFTC will finish implementing the Dodd-Frank
    Act rules. The fiscal year 2013 request not about implementing
    the rules or not, it's about trying to avert another financial
    crisis. It's about helping producers, merchants, farmers, and
    commercial companies in your States to use these futures and
    swaps so they can grow their businesses, hire people and invest
    in our country.
        I thank you.
        [The statement follows:]

                       Prepared Statement of Gary Gensler

        Good afternoon Chairman Durbin, Ranking Member Moran, and members
    of the subcommittee. Thank you for inviting me to today's hearing on
    the Commodity Futures Trading Commission's (CFTC) fiscal year 2013
    budget request.
        It is critical that the derivatives markets--both futures and
    swaps--work for hedgers, farmers, ranchers, producers, and commercial
    companies in the real economy. Futures and swaps markets allow them to
    lock in a price and focus on what they do best--servicing customers,
    producing products, and investing in our country's future. As it's the
    hedgers in the real economy--the nonfinancial side--that provide 94
    percent of private sector jobs, it's all the more important that these
    markets work for America's job providers.
        The derivatives markets that CFTC oversees are where hedgers across
    the country meet financial firms, and others--generally called
    speculators. Over time, the makeup of these markets has shifted
    dramatically. Financial firms and speculators now make up the vast
    majority of these markets. For instance, producers, merchants,
    processors, and other end-users make up approximately 15 percent of the
    crude oil futures market. Swap dealers, managed money accounts, and
    other financial actors make up the remaining 85 percent. In Chicago
    Board of Trade wheat contracts, end-users make up 9 percent of the long
    and 29 percent of the short positions, meaning that more than 70
    percent of this market consists of financial interests.
        CFTC is not a price-setting agency. Our critical mission is to
    ensure that derivatives markets are transparent and free of fraud,
    manipulation, and other abuses. Our mission is particularly important
    considering hedgers--America's job creators--use these markets to lock
    in a price and make their investments. Given the dominance of financial
    actors and speculators in these markets, it's that much more crucial
    that CFTC is well funded so that we can ensure these markets work for
    hedgers. The need for adequate funding is highlighted by rising gas
    prices at the pump.
        In 2008, the financial system and the financial regulatory system
    failed America. The unregulated swaps market helped concentrate risk in
    the financial system that spilled over to the real economy, leading to
    8 million jobs lost, millions of families losing their homes, and
    thousands of small businesses closing their doors. In 2010, the
    Congress and the President came together to pass the historic Dodd-
    Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act).
    Beyond swaps market reform, the Congress benefited commercial hedgers
    by closing gaps in the CFTC's oversight, including the so-called
    ``Enron Loophole'' and ``London Loophole'', as well as strengthening
    the agency's anti-manipulation authorities. But effectively overseeing
    these markets depends on adequate funding for the agency's expanded
    mission.
        At its fiscal year 2012 staffing level of 710 full-time equivalents
    (FTEs), the agency is but 10 percent larger than our peak in the 1990s.
    But since then the futures market has grown to approximately $37
    trillion notional, and the Congress added oversight of the $300
    trillion swaps market, which is far more complex than the futures
    market. This growth is highlighted on pages 148-149 of CFTC's budget
    submission.
        It is as if all of a sudden the National Football League (NFL)
    expanded eight times to play more than 100 games in a weekend. I think
    we'd all agree that the same number of referees could not monitor all
    those games. And referees on the field do more than call penalties and
    watch for violations of the rules. They also protect the players,
    promote fair competition, and ultimately ensure the integrity of the
    game.
        Thus, just as in my NFL analogy, CFTC needs more referees. CFTC is
    requesting significantly more resources to oversee a much expanded
    field of play. The request is for an appropriation of $308 million and
    1,015 FTEs. CFTC's budget request strikes a balance between important
    investments in technology and human capital, both of which are
    essential to carrying out the agency's mandate. This approximately 50
    percent increase in funding includes a 56 percent increase in IT
    services, but only a 43 percent increase in staff.
        Though these percentages might seem striking, let me use the
    football analogy--we're being asked to oversee the swaps markets, which
    is eight times the size of the futures markets. And we need more
    referees to protect the players, promote fair competition, and
    ultimately ensure the integrity of the markets.
        CFTC is dedicated to using taxpayer dollars efficiently--nearly
    one-fourth of our overall budget request--$70 million--is for outside
    information technology (IT) services. When the CFTC's dedicated IT
    staff is included, we're requesting $96.2 million for IT, or nearly
    one-third of the overall budget.
        But it still takes human beings to watch for market manipulation
    and abuses that affect hedgers, farmers, ranchers, producers and
    commercial companies, as well as the public buying gas at the pump.
        In the context of a constrained budget environment and the agency's
    dramatically expanded mission, CFTC took three significant steps in the
    past year to prepare for implementation of financial reform. First, we
    developed a new strategic plan for fiscal years 2011-2015. This plan
    raises the bar on the agency's performance measures to more accurately
    evaluate our progress. But the agency's performance is affected by the
    challenges of limited resources. CFTC's first performance report said
    the agency was only able to meet 57 percent of its performance targets.
    For example, CFTC examined fewer derivatives clearing organizations
    (DCOs) than called for in the strategic plan. In addition, fewer staff
    members were available to review new contracts for susceptibility to
    market manipulation, resulting in a backlog in such reviews.
        Second, CFTC put in place an organizational restructuring that went
    into effect in October 2011, which aligned the agency with our expanded
    mission. It created the Division of Swap Dealer and Intermediary
    Oversight and the Office of Data and Technology, as well as reorganized
    a number of other divisions. And third, the agency began presenting its
    budget request by the agency's mission activities, a change from our
    presentation approach in years past, which was by agency divisions. It
    offers the Congress and the public a much clearer picture of what CFTC
    does for the American people. In the chart attached to this testimony,
    you can see each of our missions and the associated funding request.
        In my remaining testimony, I will review the five areas that make
    up more than 90 percent of our requested budgeted staff increase:
      --registrations;
      --examinations;
      --surveillance and data;
      --enforcement; and
      --economics and legal analysis.

                        REGISTRATION AND PRODUCT REVIEWS

        A significant task before us in fiscal year 2013 will be the
    registration of an unprecedented number of new market participants, as
    well as reviews of new products for both the clearing mandate and the
    trading mandate.
        We want to consider registration applications in a thoughtful and
    timely manner, be efficient in reviewing submissions, and be responsive
    to market participant inquiries, but this will require sufficient
    funding. We are seeking $36.8 million and 142 FTEs for these two
    mission areas, an increase of $18.2 million and 70 FTEs.
        The more than 200 entities that may seek CFTC registration within
    the next year is a dramatic increase over any registration effort the
    agency has overseen in the past. CFTC needs staff to facilitate the
    registration of the following market participants:
          Clearinghouses.--Entities that lower risk to the public by
            guaranteeing the obligations of both parties in a transaction.
            We are working with four new entities seeking to register as
            DCOs and have inquiries from others. These entities will join
            the 16 we currently oversee.
          Designated Contract Markets.--U.S. trading platforms that list
            futures and options and likely will start listing swaps. CFTC
            currently oversees 16 Designated Contract Markets (DCMs), and
            by 2013, staff expects another 5 to seek registration.
          Foreign Board of Trade.--Regulated trading platforms in other
            countries that are generally equivalent to DCMs. Since the
            Foreign Board of Trade (FBOTs) rule became effective in
            February, two have filed formal applications to be registered
            with CFTC.
          Another 20 FBOTs currently operate under staff no-action letters.
            By 2013, staff expects a total of 28 FBOTs to seek registration
            with CFTC.
          Swap Data Repositories.--Recordkeeping facilities created by the
            Dodd-Frank Act to bring transparency to the swaps market. Four
            have already filed with CFTC, and by 2013, an additional two
            Swap Data Repositories (SDRs) are expected to seek
            registration.
          Swap Dealers.--Under the Dodd-Frank Act, CFTC is working to
            comprehensively regulate swap dealers to lower their risk to
            the economy. A rule finalized in January requires them to
            register with the National Futures Association (NFA). For
            planning purposes, CFTC staff currently estimates somewhere
            between 100 and 150 swap dealers may request registration with
            the NFA, and we'll be overseeing their registration and related
            questions.
          Swap Execution Facilities.--The new trading platform for swaps.
        CFTC staff estimates that 20-30 entities may request to become
    SEFs.
        While we will have a system for provisional registration in place,
    market participants will want the certainty of final registration. CFTC
    also is taking on a new resource-intensive responsibility of reviewing
    which swaps will be subject to the clearing mandate. Full funding for
    the agency means that we will be best prepared to review the dramatic
    increase in requested registrations and to review swaps for the
    clearing mandate. A partial increase in funding means market
    participants will see a backlog in registrations, responses to their
    inquiries, and product review because we won't have personnel
    sufficient to review their submissions in a timely and complete manner.
    Flat funding will mean market participants will wait even longer. There
    will be significant backlogs for participants seeking to register with
    CFTC, as well as for review of swaps for mandatory clearing.
    Examinations
        Another critical mission for fiscal year 2013 will be more regular
    and more in-depth examinations of the major market participants CFTC
    oversees. Examinations are CFTC's tool to check for compliance with
    laws that protect the public. The agency is seeking $35 million and 161
    FTEs for examinations, an increase of $19 million and 72 FTEs. CFTC is
    asking for nearly double our resources for this mission because the
    number of entities we examine is expected to more than double.
        This is an area where the agency fell short of our goals in the
    2011 performance report.
        CFTC directly reviews clearinghouses and trading platforms and will
    review SDRs. But while the agency reviews them directly, we don't have
    the resources to have full-time staff on site, unlike other regulatory
    agencies that do have on-the-ground staff at the significant firms they
    oversee. CFTC also doesn't do annual reviews. Clearinghouses, for
    instance, currently are examined on a 3-year cycle. For intermediaries
    such as futures commission merchants (FCMs) and swap dealers, the
    CFTC's funding situation requires us to rely on what are known as self-
    regulatory organizations (SROs) to be the primary examiners. Given our
    lack of resources, we're only able to double check the SRO's work on a
    limited number of FCMs each year, and the agency can spend little time
    onsite at the firms.
        On top of the current lack of staff for examinations, our
    responsibilities in 2013 will expand to include reviews of many new
    market participants. For instance, there are currently 123 FCMs, and
    staff estimates a similar number of swap dealers will ultimately
    register. More frequent and in-depth examinations are necessary to
    assure the public that firms have adequate capital, as well as systems
    and procedures in place to protect customer money. The number of
    clearinghouses, trading platforms, and data platforms is expected to
    triple. Reviews of these entities are critical to ensuring the
    financial soundness of clearinghouses, and ensuring transparency and
    competition in the trading markets.
        Fully funding the increase for examinations means CFTC can move
    toward annual reviews of all significant clearinghouses and trading
    platforms and adequate reviews of other market participants. A partial
    increase for examinations means cutting back our monitoring plans for
    new market participants and more in-depth risk reviews. Flat funding
    means we will continue lacking the ability to assure the public that
    CFTC's registrants are financially sound and in compliance with
    regulatory protections.
    Surveillance and Data
        Effective market surveillance is dependent on CFTC's ability to
    acquire and analyze extremely large volumes of data to identify trends
    and events that warrant further investigation.
        CFTC is seeking $65.6 million and 205 FTEs for surveillance, data
    acquisition, and analytics, an increase of $22.2 million and 65 FTEs.
    Of the $65.6 million request, 55 percent would be directed toward
    information technology.
        The Dodd-Frank swaps market transparency rules mean a major
    increase in the amount of incoming data for CFTC to aggregate and
    analyze. The agency is taking on the challenge of establishing
    connections with SDRs and aggregating the newly available swaps data
    with futures market data. This will require high-performance hardware
    and software and the development of analytical alerts. But it also
    requires the corresponding personnel to manage this technology
    effectively for surveillance and enforcement.
        In fiscal year 2013, CFTC also anticipates receiving ownership and
    control information for trading accounts. This means CFTC will have
    data to better detect intra-day position limit violations and analyze
    high-frequency trading. CFTC also will be monitoring for compliance
    with rules on aggregate position limits for both futures and swaps in
    energy and other physical commodities.
        A full increase for surveillance means CFTC will have the ability
    to analyze futures and swaps data to protect market participants and
    the public. A partial increase would limit the agency's investments in
    analysis-based surveillance tools. And flat funding will limit our
    capacity to effectively utilize and aggregate the new data we are
    beginning to receive.
    Enforcement
        CFTC's enforcement arm protects market participants and other
    members of the public from fraud, manipulation, and other abusive
    practices in the futures and swaps markets.
        Our efforts range from pursuing Ponzi schemers who defraud
    individuals across the country out of life savings; to abuses that
    threaten customer funds; to false reporting of prices; to schemes to
    manipulate prices, including of goods, such as oil, gas and
    agricultural products. CFTC has opened more than 900 investigations in
    the past 2 fiscal years, with a record number of new investigations in
    fiscal year 2011. CFTC is seeking $60.4 million and 225 FTEs for
    enforcement, an increase of $16.1 million and 50 FTEs.
        In 2002, we had 154 people devoted to enforcement, and that number
    has grown just slightly to our current staff of 170. This staff has
    been called upon to enforce laws and rules that are new to our arsenal.
    The Dodd-Frank Act mandate closed a significant gap in the agency's
    enforcement authorities by extending the enforcement reach to swaps and
    prohibiting the reckless use of manipulative or deceptive schemes. In
    addition, CFTC will be overseeing a host of new market participants.
        A full increase for enforcement means more investigations and cases
    that the agency can pursue to protect the public. A less than full
    increase means that CFTC will be faced with difficult choices. We could
    maintain the current volume and types of cases, but we would have to
    shift resources from futures cases to swaps cases or not cover all of
    the swaps market. Flat funding means not only that CFTC's enforcement
    volume likely would shrink, but parts of the markets would be left with
    little enforcement oversight.
    Economics and Legal Analysis
        For fiscal year 2013, CFTC is seeking $27.8 million and 88 FTEs to
    invest in robust economic analysis teams and Commission-wide legal
    analysis, an increase of $6.8 million and 24 FTEs. CFTC's economists
    support all of the Commission's divisions, including surveillance and
    complex enforcement cases. They are currently working with Dodd-Frank
    Act rule teams to carefully consider the costs and benefits of each
    rule. In 2013, CFTC's economists will be integral in developing tools
    to analyze automated surveillance data and determining whether new
    products are eligible for clearing. The economists also will be
    assessing the effect of position limits on futures and swaps markets.
    Flat funding or a partial increase means a strained ability to analyze
    the market and detect problems that could be negative for the economy.
        CFTC's legal analysis requirements will increase in 2013 as a
    result of new market participant registrations, as well as new product
    reviews and the clearing mandate.
        A less than whole funding increase means a more limited ability to
    give market participants timely responses to their questions and timely
    processing of their applications. Flat funding means CFTC's legal
    analysis team will be spread extremely thin, aggravating the delays in
    responding to market participants and processing applications and
    straining the support of enforcement efforts.

                                   CONCLUSION

        Market participants depend on the credibility and transparency of
    well-regulated U.S. futures and swaps markets. Without sufficient
    funding for CFTC, their businesses--and the Nation--cannot be assured
    that the agency can adequately oversee these markets.
        Funding this requested budget increase for CFTC is about ensuring
    hedgers in the real economy, the farmers, ranchers, producers,
    commercial companies, and other end-users that use derivatives markets,
    can lock in a price and lower their risk.
        We've been asked to oversee the swaps market, which is eight times
    the size of the futures market. Just as if the current number of NFL
    referees were called upon to monitor more than 100 games in a weekend,
    we need the resources to protect the players, promote fair competition
    and ultimately ensure the integrity of the markets for the American
    people.

                                                  SUMMARY OF REQUESTED INCREASES OF $102.7 MILLION BY ACTIVITY
                                                                     [Dollars in thousands]
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                                                       Fiscal year 2012 base         Fiscal year 2013 request        Fiscal year 2013 increase
                                                 ------------------------------------------------------------------------------------------------ Percentage
                                                                     Full-time                       Full-time                       Full-time        of
                                                      Amount        equivalents       Amount        equivalents       Amount        equivalents    increase
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    Registration and registration compliance....         $11,073              34         $19,188              63          $8,115              29           8
    Reviews of products and rules of operation..           7,540              38          17,585              79          10,045              41          10
    Data acquisition, analytics, and                      43,399             140          65,614             205          22,215              65          22
     surveillance...............................
    Examinations................................          15,937              89          34,907             161          18,970              72          18
    Enforcement.................................          44,293             175          60,394             225          16,101              50          16
    Commission-wide economic and legal analysis.          20,947              64          27,787              88           6,840              24           7
    Commission-wide international policy                   3,553              10           5,023              16           1,470               6           1
     coordination...............................
    Commission-wide data infrastructure.........          31,214              41          48,449              52          17,235              11          17
    Commission-wide management and                        26,204             114          27,674             120           1,470               6           1
     administrative support.....................
    Inspector General...........................           1,134               5           1,379               6             245               1  ..........
                                                 -----------------------------------------------------------------------------------------------------------
          Total, all CFTC activities............         205,294             710         308,000           1,015         102,706             305         100
    --------------------------------------------------------------------------------------------------------------------------------------------------------

             Figure 1. $102.7 million budget increase by activity.

        Senator Durbin. Thank you, Chairman Gensler.
        Because they waited patiently for me, I'm going to yield
    the opening round of questions to my colleague, Senator
    Lautenberg. And, then, turn to Senator Moran.

                             BUSINESS CONDUCT RULES

        Senator Lautenberg. Thanks, Mr. Chairman. Thank you, Mr.
    Gensler.
        The growth in your responsibility commensurate with the
    growth in the industry, of course, is quite a change over the
    years. And a lack of regulation in derivatives helped cause the
    financial crisis that we underwent.
        CFTC requesting a significant budget increase, which some
    oppose. Is it fair to say that if the Congress fails to provide
    this funding increase, derivatives will remain largely
    unregulated?
        Mr. Gensler. I think, Senator, we will be successful in
    implementing the rules that you all have asked us to do, but I
    do think, just as in my basketball or football analogy if I
    stretch it, there wouldn't be folks to oversee the markets.
        So it would be regulation by rule--we wouldn't be able to
    really do what's necessary to answer people's questions, to
    have effective cops on the beat, and, very importantly, I
    think, protect the American public.
        Senator Lautenberg. An op-ed piece written recently by a
    departing Goldman Sachs employee got a lot of attention, and it
    suggested that the firm may not always deal with its clients in
    good faith.
        The Wall Street Reform Law introduced new business conduct
    standards for swap dealers like Goldman Sachs. What's CFTC
    doing to enforce these standards and ensure fair dealing?
        Mr. Gensler. Well, I'm pleased to say that we were able to
    finalize the rules in sales practices and business conduct just
    this past January. I think that as you noted, the financial
    industry is often a counterparty, is often on the other side of
    the table, from the commercial companies in your States.
        And so that's why it's so important, I think, not only to
    finalize the rule, but then also to have the funding so that we
    can respond to inquiries, whistleblowers, and actually ensure
    that those sales practices are met.

                                POSITION LIMITS

        Senator Lautenberg. There is obviously a real good, big
    vote of thanks, in terms of the President's request for a
    budget for your department.
        And when we see what is involved, position limits, help
    ensure that unscrupulous traders can't manipulate, or will not
    be able to manipulate, oil and gas prices.
        CFTC completed its work on position limits for energy
    derivatives last year, but they're not yet in effect, correct?
        Mr. Gensler. That's correct.
        Senator Lautenberg. Gas prices continue to rise. Why are
    these limits still not in place?
        Mr. Gensler. We were able to finalize our rule writing on
    position limits last October, but there were two additional
    pieces that needed to be done.
        One was that although the Congress laid out a pretty
    detailed definition of ``swap'', the Congress mandated that we
    work with the Securities and Exchange Commission (SEC) to
    ``further define the word `swap'.''
        We wanted to, I think, and the Congress wanted to, make
    sure that we didn't inadvertently bring people in who were
    using the cash markets--transactions called ``forwards''. I've
    had a lot of conversations with Senator Moran about this.
        I think we'll finalize that rule this spring. We need to
    finalize that, and then spot-month limits will go into effect.
    Second, we also needed some additional data. The way we
    finalized the rule in October was to provide that we needed to
    get at least one-more year's data to put in place the second
    part of the limits.

                                   USER FEES

        Senator Lautenberg. There's strong funding for the CFTC
    oversight is essential to preventing another financial
    meltdown. But the industry should have to pay its fair share.
        CFTC is the only financial regulator that does not offset a
    portion of its costs through industry user fees. Would
    collecting user fees instead of depending exclusively on
    taxpayer funding be consistent with CFTC's ability to
    accomplish its mission?
        Mr. Gensler. Senator, I look forward to working with the
    Congress in any way you think is most appropriate to help
    ensure the public has a well-funded CFTC.
        I know that President Obama has suggested, I think other
    Presidents in the past of both parties have suggested, possibly
    having fees. My view is whatever the Congress wants to do I
    would work with the authorizers and the appropriators to ensure
    full funding of the CFTC.
        Senator Lautenberg. Thank you, Mr. Gensler. Senator Moran,
    your turn. And it's not just because you're the remaining
    member. It's that we recognize the quality of information.

                                CORE PRINCIPLES

        Senator Moran. You are so kind, Senator. Thank you.
        Mr. Chairman, let's talk about a couple of issues that we
    seem to talk about regularly. I want to talk about position
    limits and core principles.
        In regard to core principles, what I often hear from the
    futures industry is that they are overwhelmed by the volume,
    frequency, and speed at which CFTC is issuing new regulations.
    And, regardless, of your efforts to entertain meetings and
    round tables, there's a sense out there that while you're
    willing to sit down, you're not quite as welling to listen.
        Most observers, I think, would reach the conclusion that
    during the difficulties our country experienced in 2008,
    regulated exchanges functioned well, in large part, due to the
    core-principle regime.
        Instead of seizing on the strengths of the core-principle
    regime, CFTC under your leadership has systematically converted
    the core-principle regime to one of a prescriptive rule-based
    regime.
        Why, Mr. Chairman, after the core principles served so well
    during the financial crisis are you still pursuing these rigid
    regulations that effectively dismantle core principles?
        Mr. Gensler. I, Senator, actually think that what we're
    doing is building upon what has worked well, as I think we both
    see in the futures world, and extending it to this swaps world.
        Core principles are there for designated contract markets
    like the Kansas City Board of Trade. It's also there for the
    clearinghouses. In the clearinghouse context, we thought it's
    really critical that they do have robust risk management.
        We finalized those rules last October, and we thought
    guidance, frankly, would not be enough because of the
    significant amount of risk being moved into, particularly, in
    the swaps area.
        We have not yet finalized the ones on the exchanges, and
    we're still taking, even though officially our comment period
    closed a long time ago, we're still taking very much our time
    on this, taking more input on this.
        And I would hope we could actually have additional
    meetings. If there are things in that area that you
    particularly want us to focus on, I'd like to know about that.
        Because what we're trying to do there is really just make
    sure that it's extended to swaps, and that we're embodying in
    the final rules for designated contract markets, the best
    practices that the designated contract markets currently use in
    the futures market.

                                 IMPLEMENTATION

        Senator Moran. We may have to have those conversations. And
    you've been kind to make that offer in the past, and I welcome
    that opportunity again.
        It strikes me that we may be about to engage in the same
    back and forth that we had a year ago. But the implementation
    for discretionary rulemaking has grown since we talked a year
    ago. What I would call a haphazard nature of rulemaking.
        Since your last appearance before the subcommittee, one of
    your rulemakings has been challenged in court. Published
    remarks by the judge in that court case indicated that it's
    highly likely that the rule implementing position limits will
    be struck down.
        What will your response be should that rule be rejected by
    the courts? Are you and CFTC staff planning for that
    possibility?
        Mr. Gensler. In terms of implementation phasing, I think
    that we very much took your advice and guidance last year.
    Around spring, we actually put out for public response and
    comment 13 concepts around implementation phasing.
        Senator Moran. So I'm now responsible for the mosaic.
        Mr. Gensler. No. I think your advice was about seeking
    public input on implementation phasing.
        Senator Moran. Okay.
        Mr. Gensler. The word ``mosaic'' was something I've used.
    And I will try not to use it again.
        We got a 60-day public comment period and 2 full days of
    round tables: they were very beneficial. We've not finalized
    our rules in the 1 year since the passage of the Dodd-Frank
    Act. Here we're almost 2 years out, and we've not finalized.
        We're not trying to do this against a clock--I know when I
    first said that, people didn't believe me--but here we are
    almost 2 years, and we're maybe halfway through the final
    rules. We've got a lot still to do, and we're still not trying
    to do this against a clock. We're trying to do it in a balanced
    way.
        And in terms of phasing, we've even put out some specific
    rules for comment in the fall, in September, about the phasing
    of the clearing mandate and the trading mandate and the like.
    And that has been very beneficial to get that public input. We
    then phase in each of our individual rules. Sometimes we give a
    year to get something in place, 6 months and the like.

                                POSITION LIMITS

        On position limits more specifically, Senator, the first
    thing I would do is turn to our attorneys and probably
    personally read whatever opinion comes out of the judge to see
    what they've said.
        It's part of our democratic process that anything that we
    do, somebody could move into a court. I believe that what we
    did in October, in finalizing the position limits rules, was
    consistent with the congressional mandate, the strong mandate
    that we move forward and implement position limits, not only
    for futures, but also for swaps.
        But, of course, if a judge has a different view on that,
    then we'll take a very close look at what he says.
        Senator Moran. When do you expect that decision?
        Mr. Gensler. Well, right now, I think we're just awaiting,
    the litigants had a preliminary injunctive motion, and we're
    waiting to see what the judge says on that.
        I'm told, I'm not a lawyer, but I'm told that's generally,
    a relatively short process. So near term what I'm told that
    we'd hear from is just on that preliminary injunctive motion.
        Senator Moran. Have you had discussions about what if the
    rule is struck down? What does CFTC do next? I mean, you
    indicated you are going to read the decision by the court, but
    are you planning at this point if there is an adverse decision,
    what CFTC should do?
        Mr. Gensler. I don't have a plan yet because it would
    depend on wholly on what does the judge says.
        We think, and I will say this personally too, we've
    followed the clear congressional direction on these limits. And
    what the limits are really it's to ensure that there's not
    concentration. We're not a price-setting agency. Some folks
    have maybe suggested otherwise.
        We're really an agency to ensure that the markets are
    transparent, open and competitive, and that these exchanges
    work well, that the clearinghouses are safe.
        Through the position limits, it's about ensuring that no
    one speculator has a sort of large footprint in that
    marketplace. They've been in place in the agricultural markets
    since the 1940s. Actually, working with the exchanges, they
    were in place in the energy markets in the 1980s and 1990s.
        And I think the Congress really suggested that we sort of
    bring them back, but also extend them to the swaps marketplace.
    The reason we said we needed a delay is to get more
    information. So even in a swaps marketplace, we need that 1
    year of data to use a percentage of the market formula that had
    existed when limits applied only to futures.
        I think we first used this percentage of the market formula
    about 1980 or so. But, of course, if a judge says that he
    thinks we should do something different, we'd have to look
    obviously at what they said, and whether to appeal that and so
    forth.
        Senator Moran. Thank you, Mr. Chairman.

                            MARKET IMPACT ON PRICES

        Senator Durbin. Thank you very much, Senator Moran.
        Chairman Gensler, in your opening remarks you said, and I
    quote, ``CFTC is not a price-setting agency, but rising fuel
    prices make it clear why we need to have cops on the beat.''
        I'm trying to reconcile, if I wrote that down properly. I'm
    trying to reconcile that statement. You seem to suggest at the
    outset that what you do has no impact on price, but then go on
    to say, but because prices are going up, we have to do a better
    job.
        Mr. Gensler. Well, I think, Mr. Chairman, I thank you for
    that question. Because what we do as an agency, whether prices
    are low or high, is ensure the American public that those
    prices are arrived at where buyers and sellers meet in a
    transparent marketplace, free of fraud and manipulation.
        Position limits assure that no one has sort of a large
    footprint, no speculator, has too large a concentration. I
    think, in times when the public is asking this question, it
    reminds us why we have to, I believe, have a well-funded agency
    to ensure that these markets are free of fraud and manipulation
    and they're as transparent as possible.
        And that buyers and sellers come into that marketplace on a
    fair field of play.
        Senator Durbin. So, let me try to get down to some basics
    here so I can understand from a layman's point of view how I
    would explain this to people.
        Let's assume for a moment we're talking about a futures
    market relative to plywood, which I think at one point was on
    the Chicago Board of Trade. And let's assume there are ten
    people interested who understand that they are talking about
    the future price of plywood and may have to take delivery of
    what they are buying.
        I would assume that market would be less active, all things
    being equal, than a market with 100 people interested in the
    same issue. Is that a fair conclusion?
        Mr. Gensler. I think so.
        Senator Durbin. Now, let's take it to the next step. Let's
    assume it's not 100 people interested in the future price of
    plywood, but a thousand. And of those 1,000, 900 have no
    interest in plywood. They'd just as soon be dealing with apples
    at the Pip's next door.
        They don't want to ever take delivery. They're never really
    interested in reaching that point in the transaction. Does that
    change the trade, the volatility of trading, perhaps, the price
    of plywood?
        Mr. Gensler. There's been a lot of studies and surveys on
    the role of speculation in these markets. I'm taking that to be
    the 900 that aren't taking delivery, and we actually reviewed
    them in this position limit rule last October. There were about
    50 studies that were commenters sent in.
        I suspect you'd probably not be surprised, about one-half
    of them said that the role of speculators had an influence on
    some of the things you said, price, and volatility. About half
    said, no.
        I mean, and so you have the St. Louis Federal Reserve, and
    you have some very esteemed economists on one side saying, yes.
    And you have some other surveys and studies on the other side,
    suggesting, no.
        So, we've summarized all that, and all five of the
    commissioners, you know, have the benefit of a very good chief
    economist in the office that has helped us with this.
        Senator Durbin. So, if there is a split opinion as to
    whether or not the number of trades, the number of traders, the
    interest in taking possession has any impact on price, let me
    ask you what the empirical evidence is.
        If you're dealing with a commodity that really, and there
    are some, doesn't engage people as much as some other
    commodity, what is the nature of that market compared to the
    more active market in the next, no longer Pip's probably, but
    in the next trading theater?
        Mr. Gensler. Well, I think that there are two features. If
    the less-active market doesn't have a lot of fundamental
    research around and a lot of transparency around it, that
    market actually sometimes can be more easily manipulated, if
    there aren't people coming in and out.
        But, the second feature, I think to the core of your
    question, is if the market as many of our markets are now 80 to
    85 percent financial actors and speculators, and, you know, a
    smaller percent are the producers and merchants, I think that's
    part of the reason why we want a well-funded CFTC because the
    nature of the market is so heavily toward the financial actors
    and so heavily toward the speculators, that it's that much more
    critical that we're watching over these markets to prevent
    manipulation.
        And, second, that we do use position limits that no one
    speculator has such a large position that they start to be sort
    of the trend setter. They start and others sort of follow that
    lead in a pack.
        Senator Durbin. I have some more questions, but I'm going
    to yield to my colleague.

              LEGAL SEGREGATION WITH OPERATIONAL COMINGLING (LSOC)

        Senator Moran. Mr. Chairman, thank you.
        Mr. Chairman, it's my understanding that CFTC recently held
    a roundtable meeting to discuss the possibility of subjecting
    futures to a LSOC model. This sort of regulation, I think, at
    least appears to me, is discretionary as the Dodd-Frank Act
    only requires that you apply the LSOC model to cleared swaps.
        Given that the LSOC for swaps will not come on-line until
    November of this year, will you comment--I'm sorry--will you
    commit to this subcommittee that you will hold off on pursuing
    the LSOC model for the futures market until the cost-benefit
    analysis for the LSOC for swaps has been fully evaluated over
    the course of the next few years?
        Mr. Gensler. I want to say we're in complete agreement. It
    is discretionary. It is something that came up actually in
    January as we were completing the new segregation for cleared
    swaps that a number of my fellow commissioners said, this is
    different than what we're doing for the futures world and have
    for some time.
        And so I committed to my fellow commissioners, let's have a
    round table, and let the public tell us. And I think it was
    very beneficial.
        It was also at this round table that people commented on
    greater enhancements to customer protection and different
    models. Staff's evaluating the comments and to the extent that
    staff puts forward a proposal whether it's this legal
    segregation for futures or other recommendations, all five of
    the Commissioners are weighing in.
        We have a pretty active and busy agenda this spring and
    summer on the Dodd-Frank Act initiatives. So it might be
    disappointing for some that want LSOC for futures early.
        I think it's just inevitable, if nothing else, for capacity
    reasons, that it will wait. And I think you're right, Senator,
    that because we're doing legal segregation for the swaps
    markets by November 8, we'll learn a lot from that as well.
        Senator Moran. So I think what you're telling me is we
    would not expect the LSOC for swaps to occur, if it does at
    all, until after the LSOC for futures?
        Mr. Gensler. I think that's just absolutely correct because
    we have a very significant agenda that the Congress has
    mandated for us.
        We have enhancements to customer protection that I think
    are getting some very good input from the futures industry and
    from the exchanges. If there is a true consensus, on LSOC for
    futures, there is not that consensus at this stage.
        Senator Moran. Thank you for clarifying my misstatement,
    and I appreciate that sentiment, because one of the
    conversations that you and I've had on an ongoing basis is my
    belief that you ought to focus on the things required by the
    Dodd-Frank Act that are mandatory as compared to the
    discretionary opportunities that the Dodd-Frank Act has given
    CFTC and prioritize.
        And I think your answer to my question suggests that in
    this case, that's what you're doing.
        Mr. Gensler. Yes. I think, generally, that's the case.
    There are some things that are discretionary that we're taking
    up, I hope, soon to put out a proposed rule on getting more
    data about who owns accounts.
        This is because of all this high-frequency trading, and so
    forth. I mean, so there are probably, I'm going to say, three
    or four things, I don't have the right count in my head, that
    we do anticipate in 2012 to do to enhance our oversight of the
    markets given high-frequency trading. That's actually maybe
    three.
        And then there may be some things that come out of really
    thoughtful presentations from the futures industry and others
    on how to better enhance customer protection around segregated
    funds. And I think that's a critical part of our 2012 agenda.

                               AGRICULTURAL SWAPS

        Senator Moran. Mr. Chairman, let me raise a recent decision
    by CFTC to prevent clearing houses from self-certifying
    agricultural swaps for clearing.
        As I understand it, rule 35 requires CFTC to treat
    agricultural swaps as they would all other swaps for purposes
    of self-certification.
        Can you explain why you've chosen, it appears to circumvent
    rule 35, and treat agricultural swaps differently than other
    forms of swaps?
        Mr. Gensler. The Congress gave us authority in the Dodd-
    Frank Act to treat agricultural swaps differently. Then, we
    went through a lot of public comment to say we would treat them
    the same. That's where we ended up sometime last year after I
    think three public notices.
        I don't know that we're treating them any differently, but
    one challenge for the whole swaps marketplace, not just
    agricultural swaps, is that we haven't completed our rules. It
    may well be that what you're referring to is that we haven't
    finalized some of the general clearing rules.
        Senator Moran. So, this process dealing with agricultural
    swaps and nonagricultural swaps, did it slow down the process
    of finalizing the rule?
        Mr. Gensler. We implemented 29 Dodd-Frank Act rules. We
    have about 20 to go, roughly. So, you know, maybe we'll finish
    this sometime this summer or fall, but again, it's not against
    a clock.
        In the terms of agricultural swaps, they're to be treated
    identical to all the other swaps. There's a little bit of a
    legacy issue in that before the Dodd-Frank Act, agricultural
    swaps could not be cleared unless we did something called a--I
    think it's called a 4D order, but I apologize if I have the
    wrong letters.
        And so, it's a little bit of this legacy issue of, I think,
    somebody has filed a petition in the last month or two, and
    there's a question, do they use this 4D order or do they use
    this new self-certification.
        And I was briefed on it in the last day or two in
    anticipation of this hearing, but I might have just exhausted
    my knowledge on it.
        Senator Moran. Let me try one more time, not because you've
    exhausted your knowledge, but because I've been inarticulate in
    asking the question.
        I think what I'm interested in knowing is the timeline of
    the ability to implement self-certification for agricultural
    swaps.
        Mr. Gensler. I know that it would most definitely come if
    we finalized a handful of new rules sometime this spring or
    summer. The other issue that I was briefed on in the last day
    was, is there some way to shorten the time?
        And all I know is that our staff's looking at that to see
    if there's a way to do it.
        Senator Moran. Thank you for working your way through that
    question.
        Mr. Gensler. Okay.

                            SPECULATION AND PRICING

        Senator Durbin. Chairman Gensler, I'd like to address, as
    we started talking about at the outset, the connection between
    speculation and pricing.
        And you said that the jury is split on that based on what
    you have read. I would say that for at least 20 of my
    colleagues, they have come down on the side that speculation is
    linked to higher prices.
        And these colleagues sent you a letter, on March 5 of this
    year, calling on you to enact strong position limits to
    eliminate excessive oil speculation. I won't read the whole
    letter. You've received it.
        For the record, I'll put it in the record here.
        [The information follows:]

                 Letter From the Congress of the United States
                                                         March 5, 2012.
    Hon. Gary Gensler, Chairman,
    Commodity Futures Trading Commission, Washington, DC.
    Hon. Mark Wetjen, Commissioner,
    Commodity Futures Trading Commission, Washington, DC.
    Hon. Scott Walla, Commissioner,
    Commodity Futures Trading Commission, Washington, DC.
    Hon. Bart Chilton, Commissioner,
    Commodity Futures Trading Commission, Washington, DC.
    Hon. Jill Sommers, Commissioner,
    Commodity Futures Trading Commission, Washington, DC.
        Dear Chairman Gensler, and Commissioners Chilton, Wetjen, Sommers,
    and O'Malia: We are writing to urge you to immediately enact strong
    position limits to eliminate excessive oil speculation as required by
    the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.
    As you know, the Dodd-Frank Act mandated that your agency promulgate
    and enforce such limits no later than January 17, 2011. We are
    disappointed that, more than a year later, the Commission has not
    fulfilled this important regulatory duty.
        Congress determined that speculative position limits are an
    effective and critically important tool to address excessive
    speculation in America's oil and gasoline markets. It is one of your
    primary duties--indeed, perhaps your most important--to ensure that the
    prices Americans pay for gasoline and heating oil are fair, and that
    the markets in which prices are discovered operate free from fraud,
    abuse, and manipulation.
        There has been a major debate over the last several years as to
    whether spikes in oil prices are caused entirely by the fundamentals of
    supply and demand or whether excessive speculation in the oil futures
    market is playing a major role. It is clear to us that debate has
    ended. Exxon Mobil, Goldman Sachs, the Saudi Arabian government, the
    American Trucking Association, Delta Airlines, the Petroleum Marketers
    Association of America, and even a report last year from the St. Louis
    Federal Reserve have all indicated that excessive oil speculation
    significantly increases oil and gasoline prices. According to a
    February 27, 2012 article in Forbes, excessive oil speculation
    ``translates out into a premium for gasoline at the pump of $.56 a
    gallon'' based on a recent report from Goldman Sachs.
        The facts bear this out. According to the Energy Information
    Administration, the supply of oil and gasoline is higher today than it
    was 3 years ago, when the national average price for a gallon of
    gasoline was just $1.90. And, while the national average price of
    gasoline is now over $3.70 a gallon, the demand for oil in the U.S. is
    at its lowest level since April of 1997. Nor is the global supply of
    oil at issue. According to the International Energy Agency, in the last
    quarter of 2011 the world oil supply rose by 1.3 million barrels per
    day while demand only increased by 0.7 million barrels per day. Yet,
    during this same period, the price of Texas light sweet crude rose by
    over 12 percent. Meanwhile, oil speculators now control over 80 percent
    of the energy futures market, a figure that has more than doubled over
    the past decade.
        As the cost for American people to fill their gas tanks continues
    to skyrocket, the CFTC continues to drag its feet on imposing strict
    speculation limits to eliminate, prevent, or diminish excessive oil
    speculation as required by the Dodd-Frank Act. Although the CFTC has
    adopted initial position limits, they are not strong enough and not yet
    in force owing to industry opposition, delays in swaps oversight and
    data collection. This is simply unacceptable and must change.
        We urge you to take immediate action to impose strong and
    meaningful position limits, and to utilize all authorities available to
    you to make sure that the price of oil and gasoline reflects the
    fundamentals of supply and demand. This could entail promulgation of
    rules only with regard to the currently regulated exchange markets.
    Swaps rules should also be implemented immediately, but even so,
    waiting for swaps rules to trigger all position limits is simply not
    adequate to protect consumers. We urge you to develop alternative
    methods of moving forward and to do so as swiftly and expeditiously as
    possible.
        We have a responsibility to ensure that the price of oil is no
    longer allowed to be driven up by the same Wall Street speculators who
    caused the devastating recession that working families are now
    experiencing. That means that the CFTC must do what the law mandates
    and end excessive oil speculation once and for all.
        Thank you for your attention to this important matter. We look
    forward to receiving your response.
                Sincerely,
                        Daniel K. Akaka; Mark Begich; Richard Blumenthal;
                                Barbara Boxer; Sherrod Brown; Benjamin L.
                                Cardin; Robert P. Casey, Jr.; Al Franken;
                                John F. Kerry; Amy Klobuchar; Patrick J.
                                Leahy; Carl Levin; Joe Manchin, III; Robert
                                Menendez; Jeff Merkley; Barbara A.
                                Mikulski; Bill Nelson; Mark L. Pryor; Jack
                                Reed; John D. Rockefeller, IV; Bernard
                                Sanders; Tom Udall; Jim Webb; Sheldon
                                Whitehouse; Ron Wyden.
                        Gary L. Ackerman; Tammy Baldwin; Timothy H. Bishop;
                                Suzanne Bonamici; Leonard L. Boswell; Bruce
                                L. Braley; David N. Cicilline; Gerald E.
                                ``Gerry'' Connolly; John Conyers, Jr.;
                                Peter A. DeFazio; Rosa L. DeLauro; Lloyd
                                Doggett; Joe Donnelly; Anna G. Eshoo; Bob
                                Filner; Marcia L. Fudge.
                        Raul M. Grijalva; Brian Higgins; Maurice D.
                                Hinchey; Mazie K. Hirono; Michael M. Honda;
                                Henry C. ``Hank'' Johnson, Jr.; Marcy
                                Kaptur; Dale E. Kildee; Dennis J. Kucinich;
                                Barabara Lee; Sander M. Levin; John Lewis;
                                Zoe Lofgren; Jim McDermott.
                        Michael H. Michaud; Eleanor Holmes Norton; John W.
                                Olver; Bill Pascrell, Jr.; Chellie Pingree;
                                Mike Quigley; Nick J. Rahall, II; Lucille
                                Roybal-Allard; Bobby L. Rush; Tim Ryan;
                                Janice D. Schakowsky; Louise McIntosh
                                Slaughter; Jackie Speier; Fortney Pete
                                Stark; John F. Tierney; Paul Tonko; Peter
                                Welch.

        Senator Durbin. Based on statements made from financial
    interest experts in the field and so forth, the belief is that
    speculation has driven up the price of a gallon of gasoline in
    America as much as 56 cents a gallon. That's what I believe
    Goldman Sachs reported in one of their recent reports, February
    27 of this year.
        So there's a bill that's also been filed; are you familiar
    with it? A bill that was filed today in the Senate?
        Mr. Gensler. As I was coming to this, I was briefed on it,
    but just briefed on it, just in the last 2 hours.
        Senator Durbin. Well, I have not seen it myself, so I can't
    tell you exactly what's in the bill.
        But I do believe that it calls on you to use your emergency
    powers to establish these position limits when it comes to
    trading in terms of oil futures. And I'd like to ask you a few
    questions about that.

                              EMERGENCY AUTHORITY

        First, would you tell me what you believe to be your
    authority under those emergency powers, or CFTC's authority I
    should say, when it comes to making that kind of a decision?
        Mr. Gensler. I think with only roughly 15 percent of the
    positions in the oil market or natural gas futures markets
    being the producers, merchants, and end users, and 80 to 85
    percent being financial actors and speculators, it's kind of
    unarguable that financial actors and speculators aren't
    affecting prices. They are.
        Studies are split on whether at any given time it's higher
    or lower and things like that. That's what they split on. But I
    think it's hard to say that 80 to 85 percent of the market
    don't influence price. They do. And they're part of it.
        In terms of the emergency authorities, as I understand it,
    we've used it a handful of times, maybe four times, in the
    1970s and early 1980s. There was even a court case at the time
    that I have not yet read the case, but I need to read it, where
    somebody challenged our use of it at the time.
        It is about disruption of the forces of supply and demand
    in a particular marketplace, and the statute specifically
    refers to things about governmental actions or foreign
    governmental actions. So it was used, for instance, at that
    time, during the grain embargo.
        Senator Durbin. I'd like to interrupt you for just a
    second. This isn't a test on the final, so I want to make sure
    that we share the language.
        The law defines emergency as market manipulation, an act of
    the U.S. or foreign government affecting a commodity, or any
    major market disturbance which prevents the market from
    accurately reflecting the forces of supply and demand for a
    commodity.
        Proceed. I'm not correcting you. I just wanted to enter
    that into the record.
        Mr. Gensler. No, you're helping me. You're helping me. As I
    recall it that fits the four times we brought emergency
    actions.
        There was a supply disruption in the one case because of
    the grain embargo related to the Soviet invasion of
    Afghanistan. There were one or two other instances where a
    crop--potatoes--literally were, had a problem, and so there was
    a situation in your example where you couldn't deliver the
    plywood.
        Back to your plywood example. The plywood couldn't be
    delivered. In that case, it was potatoes, that couldn't be
    delivered.
        It's those types of circumstances. I've asked our general
    counsel, because I know this is a very important matter to many
    members of this body, to brief us at CFTC level, to brief us
    all on the legislative history and the legal, what really is
    the contour of the limits of that emergency authority.
        Senator Durbin. So, is that authority given to you as
    chairman, or to CFTC?
        Mr. Gensler. To the Commission, Sir.
        Senator Durbin. And so any designation or use of the
    emergency authority would require CFTC action, right?
        Mr. Gensler. That's correct.
        Senator Durbin. A majority vote by CFTC?
        Mr. Gensler. That's correct.
        Senator Durbin. All right. And, to your knowledge, does the
    Congress have any authority to order you to exercise that
    emergency power?
        Mr. Gensler. Not as I understand the statute, but, of
    course, you could change our laws.

                               EMERGENCY ACTIONS

        Senator Durbin. I guess the obvious question that follows
    once we understand the process under the law and the history of
    the law is whether or not you and the commissioners believe
    that we are facing 1 of the 3 options that would lead to
    emergency action.
        And let's just suggest that, I guess, market manipulation,
    could be discussed, or more likely, any major market
    disturbance which prevents the market from accurately
    reflecting the forces of supply and demand for a commodity.
        So, are those things, those elements, 2 of the 3 in the
    law, have they been spelled out as it relates to gasoline
    prices or oil futures, to your satisfaction, at this point?
        What I'm asking is, whether or not there's been an analysis
    done by your CFTC staff as to whether or not the current
    gasoline pricing and the oil price future trading would put you
    in a circumstance where you could logically consider one of
    these options for emergency authority, exercise of emergency
    authority?
        Mr. Gensler. I've actually asked for some advice as to what
    that provision means, how we've used it, what that court case
    in 1979 said about it, so that we can be best informed as to
    how narrow or broad that authority is.
        As I understand it, we have used it in a very narrow sense
    when there was actual manipulation.
        We've brought 30-plus manipulation cases in the history of
    our agency, and we've only gone and won in court once. I mean,
    our manipulation authority was very narrow, and now the Dodd-
    Frank Act has broadened it.
        But those previous emergency actions were pre-targeted
    narrow provisions, but I've asked our general counsel's office
    working with others at the agency to best inform the five
    commissioners on that provision of the statute.
        Senator Durbin. I'm asking two questions, and I want to
    make sure that they're clear each.
        The first, I think you've answered. That you have asked the
    appropriate legal authorities, people with background on the
    history of the agency, to talk about your authority under the
    law, and how it has been exercised in the past.
        What I'm asking more specifically is whether or not you
    have asked whether or not the current situation with our rising
    gasoline prices and the speculation in the area of oil futures
    would apply to any of these three possible reasons to exercise
    your authority?
        Mr. Gensler. And I think I can best answer the first, but
    I'm limited in answering the second because I'm trying to
    understand the contours from our general counsel and our
    hardworking, dedicated folks at CFTC, how wide or narrow that
    is, the first before trying to answer the second.
        But, I will say, historically, it's been used only in a
    very targeted way.
        Senator Durbin. So, have you at least started the factual
    inquiry about possible market disruption related to gasoline
    prices?

                       SURVEILLANCE TO DETECT EMERGENCIES

        Mr. Gensler. We meet as a Commission in a closed-door
    meeting every Friday, and we have for 30-plus years, and we put
    it in the Federal Register, people know we do this, to do
    surveillance on markets, from the grain markets to the interest
    rate markets to the energy markets.
        And we have about 50 to 55 people in a surveillance unit
    that bring information to us in these closed-door sessions
    every Friday. The energy markets come up, as you would think,
    as a regular basis, as the grains do and the financials.
        The staff is always tasked to come and bring to us matters,
    if they see issues, in these marketplaces. I mean I'm trying
    to----
        Senator Durbin. I understand the nature of your answer. I
    think you are carefully avoiding saying whether there's been
    any specific factual inquiry on anything until you have
    satisfied the first question.
        Don't let me put words in your mouth, stop me at any point
    here. First question, about your authority, historic
    precedence, before you go to the next question, which will be
    raised by this bill and by the letter from the Senators, as to
    whether or not your authority can or should be exercised when
    it comes to gasoline prices.

                             SURVEILLANCE MEETINGS

        Mr. Gensler. But I want to assure you and the American
    public, our staff, even though it's, I believe, underfunded,
    our staff every day and every week is bringing to the
    Commission concerns if they think they see manipulation in
    these markets, if they think they see something about position
    limit violations and the like.
        We're not waiting for anybody to say what the limits of
    emergency authority are. I mean, our agency, again, not a
    pricing agency, it is to ensure transparent markets, free of
    fraud and manipulation, and the people are following the rules
    of the road.
        Senator Durbin. Now, I'm going to ask a question. I already
    know the answer.
        Can you tell me if your staff has produced any information
    for CFTC to consider at these weekly meetings relative to
    rising gasoline prices and the impact of speculation on oil
    futures?
        Mr. Gensler. We look at the statistics on a pretty regular
    basis. We actually publish to the market every Friday the size
    and scope of the nonproducer merchant side, the speculative
    side, of the markets.
        So we're looking at that, in the natural gas markets, in
    the heating oil markets, the oil markets, on a very regular
    basis.
        Senator Durbin. Are these Commission meetings public?
        Mr. Gensler. They're closed-door meetings under the
    Sunshine Act, but we publish, we put in the Federal Register
    every week, that we have these Friday meetings.
        Senator Durbin. You announce the meetings are taking place?
        Mr. Gensler. Yes. Oh, absolutely.
        Senator Durbin. But not the substance of your discussions?
        Mr. Gensler. That's correct, because we're talking about
    confidential information that the Congress has actually
    directed us under Commodity Exchange Act section 8 not to
    disclose material, about individuals and their transactions.

                                POSITION LIMITS

        Senator Durbin. I've gone way over my time. I'm going to
    yield back to Senator Moran for another round of questions, if
    he has them.
        But the last thing I want to say is, CFTC has adopted a
    rule to implement position limits on 28 commodities including
    oil contracts as soon as the joint rule between CFTC and SEC
    defining swap is adopted, the rule-implementing position limits
    will go into effect?
        Mr. Gensler. For the spot month limits, that is correct.
        Senator Durbin. And, can you give me any indication of how
    soon that will occur?
        Mr. Gensler. We stand ready at CFTC to move forward
    whenever the SEC gives us the full document.
        Senator Durbin. Well, since we fund SEC, we'll tell them,
    at least, I'll tell them, to hurry along. I'm not sure if my
    colleague agrees with that position.
        But I want to do it right. And I understand their work has
    been challenged in court, as yours has been, and most other
    agencies have faced. I want them to do it right, but I want
    them to do it in a timely way.
        Senator Moran.

                                  SPECULATION

        Senator Moran. Chairman, again, thank you.
        Chairman Gensler, this conversation about speculation in
    the oil market, you indicate that about 85 percent of the crude
    oil futures market is made up of speculators.
        Mr. Gensler. Well, financial actors and speculators.
        Senator Moran. And the difference between financial actors
    and speculators?
        Mr. Gensler. Well, people, colloquially, use the word, but
    some swap dealers are part of that 85 percent, and they are
    helping others hedge. They have producers and merchants on the
    other side.
        So the 80 to 85 percent are swap dealers, hedge funds,
    money managers, even pension funds sometimes are investing. And
    hedgers and speculators meet in a marketplace, but some
    financial actors would prefer not to be called speculators.
        Senator Moran. And I think your testimony was an indication
    that with that magnitude of speculation, there is a consequence
    to the price, either up or down, that's what you were
    indicating in the studies is what the consequence is, but there
    is a consequence to that level of speculation?
        Mr. Gensler. Well, I think that every participant in a
    marketplace can influence a price. Again, we're not a price-
    setting agency, but it's critical I think that we have an
    agency that brings a bright sunshine to that market, that it's
    transparent, free of fraud and manipulation.
        We use the position limits to help limit any one sort of
    speculative party's footprint in the market place.
        Senator Moran. I just would indicate that when we use the
    word ``speculation'', it seems to have developed a negative
    connotation.
        Mr. Gensler. Not to me.
        Senator Moran. And you did differentiate between different,
    within that 85 percent, there's different actors.
        Mr. Gensler. That's correct.
        Senator Moran. And I think there's always a suggestion out
    there in today's media world, that speculation is something
    that causes bad things to happen.
        But you just indicated that's not your belief. In fact,
    speculation, what benefits arise from those who speculate in
    markets, in the oil market.

                             GENESIS OF THE MARKET

        Mr. Gensler. I'd be glad to answer that.
        I think that going back to the genesis of this market, and
    it happened in Senator Durbin's State, in Chicago, in the
    1860s, when a wheat farmer or somebody growing corn, they
    needed to lock in a price at harvest time.
        And they wanted to lock in that price so they could focus
    on what they really did well, and tilling the field, and so
    forth. And so they needed somebody on the other side, and the
    party on the other side is what we call a speculator.
        So there's the hedger, the natural hedger, meeting the
    speculator in the marketplace, probably since Roman times. In
    the 1920s, the Congress said we need to regulate so that it's
    transparent.
        And so we were founded inside the Department of
    Agriculture, and then by the 1970s, we became a Commission and
    you know the history.
        But it's still a marketplace where hedgers and speculators
    meet. That the natural hedgers need to meet somebody on the
    other side. But what's critical is that we have clear rules of
    the road against manipulation.
        I believe that the position limit authority is that no one
    speculator sort of has this big footprint, and that we have
    great transparency in the marketplace.
        Senator Moran. Speculation is useful to the economy
    including in establishing a market for oil and gasoline. And I
    guess the point you make is that you want to be careful about
    the magnitude of any one individual's position within that
    market.
        Mr. Gensler. That's right. That's right.
        Senator Moran. Thank you, Mr. Chairman. Mr. Chairman, I
    need to go to the Department of Homeland Security
    Appropriations Subcommittee hearing.

                    FUNDING NEEDED FOR NEW RESPONSIBILITIES

        Senator Durbin. Thank you very much, Senator Moran. You've
    been very patient. I thank you for that.
        I want to kind of move into another area here and probably
    make a statement and ask you a question along the way.
        Your current-year appropriation is in the range of $205
    million.
        Mr. Gensler. Yes.
        Senator Durbin. The President had requested close to $300
    million, I believe, for this current fiscal year.
        Mr. Gensler. Right. Correct, $308 million.
        Senator Durbin. And so what you were given is dramatically
    less than the President's budget and less than what the Senate
    had suggested.
        And my feeling is that your agency, based on your testimony
    and the clear evidence we have, needs more resources to deal
    with the challenges that you are facing and that we've given
    you by law, passed by the Congress, signed by the President.
        It isn't as if you're dreaming up new assignments. We're
    sending them your way in volume as we move you from the well-
    known marketplaces like Chicago, which I'm very proud to
    represent, to a new world of swaps and over-the-counter (OTC)
    trading, that is dramatically larger in volume.
        For the record, what is the difference if we can speculate,
    I guess we can do that here, if we can speculate, the
    difference in size between that regulated marketplace that we
    can see on the street in Chicago and what is going on over the
    counter?
        What's the difference in size?
        Mr. Gensler. It's about eight times the size in terms of
    the aggregate dollar amounts. There's $300 trillion notional in
    swaps, which is $20 for every $1 of goods and services produced
    by America.
        Senator Durbin. That is an indication of new assignments
    coming your way, to deal with that market, and to try to have
    appropriate oversight.
        And so when the President asks for more resources, it's
    because you have a new and large responsibility coming.
        Mr. Gensler. That's right.
        Senator Durbin. Now, I have said to my friends in the
    industry, the Chicago Mercantile Exchange (CME), and others,
    that I have felt their position since I have been a Congressman
    and Senator, has been very clear and concise.
        They believe that their strength in the marketplace is the
    fact that they do follow the rule of law. They are subject to
    oversight. There is transparency, and it is rare, I wouldn't
    say never, but it is rare that an embarrassing situation
    arises.
        And that marketplace becomes a magnet for people all around
    the world because of those features. And that all depends on
    appropriate regulation from my point of view. And I think from
    theirs too. I don't want to put words in their mouth.
        Now, there are people who argue that if the Congress does
    not give you the resources to do your job, appropriate
    regulation of not only the existing marketplace, but new market
    responsibilities like OTC, that the alternative should be a
    user fee, a transaction tax, mirroring the example of SEC,
    which generates its annual budget through fees collected.
        And now is linked up more closely to the collection to the
    actual budget that they have to spend. And I, for one, have had
    misgivings about that because I question what will that do to
    the competitiveness of the American marketplace or CME, for
    example, against other countries with marketplaces that don't
    charge the same user fee or transaction tax.
        Does it create a competitive disadvantage for the United
    States in what has become a global industry? For the record,
    would you like to tell me your position or your belief about
    this issue?
        Mr. Gensler. My position is I would like to work with the
    Congress on whatever helps get the funding, and so, I don't
    have a philosophic bias on this.
        I believe that just as in the securities field, the
    transaction volume is so significant that it would end up being
    a very small fee if the Congress wanted to move forward on it.
        Senator Durbin. Well, let me take a step beyond where
    conversations have been in the past, and ask you, if you
    included the OTC market in this user fee, transaction tax,
    whatever you want to characterize it, what you've said to me is
    that it is dramatically larger than the marketplaces that we're
    aware of, the exchanges we're aware of.
        And that, do you include that in, when you say it would be
    a very small fee?
        Mr. Gensler. Oh, absolutely. I think that if the Congress
    were to work on this, that it would be appropriate, it would be
    spread across the swaps marketplace if it included futures.
        In this $300 trillion swaps marketplace that we're supposed
    to oversee, we have a $300 million budget, so just the
    arithmetic, that's $1 of budget request, $1 of budget for every
    $1 million in the swaps market, just to give a sense of the
    scaling.
        Senator Durbin. What I've said to my colleagues on both
    sides of the Rotunda is that if we do not adequately finance
    your agency to keep up with the responsibilities that have been
    sent your way, and the dramatic increase in the volume of
    trading in the traditional markets, that there will be growing
    pressure for some other funding source.
        And I hope that we rise to the occasion. I hope that we
    find the financing and appropriations to meet the President's
    request in the next fiscal year.

                                 FEAR OF GROWTH

        The last question is this: There is always a fear, I've
    served on the appropriation committees in the House and the
    Senate that we're giving an agency too much money too fast. And
    that the net result of it will be waste and bad decisions.
        To take your budget of $200 million and increase it by 50
    percent in a 12-month period of time is a pretty daunting
    assignment. Now, you've said, most of it will go to technology,
    and I'll let you say for the record, how much of that is
    scheduled, that you can see, it's going to happen.
        We are just moving along a path we had already created to
    create the technology that we need. But 40-percent-plus will be
    in new hires, and that too, is a challenge, to come up with the
    talent you need in your agency. I have visited your office in
    Chicago. I have met with your people.
        You have some extraordinarily talented people. The folks
    who would like to get on the floor and kick around Federal
    employees ought to sit down for 5-minutes with your staffers in
    Chicago and tell me that they can even comprehend what they do
    for a living, let alone dismiss it as wasteful bureaucracy.
        So tell me about increasing your budget by 50 percent in 1
    year, and whether this can be spent in a way that a year later
    you could come before us and say we saw it coming. We're ready,
    and will spend it well.
        Mr. Gensler. I thank you for those comments, and I'll pass
    them on to the staff, particularly in Chicago.
        I'm very proud of what they've been able to do. I think we
    can, but just as you worked with us last year, I think you had
    been conscious of that and I think it's called 2-year money, as
    a term of art is not incorrect, but I think that we could work
    with you.
        And, you know, how to ensure that we just didn't waste any
    taxpayer dollars. I mean, we're not going to put money to work
    if we can't hire the right people. So to hire 300 people in a
    year is a significant endeavor.
        The sooner we would know it, obviously, the better, if we
    end up in a process where this is after October and then
    continuing resolutions, then we have to be realistic that it
    would probably be best that it's put off into 2013 and 2014.
        But I think the sooner we'd know it, we would work with you
    to make sure we would never waste any taxpayer money
        Senator Durbin. Thank you, and thanks for your patience. I
    apologize again for being late, and I know we'll continue to
    work with you as we prepare the appropriations bills.
        We have a deeming resolution that has been filed this week
    in the Senate by Senator Conrad of the Senate Budget Committee
    which reflects the statutory bipartisan agreement on spending
    levels.
        There is some difference of opinion between the House and
    the Senate now as to whether that is going to be the guiding
    rule or some other effort will be intervening, but I think the
    Senate is likely to proceed based on this bipartisan law signed
    by the President.
        And I'm hoping that we can move on it on a timely basis to
    meet your last observation. The later in the process you are
    given notice, the less time you have to make it work right.
        And for your agency, for all those regulated by it, and for
    the taxpayers of this country, we ought to do our best to avoid
    that problem. Thank you very much for being here.
        Mr. Gensler. Thank you, Mr. Chairman.

                              SUBCOMMITTEE RECESS

        Senator Durbin. I'm going to have the subcommittee stand
    recessed. You may get some written questions. It's infrequent,
    but if you do, and could reply in a timely way, I'd appreciate
    it.
        Mr. Gensler. Thank you.
        Senator Durbin. Thanks.
        [Whereupon, at 3:53 p.m., Wednesday, March 21, the hearing
    was concluded, and the subcommittee recessed, to reconvene
    subject to the call of the Chair.]

      FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR FISCAL
                                   YEAR 2013

                                  ----------

                           WEDNESDAY, MARCH 28, 2012

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

                           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 afternoon. I am pleased to convene
    this hearing of the Appropriations Subcommittee on Financial
    Services and General Government. Senator Moran is at the
    Supreme Court--I do not know why--but will be back momentarily,
    and I will give him a chance if he would like an opening
    statement at that time.
        Welcome to Treasury Secretary Timothy F. Geithner. Glad to
    have you here. We are going to discuss your Department's
    critical work in support of economic recovery--particularly
    programs and policies dealing with the foreclosure crisis. And
    I am going to raise issues about what I consider to be a
    looming debt crisis involving student loans and where that will
    take us.
        The Department of the Treasury, as you know, plays a key
    role in promoting economic stability and prosperity, developing
    policies and strategies to promote not just recovery, but
    sustainable growth. Now, one of the largest barriers to
    economic recovery, we have discussed many times, is our
    struggling housing market. Under the Home Affordable
    Modification Program, the Treasury Department provides
    financial incentives for lenders to prevent foreclosures
    through principle reduction.
        Our economy, I am afraid, will not make a full recovery
    until we address the $700 billion worth of underwater mortgages
    held by more than 11 million homeowners. I believe that around
    20 percent of homeowners are affected. There are 3.3 million
    homeowners currently facing foreclosure.
        There are a number of approaches that can help families
    save homes, but many economists, banks, administration
    officials, and attorneys general from both political parties
    believe that principle reduction has to be one of the tools we
    use. Reducing principle often makes sense for both the
    homeowner and the lender, not to mention the communities which
    are being littered with foreclosed and abandoned property. That
    is why the recent bipartisan settlement between the five major
    lenders and a coalition of attorneys general of both parties
    includes $10 billion in principle reduction for underwater
    homeowners. I think we have to do everything we can to stop
    this foreclosure problem from getting worse as a means of
    simple justice, as well as making certain that economy recovery
    continues.
        Here is the issue I am going to raise with you. Of the 11
    million underwater mortgages, 3 million are being held by
    Fannie Mae and Freddie Mac. To date, the Department of the
    Treasury has provided $170 billion in taxpayers' dollars to
    keep Fannie Mae and Freddie Mac afloat. I want to explore today
    what more your Department can do to help these homeowners,
    especially through carefully tailored principle reduction.
        The second issue is the student loan crisis. And I had a
    hearing last week that really focused on what is happening. As
    you are undoubtedly aware, total outstanding student loan debt
    exceeded $1 trillion last year. There is now more student loan
    debt than credit card debt in America. The credit rating
    agency, Standard & Poor's, warned us that ``Student loan debt
    has ballooned and may turn into a bubble.''
        The hearing I held last week brought several things to
    light, including the impact of high-interest loans on young
    people, and many times on their parents. I want to discuss the
    impact of this growing student loan debt, the numbers that are
    associated with it, and what it means for our future.
        It was interesting to me that the 32-year-old woman who
    testified before us has started off with $79,000 in student
    loan debt 5 years ago. It is now up to $98,000. The private
    loan that she has incurred, which is in the range of $40,000,
    will ultimately cost her more than $111,000, if paid off over
    the term. And it has completely changed her life. She cannot
    borrow another penny to go to a real school. She wasted her
    money on a for-profit school. And she is about to lose her
    home.
        I think these things are connected unfortunately, and the
    student loan debt, if it does not cost young couples their
    homes, may impede them from ever having one. That will have a
    long-term impact on economic growth.
        Now, the money for your Department, which I am sure is
    first and foremost on your mind: the request from the
    administration is $14.072 billion for fiscal year 2013. It is a
    $909 billion or 6.9-percent increase more than current levels.
    And the majority is needed for the Internal Revenue Service,
    which constitutes more than one-half of the discretionary
    funding in our jurisdiction.
        I am pleased to see your budget request continue to
    prioritize the Community Development Financial Institution Fund
    (CDFI). And if you would like to say a word about that, we will
    give you a chance. Last year this subcommittee held an in-depth
    hearing on how CDFIs have leveraged small amounts of Federal
    funds to develop affordable housing, retail, small business
    lending, and the like. I have seen the impact on some
    neighborhoods in Illinois, and I would like to know if you
    share my positive impression. I hope you do.
        And I am going to give Senator Moran a chance to speak when
    he arrives, but at this time I would like to turn the floor
    over to a busy man, our Treasury Secretary Tim Geithner.
    Welcome.

                    SUMMARY STATEMENT OF TIMOTHY F. GEITHNER

        Secretary Geithner. Mr. Chairman, nice to see you. Thanks
    for having me here, and thanks for all your support and your
    colleagues' support for Treasury over these years.

                               PREPARED STATEMENT

        You know, if you would like, since we are here alone, I
    would be happy to just leave my opening statement for the
    record and get to the conversation, whatever is best for you.
        Senator Durbin. Okay.
        [The statement follows:]

                   Prepared Statement of Timothy F. Geithner

                                  INTRODUCTION

        Let me start with the broader challenges facing the national
    economy.
        Our economy is gradually getting stronger. Over the last 2\1/2\
    years, the economy has grown at an average annual rate of 2.5 percent.
    Businesses have added nearly 4 million jobs over the last 2 years,
    including 429,000 manufacturing jobs.
        While the economy is regaining strength, we still face significant
    economic challenges. Unemployment is still far too high, the housing
    market remains weak, and the overall effects of the financial crisis
    remain an obstacle to growth. The strength of our recovery will depend
    in part on events beyond our shores, as we saw last year when United
    States growth was buffeted by headwinds from Europe.
        The harm caused by the crisis came on top of a set of deep, pre-
    existing economic challenges, including a long period of stagnation in
    the median wage, diminished confidence in the ability of children to
    exceed the economic achievements of their parents, a substantial
    ongoing shift in the risk and cost of healthcare and retirement
    security away from employers and onto workers, poverty rates much
    higher than in any economy with comparable wealth, and the dramatic
    erosion in our fiscal position between 2001 and 2008.
        The President has laid out a strategy to address these challenges.
    His strategy entails a carefully designed set of investments and
    reforms to improve opportunity for middle-class Americans and
    strengthen our capacity to grow by improving access to education and
    job training, promoting innovation in our manufacturing sector, and
    investing in infrastructure.
        These critical investments are combined with a balanced plan for
    restoring fiscal sustainability. The President's budget reduces
    projected deficits by a total of more than $4 trillion over the next 10
    years by adding more than $3 trillion in deficit reduction to the
    approximately $1 trillion in savings already enacted through the
    discretionary caps included in the Budget Control Act. These savings
    are sufficient to stabilize our debt as a share of the economy by 2015
    and begin placing our debt on a downward path as a share of Gross
    Domestic Product.
        Treasury plays a vital role in helping to shape and implement the
    President's economic policies, driving reform of the financial system,
    encouraging lending to small businesses, working to reform the tax
    system, promoting economic prosperity, and monitoring risk in the
    financial system.
        Treasury is working hard with the Department of Housing and Urban
    Development and with the Federal Housing Finance Agency to repair the
    housing market. We have active programs to modify mortgages for
    distressed homeowners so that people can stay in their homes, help
    States in the hardest hit areas provide both loan principal reduction
    and payment forbearance for the unemployed, transition vacant homes to
    the rental market and make it easier for homeowners who are underwater
    to refinance their loans.
        As the President has made clear, more can be done to help, and we
    urge the Congress to consider the President's plan to help homeowners
    refinance their mortgages to take advantage of lower rates.
        Treasury is also working with other agencies, in particular the
    Department of Education, on a range of ways to help make college more
    affordable, such as the President's proposal to make permanent the
    American Opportunity Tax Credit. The administration is also moving
    forward with its ``Pay As You Earn'' proposal to help reduce debt
    burdens, and the President has called on the Congress to stop the
    interest rate on Stafford loans from doubling in July.
        In addition to our core policy functions, the Congress has given
    Treasury a very broad mission, with responsibilities that touch many
    aspects of the lives of Americans.
        Treasury is responsible for raising the resources necessary to fund
    critical government functions, from national defense to protecting
    national parks. The Department disbursed more than $2.4 trillion in
    Social Security benefits, veteran's pensions, and other benefit
    payments to more than 100 million Americans last year. Treasury
    delivered tax credits to drive investment in clean-energy production
    and to help families finance college education. We design and enforce
    the financial sanctions necessary to prevent the spread of nuclear
    weapons and the financing of terrorism. Our Internal Revenue Service
    (IRS) collected the $2.4 trillion in taxes necessary to fund core
    Government operations. We run the factories that produce every American
    dollar and coin.
        Treasury's fiscal year 2013 budget proposal supports the
    President's strategy through key priorities that will strengthen
    economic growth and make the Government more efficient while delivering
    essential services at lower costs to the taxpayer. The proposal also
    reflects Treasury's contributions to protect our national security
    interests and prevent illicit use of the financial system.
        Unlike most Federal agencies, Treasury's annually appropriated
    budget is about people more than programs. Salaries and operating costs
    make up 96 percent of our budget, and most of the rest of our budget is
    for investments in technology they require to function.
    improving efficiency, reducing taxpayer costs, and reforming government
        The Treasury budget request reflects our commitment to deliver core
    services more efficiently and at the lowest cost to the taxpayer. Our
    request includes efficiencies, program reductions, and other measures
    that will produce savings of $286 million in fiscal year 2013 and
    additional cost reductions in the years ahead.
        Key proposals include the consolidation of the Bureau of the Public
    Debt and the Financial Management Service. This consolidation will save
    $36 million over 5 years, starting with fiscal year 2014, through
    management, administrative, and support service efficiencies.
        As you know, these bureaus provide the financial infrastructure for
    the Federal Government. Both bureaus have successful track records
    working together on joint initiatives, including a recent information
    technology consolidation, which is projected to save $129 million over
    5 years. I am confident that they will build on this success by
    consolidating and improving the delivery of their core services.
        The budget also proposes legislation to provide Treasury with the
    ability to change the composition of coins to utilize more cost-
    effective materials. Currently, the costs of making the penny and the
    nickel are more than twice the face value of each of those coins. In
    addition to this proposal, Treasury is implementing measures to improve
    the efficiency of coin and currency production, including improved
    manufacturing practices and administrative cost reductions, which will
    save more than $75 million in fiscal year 2013.
        These savings build on a number of steps that the Department has
    taken during the last 3 years to improve efficiency and reduce taxpayer
    costs.
        Last December, we announced that we were suspending the production
    of Presidential dollar coins for circulation. At that time, there were
    1.4 billion surplus $1 coins sitting unused in Federal Reserve vaults.
    These surplus coins will now be drawn down over time. Taking this
    simple step will save taxpayers $50 million per year in production and
    storage costs.
        We are also continuing to achieve results in our ongoing paperless
    initiative, which will yield more than $500 million in savings over 5
    years. These efforts not only improve our internal management but
    provide modernized services to meet the public demand for more
    electronic services. In response, we have changed the way we provide
    services and are achieving savings while providing taxpayers the
    services they deserve.
        To give you an example of this, 6 years ago, just more than one-
    half of individual taxpayers filed their returns online. We have worked
    proactively to increase electronic filing, and today, 77 percent of
    taxpayers choose to file online. In 2013, it is our goal to get 80
    percent of taxpayers to file online, achieving an additional $8.1
    million in savings on top of the $63.9 million we have saved since
    2009.
        The fiscal year 2013 budget for Treasury's operating bureaus is 2.7
    percent below fiscal year 2012 and 6.8 percent below our fiscal year
    2010 enacted budget, excluding the IRS. The request for the IRS
    includes investments in enforcement activities that will contribute
    significantly to improving voluntary compliance with the tax code and
    closing the tax gap. For each additional $1 we propose to spend on
    compliance activities we bring in more than $4 in additional revenue.
    The enforcement investments in our request will bring in an additional
    $1.5 billion in annual revenue once fully implemented.

                        ECONOMIC GROWTH AND JOB CREATION

        We are also supporting small business growth through our Small
    Business Lending Fund (SBLF) and State Small Business Credit Initiative
    (SSBCI). Last year, we provided more than $4 billion to 332 community
    banks through the SBLF. Participating institutions estimate that they
    will increase their small business lending by $9 billion within 2 years
    of receiving the investments. By the end of this fiscal year, we will
    have provided approximately $1.5 billion to State programs that support
    small business lending and investment through SSBCI. States expect
    these investments to spur at least $15 billion in new small business
    financing.
        Our $221 million request for the Community Development Financial
    Institutions Fund (CDFI Fund) is focused on key community development
    priorities designed to improve services in underserved communities,
    including access to healthy food and financial services. Of the total
    request, up to $25 million is for the administration's Healthy Food
    Financing initiative, which will support increased availability of
    affordable, healthy food alternatives in these communities.
        The CDFI Fund's core program for financial and technical assistance
    provides monetary awards to CDFIs, which in turn provide loans,
    investments, financial services, and technical assistance to
    underserved populations and low-income communities. In 2010, CDFIs were
    awarded $105 million in grants under the CDFI program, which should
    contribute to $589 million in community development activity and the
    creation or preservation of approximately 10,000 jobs.
    protect our national security interests and prevent illicit use of the

                                FINANCIAL SYSTEM

        Finally, Treasury's financial intelligence and enforcement
    activities play a significant role in protecting our financial system
    from threats to our national security. Our funding request for the
    Office of Terrorism and Financial Intelligence is maintained at $100
    million and reflects our continued efforts to combat rogue nations,
    terrorist facilitators, money laundering, and other threats to our
    financial systems and our Nation's security.
        The work that this office conducts is far reaching and of critical
    importance to national security. The sanctions the administration
    imposed on Libya were a critical factor in removing the Gaddafi regime,
    and they continue to add pressure to the regimes in Iran, Syria, and
    North Korea.

                                   CONCLUSION

        Treasury benefits from a talented and dedicated group of public
    servants. Their work affects the lives of all Americans. They have
    played a critical role in pulling our economy out of crisis and setting
    the Nation on a path to recovery.
        Our Treasury team helps to protect America's economic interests and
    national security--so seniors can get their Social Security benefits,
    families can borrow money to buy a home or send a child to college, and
    businesses can grow and create jobs. They have worked hard to continue
    to make Treasury a leaner, more efficient organization that effectively
    delivers essential services to the American people.
        I appreciate the support of this subcommittee over the past several
    years in helping to make sure we have the resources to carry out these
    important responsibilities.

      FEDERAL HOUSING FINANCE AGENCY'S LACK OF PRINCIPLE REDUCTION POLICY

        Senator Durbin. So, let us start talking about this
    situation involving Mr. DeMarco's Federal Housing Finance
    Agency (FHFA). Here is how I understand it, and I would like to
    hear your take on it. I have heard him defend his position
    against principle reduction saying, that is not my job. My job
    is to oversee Fannie Mae and Freddie Mac as to their solvency.
    And I am not promoting any type of housing project or any type
    of recovery project when it comes to mortgage foreclosure. I
    just look at the bottom line. How is it going to affect Fannie
    Mae and Freddie Mac? That is perhaps as brutally honest. I do
    not know if it is true, but that is how he sees it.
        You are in a position where you are providing $170 billion
    in assistance to the government-sponsored enterprises (GSEs)
    through preferred stock purchase agreements. The administration
    has made it clear that principle reduction is an important
    component in stopping foreclosures and economic recovery. Now,
    reconcile these things.
        Secretary Geithner. Excellent question, and I am glad you
    are drawing attention to it.
        The law the Congress passed that put the GSEs into
    conservatorship and gave the FHFA more authority, gave them in
    some ways two mandates. One was to promote policies that help
    the overall housing market, but as important as that, and this
    is the critical constraint, they need to make sure they are
    operating in the interest of the taxpayer, looking to working
    to minimize losses, maximize returns to the taxpayer as a
    whole. They are doing a lot of different things to help people
    to modify mortgages with payment reductions and to help
    homeowners refinance, even homeowners that are deeply under
    water.
        But in the area of principle reduction, as you have heard
    Mr. DeMarco testify, they adopt a program they call principle
    forbearance, and they have been very reluctant to reduce
    principle. There is a very strong economic case for investors,
    any investor, whether it is the Government, or a bank, or a
    private investor, to reduce principle in some circumstances
    because that might increase overall recovery to the investor
    and the taxpayers. And where that is true in the private
    market, it is equally true for Fannie Mae and Freddie Mac.
        And so, we have been encouraging Fannie Mae and Freddie Mac
    to take another look at the math, at the economics of it, the
    finance, because we think there is a strong case in some
    circumstances to add principle reduction as part of their
    strategies to help maximize return to the taxpayer.
        Now, what Mr. DeMarco has said is that they are taking
    another look at their numbers, looking at our economic case. We
    are in the process of working through that with him, and I hope
    he is going to be in a position to indicate what he plans to do
    in the next several weeks.
        But you are right to emphasize this as an important part of
    a credible national strategy, that they have been reluctant to
    move, even though they have done a lot of things that have been
    very, very helpful. The art in this to try to make the
    financial case that for homeowners that are deeply under water,
    and you and your spouse loses a job, there are some cases in
    which principle reduction is not just good for the homeowner
    and the community, but it is good for the taxpayer too.
        Senator Durbin. So, am I right to say that 30 percent of
    these mortgages, roughly, through Fannie Mae and Freddie Mac
    would be at least subject to this principle reduction?
        Secretary Geithner. I do not think it is that high, but I
    have to look at the numbers and see. You know, Fannie Mae and
    Freddie Mac, contrary to what is popular perception in some
    quarters in Washington, were actually more conservative than
    the private markets and their underwriting standards, and
    required larger down payments in areas. So, in fact, the
    overall quality of the loans they made and the record of
    delinquencies performance is better than the overall market. I
    do not know what the exact numbers are in terms of how many
    people are under water, worst case. But, again, the economic
    case is there. There is a set of homeowners who are deeply
    under water and experience a hardship where it is better for
    the taxpayers to reduce principle. And our job is to try to
    encourage them to recognize that.
        Senator Durbin. So, let me just pursue this along a similar
    question, a little different line. It is the stated policy of
    the administration that principle reduction is one of the key
    elements in reducing foreclosures, stabilizing the real estate
    market, and perhaps reaching a point where we know what the
    value of real estate is, which I think is one of the still
    largely unanswered and central questions to our economic
    situation. And now you have the power through the Treasury
    Department to fund the group that oversees Fannie Mae and
    Freddie Mac, which is basically saying we do not buy that. We
    do not buy principle reduction. Do you need to be told by me or
    the Congress to close the carrot drawer and open the stick
    drawer? How do we get Fannie Mae and Freddie Mac to run the
    same play as the rest of the economy?
        Secretary Geithner. I have asked that question of my staff
    many times and of my predecessor because the law that gave them
    this authority was passed in the fall 2008, before I took
    office as the Secretary. And the Congress, in considering how
    much authority to give the administrator at that point, decided
    to keep it completely independent of the Secretary of the
    Treasury and the administration. I have no power to compel,
    even though you are right to remind people that in a sense
    those institutions exist only because we are providing the kind
    of support in terms of capital they need to be able to borrow
    at affordable rates and to continue to play the role they are
    playing in the housing market.
        I wish it were different, but the Congress considered this
    and decided at that point to--and they did it--I understand why
    they did it, to leave that entity, which had been subject to a
    lot of political pressure and political influence in the past,
    to leave it completely independent of any influence by the
    administration.
        Senator Durbin. Do you have anything to say about what they
    do with the senior preferred stock purchase money that you send
    their way?
        Secretary Geithner. Well, let me say they were limited to
    the power of our persuasive abilities.
        Senator Durbin. Carrots.
        Secretary Geithner. Of course, if the Congress were to
    change it, change that balance of authority, I would welcome
    that. But I think that, again, we are working very closely
    together, and we think there is a very strong economic case in
    this context, and we think that should govern.
        Senator Durbin. You know more about this business than I
    will ever know. Give me the Fannie Mae and Freddie Mac argument
    from their point of view against principle reduction.
        Secretary Geithner. Well, I think Fannie Mae and Freddie
    Mac themselves are actually pretty supportive of this. FHFA has
    been a little more conservative over time because their
    argument would be this: they would say that, look, we have to
    make sure we are maximizing returns to the taxpayer. If there
    is a chance that over time if we forbear on principle but do
    not forgive it, we could get a higher return to the taxpayer,
    we are obligated to pursue that path. That is the argument they
    would make.
        But ours is a simple choice. We think there is a set of
    cases where it is clearly in the interest of the taxpayer for
    them to do principle reduction up front. It is not an
    overwhelming number, but where it makes sense to do it, we
    should do it. That is what we are trying to convince them.
        Senator Durbin. I am going to turn to my colleagues with
    one last question. Can you think of an example where
    foreclosure would be in the best interest of Fannie Mae and
    Freddie Mac?
        Secretary Geithner. Well, I hate to say it this way,
    because as you pointed out, and you have said this many times,
    across the country there are thousands and thousands and
    thousands of people who are completely innocent victims of the
    fact that they either lost their job or they saw their house
    price decline precipitously, or they face another hardship and
    could not afford to stay in their home. And in that context,
    the first best solution is for the bank or Fannie Mae and
    Freddie Mac to work with the homeowner to restructure their
    payment obligations so it is within the ability of the
    homeowner to pay so they are given a little more time to find
    another job to get back on their feet.
        But not everyone will be able to do that. So, there are
    some cases where the best case for the homeowner is for them to
    be able to leave their house and go and find some affordable
    option, even if they have to rent.
        But, again, the obligation of all of us should be to do
    everything we can to make sure where people have the chance to
    stay in their home, and when that is clearly better for the
    Government in some context, not just for the community, we want
    to give them that chance.
        But there is one dimension of this that I would like to
    come back to, if we can, after your colleagues have a chance to
    do a----
        Senator Durbin. Sure. Okay. I will let Senator Moran.
        Senator Moran. I would yield to Mr. Lautenberg.
        Senator Durbin. Senator Lautenberg, would you like to
    proceed?

                    STATEMENT OF SENATOR FRANK R. LAUTENBERG

        Senator Lautenberg. I apologize for being late. And
    perhaps, Mr. Secretary, welcome you. And I do not want to be
    repetitive, but I may run into that as a consequence of not
    having heard your full presentation.

                               PREPARED STATEMENT

        One of the things that we see here, and especially in the
    private sector--I ask unanimous consent that my full statement
    be included in the record.
        Senator Durbin. Without objection.
        [The information follows:]

               Prepared Statement of Senator Frank R. Lautenberg

        Mr. Chairman, we have stepped safely back from the edge of
    financial crisis, and our economy is steadily recovering. But some
    effects of the crisis remain. More than 11 million homeowners owe more
    than their homes are worth. A path forward for these homeowners is
    essential for the health of our housing market and our economy. Unless
    there is some relief, 9 million homeowners could face foreclosure and
    eventual liquidation. While the impact on our economy would be severe,
    the human cost would be unthinkable. None of us can afford foreclosures
    at this scale--not homeowners, not investors, not taxpayers. The path
    forward is clear. Writing down some of the principal owed by underwater
    homeowners will help stem the tide of foreclosures and revive the
    housing sector, which has long been a drag on our national recovery.
    Principal forgiveness for responsible homeowners will give hope to
    those families, and reason for optimism for our economy as a whole.
        We must also be attentive to emerging risks to our financial
    system, and growing levels of student loan debt are raising alarms. I
    am concerned about reports that students are being swindled into
    borrowing more than they can afford. This sounds similar to the
    predatory mortgage lending practices that preceded the financial
    crisis. Like mortgages in the years before the crisis, student loans
    are difficult to understand and difficult to value. And Americans are
    taking out student loans--including private student loans--at a rapid
    pace. Many borrowers don't realize that private student loans lack the
    borrower protections of Federal student loans. Christopher Bryski--a
    constituent of mine who studied at Rutgers University--passed away in
    2006. His Federal student loans were discharged by law when he passed,
    but his private loans were not. Six years later, Christopher's dad is
    still sending monthly payments to his deceased son's bank. Student
    loans should be designed to protect borrowers, not just enrich banks.
    If we learned anything from the recent crisis, it's that financial
    products designed to generate profits for banks at the expense of
    consumers pose serious risk to the economy as a whole.
        I look forward to hearing from Secretary Geithner about what we can
    do to reduce risks and restore our economy back to full health.

                          MORTGAGE PRINCIPLE REDUCTION

        Senator Lautenberg. But I am concerned about the students,
    and I know that you have been discussing the homeowner
    foreclosures, and I have a question there about--and I think I
    heard you say it. A few of us or none of us can afford
    foreclosures at this scale, not homeowners, not investors, not
    taxpayers. And I will have an opportunity to ask you questions
    about that.
        But writing down some of the principle owed by underwater
    homeowners will help stem the tide of foreclosures, and revive
    the housing sector, which has long been drag on our national
    recovery. Principle forgiveness for responsible homeowners will
    give hope to these families and reason for optimism for our
    economy as a whole. And we have also got to be attentive to
    emerging risk to the financial system, growing levels of
    student loans.

                                 STUDENT LOANS

        I want to look at that, please, for a moment. And I am
    concerned about reports that students are being swindled into
    borrowing more than they can afford. And it sounds similar to
    the predatory mortgage lending practices that preceded the
    financial crisis.
        Like mortgages in the years before the crisis, students are
    difficult to understand and difficult to value, and Americans
    taking out student loan, including private student loans, are
    running into difficulties at a rapid pace.
        Many borrowers do not realize that private student loans
    lack the borrower protections of Federal student loans. And a
    case of a young man named Christopher Bryski, a constituent of
    mine who was studying at Rutgers University, who passed away
    very young in 2006, his Federal student loans were discharged
    by law when he passed. But his private loans were not. Six
    years later, Christopher's dad is still sending monthly
    payments to his deceased son's bank. And student loans should
    not--should be designed to protect borrowers, not just in rich
    banks.
        So, if we learned anything from the recent crisis, it is
    that financial products designed to generate profits or banks
    at the expense of consumers pose serious risks to the economy
    as a whole.
        So, I want to talk about that, and if I can use the
    remainder of my moments, Mr. Chairman, I would appreciate it.

      FEDERAL HOUSING FINANCE AGENCY'S LACK OF PRINCIPLE REDUCTION POLICY

        Opponents of principle forgiveness for struggling
    homeowners have argued that lowering the amount owed on
    underwater mortgage costs would cost taxpayers too much. We
    already heard that. However, analysis by the FHFA suggests that
    forgiveness would save taxpayer money.
        And forgive me if this is repetitious, but what has your
    analysis of the Treasury's principle forgiveness program
    revealed about the benefits of principle forgiveness for
    taxpayers and homeowners?
        [The information follows:]

    The Effect of the Principal Reduction Alternative on Redefault Rates in
          the Home Affordable Modification Program: Early Results \1\
    ---------------------------------------------------------------------------
        \1\ The logistic regression described in this paper was performed
    by Fannie Mae in its role as program administrator under Treasury's
    Making Home Affordable Program. The data points, figures and tables
    reflected herein were sourced from Fannie Mae as program administrator.
    ---------------------------------------------------------------------------
                               EXECUTIVE SUMMARY

        Since the inception of the Making Home Affordable Program, more
    than 1 million homeowners have had their mortgages permanently modified
    through the Home Affordable Modification Program (HAMP). As of May
    2012, more than 63,000 homeowners have received permanent modifications
    with loan principal reduction under HAMP Principal Reduction
    Alternative (PRA).\2\ This document presents an analysis of the
    performance of HAMP modifications with and without PRA. To date, this
    analysis has shown the following results:
    ---------------------------------------------------------------------------
        \2\ Fannie Mae and Freddie Mac do not participate in the PRA
    program.
    ---------------------------------------------------------------------------
      --Payment reduction is an important driver of HAMP modification
            performance.
      --HAMP modification redefault rates also fall as the loan's after
            modification mark-to-market loan-to-value, or MTMLTV, ratio
            decreases (i.e., as the size of the loan's current principal
            balance relative to the home's value decreases).
      --HAMP PRA participating servicers tend to use the principal
            reduction feature on loans that have relatively riskier credit
            characteristics than the overall HAMP population--borrowers
            with much lower credit scores and that are more seriously
            delinquent at time of modification.
      --A logistic regression controls for these riskier characteristics.
            The regression shows that for a given payment reduction,
            homeowners who received a HAMP modification with principal
            reduction perform better than homeowners who receive a HAMP
            modification without principal reduction.

        EARLY EFFECTS OF HOME AFFORDABLE MODIFICATION PROGRAM PRINCIPAL
                    REDUCTION ALTERNATIVE ON REDEFAULT RATES

        In June 2010, the Department of the Treasury announced the HAMP
    Principal Reduction Alternative program. HAMP PRA provides financial
    incentives to investors for reducing principal owed by homeowners whose
    homes are worth significantly less than the remaining balance owed on
    the mortgage. As of May 2012, homeowners have been granted more than
    63,000 HAMP PRA permanent modifications.
        HAMP data show that the amount of the monthly payment reduction
    affects the performance of HAMP modifications. Twenty-four months after
    converting to a permanent modification, there is a 28-percentage-point
    difference in the redefault rate between loans that received a 20
    percent or less monthly payment reduction and loans that received more
    than a 50-percent monthly payment reduction. Figure 1 shows the
    redefault curves by the percent of monthly payment reduction.

            Figure 1. 60+ Day Delinquency Rate by Payment Reduction

        The redefault rate of HAMP modifications also decreases as the
    after-modification MTMLTV ratio decreases. At 24 months, loans with
    less than or equal to 80-percent MTMLTV redefault at a rate that is 12-
    percentage points lower than loans with more than 170-percent MTMLTV.
    Figure 2 shows the redefault curves by MTMLTV. The gap in the redefault
    rate between loans with higher and lower postmodification MTMLTVs
    increases as the loans age. This gap is smaller for the redefault rate
    after 6 months than for the redefault rate after 24 months.

             Figure 2. 60+ Day Delinquency Rate by After Mod MTMLTV

        To date, participating servicers have selected loans with riskier
    credit characteristics to receive the principal reduction feature under
    HAMP PRA--loans that are more seriously delinquent at the time of
    modification and borrowers with lower overall credit scores than all
    HAMP modifications.
        If one were to look only at the early redefault performance of HAMP
    PRA versus all HAMP modifications without controlling for these riskier
    characteristics, it would appear that loans modified with the principal
    reduction feature under HAMP PRA are performing slightly worse than
    overall HAMP modifications, as shown in Table 2.

         TABLE 2.--HAMP MODIFICATION PERFORMANCE AFTER 6 MONTHS WITHOUT CONTROLLING FOR RISK CHARACTERISTICS \1\
    ----------------------------------------------------------------------------------------------------------------
                           All modifications                               Modifications with PRA forgiveness
    ----------------------------------------------------------------------------------------------------------------
                                            Percentage of 90+ days    Number of permanent     Percentage of 90+ days
      Number of permanent modifications     delinquent at 6 months       modifications        delinquent at 6 months
    ----------------------------------------------------------------------------------------------------------------
    800,613..............................                     5.80                   30,345                     6.30
    ----------------------------------------------------------------------------------------------------------------
    \1\ Sample shown includes all HAMP loans that were modified at least 6 months before March 2012.
    Source.--Making Home Affordable Program System of Record--data through March 2012

        The standard approach in statistical analysis for disentangling the
    impacts of different factors influencing an outcome is called
    regression analysis. In this case, a logistic regression controls for
    risk characteristics, which allows a better comparison of the
    performance of HAMP modifications with and without the principal
    reduction feature. These loan characteristics include MTMLTV,
    origination loan-to-value ratio, percentage monthly payment change,
    credit score at modification, age of the loan, delinquency of the loan
    at time of modification, investor type, vintage of the modification,
    unpaid principal balance of the loan at time of modification (including
    all past due amounts), delinquency number of months in trial, whether
    the loan received principal reduction, whether the modification was
    done under the HAMP PRA program or received principal reduction under
    traditional HAMP, whether the loan received principal forbearance,
    geography, servicer, and home price forecast following the
    modification.
        This analysis indicates that for loans with similar
    characteristics, there is a measurable improvement in performance when
    the HAMP modification includes principal reduction.
        This result is consistent with an assumption of the HAMP net
    present value (NPV) default model that a homeowner who receives a
    modification with principal reduction will perform similarly to a
    homeowner at the same post-modification MTMLTV who receives a
    modification without principal reduction.
        Some have wondered if principal forbearance has a similar effect on
    modification performance as principal reduction. These results indicate
    that a homeowner receiving a HAMP modification with principal
    forbearance performs slightly better than a homeowner who receives a
    HAMP modification without forbearance as well as without principal
    reduction. This improvement, though, is smaller than the improvement
    seen for a HAMP modification with principal reduction.
        The regression analysis allows us to separate the impact of the
    principal reduction from other characteristics that influence default.
    For illustrative purposes, we constructed a hypothetical homeowner with
    a premodification MTMLTV of 165 percent and a 10-percent chance of
    redefault (90+ days delinquent) within 6 months without a payment
    reduction. We then consider the redefault rate after 6 months implied
    by the same regression model for three different modifications, each of
    which provides a 30-percent payment reduction. The three different
    modifications provide the 30-percent payment reduction in the following
    ways, via:
      --Rate reduction and term extension to achieve a 30-percent payment
            reduction, an example of a standard HAMP modification: The
            model shows that the homeowner would have a 4.6-percent chance
            of redefault.
      --Forbearance (no rate or term adjustment) to achieve a 30-percent
            payment reduction: The model shows that the homeowner would
            have a 4.4-percent chance of redefault.
      --Principal reduction (no rate, term, or forbearance adjustments), to
            achieve a 30-percent payment reduction and an after-
            modification MTMLTV of 115 percent: The model shows that the
            homeowner would have a 3.5-percent chance of redefault.
        Table 3 illustrates these results for our hypothetical borrower
    with an MTMLTV of 165 percent.

       TABLE 3.--ESTIMATED DEFAULT OUTCOMES BY MODIFICATION STRUCTURE FOR
        HYPOTHETICAL BORROWER WITH 10 PERCENT INITIAL DEFAULT PROBABILITY
    ------------------------------------------------------------------------
                                                                 Probability
                                                                of advancing
                                                                  to 90-day
                      Modification structure                     delinquency
                                                                  within 6
                                                                   months
                                                                (percentage)
    ------------------------------------------------------------------------
    No modification...........................................            10
    Rate reduction and term extension to achieve a 30-percent            4.6
     payment reduction (no change in MTMLTV)..................
    Forbearance to achieve a 30-percent payment reduction (no            4.4
     change in MTMLTV)........................................
    Principal reduction to achieve a 30-percent payment                  3.5
     reduction and MTMLTV of 115 percent......................
    ------------------------------------------------------------------------
    Note.--These early redefault rates are just a fraction of expected
      redefault probabilities over the loan's lifetime, and so the absolute
      differences in probabilities that we see here would be expected to
      increase over time.

                                   CONCLUSION

        While it is still early, data show that there is a measurable
    improvement in borrower performance when the HAMP modification includes
    principal reduction. The outcome of the regression test is consistent
    with the assumption in the HAMP NPV default model that a homeowner who
    receives a modification with principal reduction to a certain MTMLTV
    will perform similarly to a homeowner getting a modification at that
    MTMLTV without principal reduction. In summary, the table above
    demonstrates that principal reduction leads to a 20-percent reduction
    in redefault probabilities as compared to a modification utilizing
    forbearance, and principal reduction leads to a 24-percent reduction in
    redefault probabilities as compared to a modification that receives
    payment reduction, but neither forgiveness nor forbearance.

        Secretary Geithner. Well, if you look at the economics of
    it and the finance, we believe that there is a very strong case
    for some homeowners who are deeply under water, experiencing
    hardship, there is a very strong case to provide principle
    reduction up front instead of other forms of payment reduction.
    And we are trying to make that case to FHFA.
        Now, you know, what you do with these cases, you look at a
    range of options, and you try to figure out what is the best
    option for both the borrower and the family and the home at the
    least cost to the taxpayer. And in some cases, it may be a
    payment reduction that substantially reduces the level of your
    monthly obligations for a long period of time. In some cases it
    may be principle reduction.
        What we are trying to do is to work through the case with
    FHFA and convince them that it is in the interest of the
    taxpayer and consistent with conservatorship for them to adopt
    the type of program we put in place for their book of
    mortgages. And they are working with us on this. They have been
    a little hesitant, a little more conservative so far. But they
    are reasonable people, and they are amenable to argument, and
    we think the facts are very compelling.
        Senator Lautenberg. You will be able to have another----
        Senator Durbin. Yes. We will have a second round for sure.
        Senator Moran.

                        STATEMENT OF SENATOR JERRY MORAN

        Senator Moran. Mr. Chairman, thank you. Mr. Secretary,
    thank you very much. Thank you for calling and giving me the
    opportunity to visit with you. I am sorry I was not able to do
    that.
        I continue to hear concerns about a lack of coordination
    among the Stability Council members on various Dodd-Frank Act
    rulemakings, especially those related to the derivative titles.

                           DERIVATIVE MARKET REFORMS

        As the chairperson of the Financial Stability Oversight
    Council, do you have confidence that you will be able to
    encourage the harmonization of derivative market reforms at a
    time at which it appears that you are unable to encourage or
    facilitate consensus between the Securities and Exchange
    Commission (SEC) and the Commodity Futures Trading Commission
    (CFTC)?
        Secretary Geithner. Well, you were right to point out that
    we have a very complicated system in the United States, and by
    preserving a lot of different people with authority over the
    pieces of the system, it makes it a little harder to
    coordinate, and frankly, makes the process more complex. The
    additional challenge is these are global markets.
        And so, it is very important to us that we get the world to
    move with us. What we do not want to do is raise the standards
    of the United States, have the world decide not to raise its
    standards and have markets just ship outside of the United
    States.
        So, we have got two dimensions of complexity. One is we
    want to get the U.S. agencies in the same place on the sensible
    terms, and we want to get the world in the same place.
        Now, the Congress in its wisdom did not give the Secretary
    of the Treasury the authority to write these rules, and I do
    not have the authority to force convergence on these agencies.
    But we are working very closely with them to try to make the
    case that we are not going to be able to get the world in a
    sensible place unless U.S. entities are aligned. And where the
    SEC and the CFTC, under their independent jurisdiction, have
    the discretion to be fully aligned, we think that makes a lot
    of sense.
        I am actually pretty confident that the broad framework of
    oversight and derivatives is going to get landed in a sensible
    place, both here and globally. I am much more confident than I
    was 1 year or 18 months ago. There are still a lot of concerns
    out there about some of the details, and you know in our system
    we go out for public comment on each of these rules, and
    everyone has a chance to assess the implications in their
    context. That gives the regulators a chance to adapt.
        So, we are on it. We are focused on it. We care a lot about
    making sure these rules land in a sensible place. And, you
    know, we have got some ways to go, but we are going to keep
    working on it.
        Senator Moran. Generically, Mr. Secretary, not necessarily
    your comments, but when a person says the Congress in its
    wisdom failed to do something, is that said just factually or
    with disrespect?
        Secretary Geithner. No, that was extraordinary deference
    and respect.
        Senator Moran. All right, thank you.
        Secretary Geithner. And to be fair, we did not seek
    authority to write the rules and derivatives. We thought they
    should be left with the SEC and the CFTC. And the SEC and the
    CFTC, not surprisingly, agreed.
        Senator Durbin. Let the record show that the witness is not
    under oath. Proceed.
        Senator Moran. He is not what?
        Senator Durbin. Under oath.

                         ENTREPRENEURSHIP OPPORTUNITIES

        Senator Moran. Under oath. Mr. Secretary, at the end of
    January, President Obama sent to the Congress his Startup
    American legislative agenda, and three items that are currently
    on the way to his desk, the so-called Jobs Act. And I am
    supportive of that development. In my view, there remains to be
    a lot of work done in regard to innovation and startups,
    creating an entrepreneurship environment. I got interested in
    this topic because, in my view, the Congress and the
    administration has failed to do much of anything about the
    deficits. And while I am not walking away from the spending and
    revenue sides of the deficit issue, another way--an additional
    way to deal with our growing deficit is to grow the economy.
        And so, I started looking at entrepreneurship
    opportunities, trying to create that circumstance in the United
    States in which somebody who has an idea and goes to work in
    their backyard, their garage, their basement, has a greater
    opportunity of succeeding than they otherwise would have.
        Senator Warner and I introduced legislation called the
    Startup Act that would make permanent zero capital gains for
    investments in small businesses. The President signed a
    temporary version of that provision that expires at the end of
    2010--it went into effect in 2010 and has since expired. And I
    am interested in knowing your view, your opinion, as to the
    impact of this exemption in 2011, what additional investment we
    might expect if it was reinstated as either suggested by the
    President or in our legislation.
        Secretary Geithner. Well, we are with you on this
    completely, and we think it should be extended and made
    permanent. And we think it would have a powerful incentive in
    encouraging investment in startups, and that is a good thing.
        I do not have with me today an estimate of the magnitude of
    the impact, but I would be happy to see if there is anything
    with enough integrity we could share with you. We would be
    happy to do that.
        Senator Moran. I would welcome your input. Thank you very
    much.
        Thank you, Mr. Chairman.
        [The information follows:]

        The administration supports a 100-percent exclusion from income for
    long-term capital gains on qualified small business stock from capital
    gains tax, and we proposed in our fiscal year 2013 budget to make this
    favorable tax treatment permanent. While we are not aware of any
    studies on the economic impact of this particular provision, largely
    due to the required 5-year holding period, it is no doubt an important
    incentive to encourage and reward investment in new and growing
    businesses, such as many startup companies.

        Secretary Geithner. Just because you raised it, I think
    that there are other things in the tax law, too, that would be
    helpful in this context. And just for you to consider as you
    think about this legislation going forward, we think there is a
    very strong case to reinstate expensing, full expensing, for a
    temporary period of time, too. That creates an incentive for
    people to invest, good for the economy, good to grow the
    economy now. We have also suggested various ways to encourage
    through the tax code small businesses to add to payroll, hire
    more people, add hours, when we are trying to get more people
    back to work. I think those things will work by incorporating a
    grain of permanent capital gains inclusion for investment in
    small businesses. There is a lot of merit to those things.

                            ACCELERATED DEPRECIATION

        Senator Moran. Mr. Secretary, I am glad you added those
    points, and I share that view. I would add that it would be
    helpful in regard to one of those particular accelerated
    depreciation issues is general aviation. And the President has
    a habit of talking about general aviation aircraft and
    corporate jets. And the provision that we are always talking
    about that is being criticized is accelerated depreciation. And
    it is certainly an important one to the manufacturing base in
    Kansas and across the country.
        But I know just as a rural member of, well, of the
    Congress, somebody who represents a very rural State, if we are
    going to have small businesses, manufacturers located in small
    towns, we ought to have a viable general aviation industry that
    encourages those businesses to be able to fly to places to
    connect with the rest of the world so that we are not all
    centered around airports. And I just would ask you to encourage
    the President to reduce the rhetoric about accelerated
    depreciation when it comes to general aviation aircraft.
        Secretary Geithner. I think our proposal, Senator, is to
    put them on the same footing, to level the playing field, with
    other people who make aircraft. But I get your point, and I
    understand your concern.
        Senator Moran. Thank you very much.

                              STUDENT LOAN CRISIS

        Senator Durbin. Mr. Secretary, I mentioned student loans
    earlier, and I want to draw some parallels. There are
    interesting parallels between mortgages and American student
    loan debt.
        There is $1.4 trillion in mortgage debt in this country
    held by about 52.5 million mortgage holders, and 11 million, or
    about 20 percent of them, are under water. We are talking about
    what we do for principal reduction, to deal with the reality of
    foreclosure, and the impact it has on their lives, and our
    communities, and the future of the housing market.
        Now, look at the parallel universe. Student loan debt
    totals $1 trillion--not $1.4 trillion, but $1 trillion. The
    number of students is 37 million; and 15 million, or 39 percent
    of them, are actually paying on their debt. That is 39 percent.
    The remainder, 61 percent, or 22 million, are not paying on
    their debt. Some are in school, but many of them are in a
    position where for a variety of reasons, they cannot pay on
    their debt.
        One of your charges is to look ahead at the impact of
    certain financial decisions that are being made on the future
    of our economy. And when I look at what the foreclosure side on
    the mortgage market is doing to our economy overall, I then try
    to jump ahead a few years and anticipate the impact of this
    student loan debt on our economy.
        Now, there is a significant difference. The most
    significant difference is that the mortgage debt is
    dischargeable in bankruptcy; the student loan debt is not. I
    ask people at the Federal agency, well, what do you think of
    this, that we have so much student debt out there owned by our
    Government, and so much it is not being paid, and defaults, and
    the like.
        And their answer was a little smug. They said, we will get
    our money. Someday we will get our money. It may be a Social
    Security check, but we will get it. That is a grim prospect for
    someone 22 years old, and their mom, and signing up for a
    student loan to think that is the outcome of this decision.
        Tell me what you think in terms of whether or not this
    should be a matter of concern. Are we dealing with a potential
    bubble as some analysts have said? And what do you think we
    should do about it?
        Secretary Geithner. A very important question, and my
    compliments to you for drawing attention to it.
        Let me just say a few general things, and we do share your
    concern, particularly about the unique challenges in the
    private student loan market.
        In the Government student loan market, as you know, there
    are a lot of various forms of flexibility to make sure you can
    adjust payment to income over time, many other ones, too, and
    that is very important. In the private market, those
    protections do not exist, and we would like to work with you on
    how best to think about solving that problem. I know Secretary
    Duncan is thinking a lot about this.
        As you know, the Consumer Financial Protection Bureau
    (CFPB), has responsibility and some authority to look at
    practices in these areas, and they are responsible now for
    taking a look at whether you are seeing behavior by lenders
    that would magnify the risks in this context. We think it is
    very important that--and the President has been very focused on
    this, to try to make sure we are holding all providers of
    postsecondary education--community, private, public--to higher
    standards for the quality of the education they provide to the
    country because, as you pointed out, many people are going to
    very expensive schools where they have not been able to earn a
    return that justifies the expense. And we are working very hard
    to make it more affordable for people to go to college with the
    Congress' support, a range of tax incentives, and other
    options.
        But even with what CFPB is doing, even with these efforts
    to deal with some of the special challenges posed by these
    private universities and for-profit universities across the
    country, and even with steps the Congress has supported to make
    it affordable to go to college, we have a problem we do not how
    to deal with yet in the private student loan business. So, we
    would like to work with you on your specific proposal. There is
    definitely some merit in it. We want to do it carefully, but
    for all the reasons you said.
        It is important to recognize that the average earnings for
    somebody who goes to college are much higher than somebody who
    just graduates with a high school diploma. There is a very good
    case for society as a whole and for the individuals to be able
    to borrow money, and afford, a community college or a 4-year
    college program. But you want to make sure you are doing that
    in the most financially sensible way for you, and with the
    protections you deserve in that basic context.
        A lot of those protections exist in the Federal student
    loan market, and we have got some work to do to bring those to
    the private market.
        Senator Durbin. Let me add one other element I should have
    added, and the difference if we contrast mortgage loans and
    student loans. The bubble in the mortgage market was brought on
    by overpricing real estate. And as a result of people losing
    their homes, being unable to pay, real estate prices came down
    dramatically. The President raised this point in his State of
    the Union Address about the cost of higher education. It seems
    like there is no ceiling. It is just on its way up forever. And
    I am not sure if the bubble bursts and more and more students
    cannot make their payments, whether the message will be driven
    home to a lot of these institutions.
        Some of the tuition charges at schools, including some I
    attended, I think have reached an outrageous level, and I do
    not think that they are sensible anymore in terms of the debt
    that a student has to incur. But they need to be. We have to
    create incentives for them to price a product that is worthy of
    the investment that many young students and their families are
    making.
        It turns out that when it comes to the private loan side of
    it, more and more of these schools, even with the fact that you
    cannot discharge the loan in bankruptcy, are insisting that the
    parents sign on, too. And many parents who thought they were
    headed for retirement with a college-educated child end up
    continuing to work because of student debt that cannot be paid
    at the end of the day.
        Secretary Geithner. It is also true that many people used
    to have the ability to borrow against their house to cover the
    cost of college for their kids, which was a very financially
    attractive way to pay for higher education. But, of course,
    that opportunity no longer exists for many people because of
    how much home prices have fallen.
        Senator Durbin. I am much larger than the average canary,
    but I hope that this testimony today will start some people
    thinking about what this student loan debt is going to mean to
    us in the longer term. And I am not sure which way to turn at
    this point.
        Senator Moran. Mr. Lautenberg is fine.
        Senator Durbin. Senator Lautenberg.
        Senator Lautenberg. Thanks very much. Unscrupulous mortgage
    brokers' practices have led Americans to buy homes that they
    clearly could not afford, and today we see some for-profit
    colleges are pushing students to run up debt they can never
    repay. What, if anything, can the administration do to make
    sure that for-profit colleges do not put our economy at risk
    like the mortgage brokers did?
        Secretary Geithner. Well, excellent question. The President
    and Secretary Arne Duncan have in place a range of policies
    designed to address just this question. So, in addition to what
    the CFPB, we hope, will do in improving the quality of
    disclosure and providing information about borrowing choices
    for its students, in addition to what we can do through the tax
    system and elsewhere to help make college more affordable, the
    President and the Secretary of Education are working hard to
    try to reduce the rate of growth and costs.
        You are both right to highlight this. You want individuals
    to know when they are thinking about how they pay for college
    or community college, about the difference between the
    protections you get with a Federal student loan and a private
    loan. So, you want them to go in eyes open. You do not want
    them to have unrealistic expectations about what they are going
    to be able to earn after college, not justified by the quality
    of the education they get. Those things are very important.
    And, again, you are right to bring attention to it.
        I spent some time talking to the President and Secretary
    Duncan before our hearings; I knew you were going to raise it.
    I know that they are very focused on your specific suggestions
    and would like to work with you on it.
        Senator Lautenberg. Well, is it possible that private
    student loans could have some of the same borrowing protections
    as Federal loans?
        Secretary Geithner. Well, that would really be a matter for
    consideration by the Congress and the CFPB. That is something
    we have to look at. I know the chairman has proposed or is
    considering some specific legislation that would allow private
    student loans to be discharged in bankruptcy with a full set of
    protections. That would be one approach, and we will look at
    all sensible ideas in this area.
        Senator Lautenberg. Right now, budget cuts would slash Pell
    Grants, 10 million students, by at least $1,000. What might be
    the impact of cutting Pell grants for student loans?
        Secretary Geithner. Well, again, if the U.S. Government
    were at this time, with all the concerns we have about the
    basic competitive position of the American economy, and the
    need to equip Americans with the skills they need to get jobs
    to significantly reduce the assistance it provides students
    going to college, that would be a bad thing for the country.
    And it is one reason why it is important for us to recognize
    that even though we recognize our deficits are unsustainable,
    and even though we recognize we are going to have to bring them
    down over time, to understand where we cut and how we do it is
    as important as doing it itself.
        And so, here we put in place tax reform and fiscal reforms
    to help reduce those deficits in the future, we have to be
    preserving room--and we can afford to do this as a country--
    preserving room to make it easier, not harder, for kids to go
    to college.
        Senator Lautenberg. Going back some years, I was a
    beneficiary of the GI bill, and was able to get a pretty good
    education at Columbia Business School. And I helped co-found a
    company that now employs more than 40,000 people and presents
    the employee statistics every month, ADP. And we built the
    greatest generation, so called. I was one of the builders, but
    I do not know whether I carried my share of the 8 million
    people who got a GI bill education.
        And not to avail ourselves out of what can come out of a
    broad-scaled educational program that encourages people, does
    not discourage them, does not put them under unrealistic
    burdens, and put our society further in debt, understand that
    watering those flowers produce--it is not only a beautiful
    scent, but a beautiful view.
        Thanks very much.
        Secretary Geithner. I agree. Could I just say, Mr.
    Chairman, that I, too, borrowed to finance my college and
    graduate school education, and I was able to repay those loans
    on a civil service salary, which was a very fortunate thing for
    me. I think as a country, if anything, we are under investing
    in an investment that would have very high returns for the
    country as a whole, and the GI bill is the best example.
        Again, it's a good thing to remember as we think about how
    we find a bipartisan agreement on ways to reduce those long-
    term deficits, because we need to be doing that in a way that
    preserves room for these kinds of investments.

                                  VOLCKER RULE

        Senator Moran. Mr. Secretary, I am going to ask you to
    advise one of my bankers in their efforts to comply with the
    record keeping requirements of the Volcker Rule.
        The way I understand the situation is a bank without any
    proprietary trading ambitions, either before or after the
    financial crisis, would now have an affirmative obligation to
    prove the negative. In other words, although they never had a
    proprietary trading operation, the Dodd-Frank Act now forces
    them to develop an expensive compliance system to prove that
    fact to the Government.
        Has the Treasury Department made any efforts to quantify
    the costs of that compliance, and how would you suggest a
    banker do that?
        Secretary Geithner. I have heard that concern, and that is
    one of the many comments and concerns expressed by the private
    market in response to the rule proposed by the regulators.
    Again, this is a rule proposed by a group of independent
    regulators. I know they are taking a look at that concern among
    many.
        I think the question they face is, can they find a way--and
    I am very confident they can--can they find a way to achieve
    the objectives of the law, which is to limit proprietary
    trading by the largest banks in the country, but still preserve
    exceptions the Congress designed for market making and hedging,
    and make sure that complying with that does not put an undue
    burden on the rest of the system. I am very confident they can
    do that, but they have got some work to do. And it is important
    to me, not just to your banker, that they get this right.
        Senator Moran. Thank you. I appreciate that confidence that
    it can be accomplished. And it is that reminder that this
    premise about too big to fail, one of the things we have to be
    very cautious of is that because of regulatory burdens, we do
    not force financial institutions to become bigger and bigger to
    cover the costs of the regulatory burden created by the Dodd-
    Frank Act and other legislative rulemaking.

                          SMALL BUSINESS LENDING FUND

        Let me ask another one dealing with a similar topic, your
    written testimony references support for community banks from
    the Small Business Lending Fund (SBLF). But I am concerned
    about a lack of an exit plan for those several hundred banks
    that received TARP money from the Capital Purchase Program,
    that were not eligible or were otherwise prevented from
    participating in the SBLF. Do you have a strategy to recover
    those taxpayer dollars and to allow community banks to exit the
    program?
        Secretary Geithner. Excellent question, and we are very
    focused on this. I should point out that we have already
    recovered more than $10 billion of the total amount invested by
    the Government in the banking system in the crisis. The
    expected return on those investments for banks is going to be
    north of $20 billion.
        But you are right, we still have a series of quite small
    investments left in a number of community banks across the
    country. And we are working with those institutions and their
    regulators to encourage them to repay and make it possible for
    them to repay. Not everybody is going to be able to do it.
    There will be some banks that cannot do it. But we are trying
    to figure out a way to encourage those firms to replace those
    investments by the taxpayer with private investments as quickly
    as possible. And they generally want to do it, too. They are
    very eager to return those investments.
        Senator Moran. Mr. Secretary, thank you. Mr. Chairman,
    thank you.

          FINANCIAL CRIMES ENFORCEMENT NETWORK INFORMATION TECHNOLOGY
                                 MODERNIZATION

        Senator Durbin. Mr. Secretary, in your Financial Crimes
    Enforcement Network (FinCEN), there has been a lot of work for
    a long time to upgrade the technology. Tell us where you are.
        Secretary Geithner. Well, we have got some work ahead of
    us. And, as you have said, this has been a challenge for many
    arms of government. We have a stronger management team in place
    in working how to design and execute this modernization. We
    have drawn on resources outside FinCEN to help reinforce it. I
    would be happy to give the subcommittee more details on how
    things are going. But I think they are doing okay.

        OFFICE OF FOREIGN ASSETS CONTROL SANCTIONS AGAINST IRAN, SUDAN,
                               BELARUS, AND SYRIA

        Senator Durbin. There is another aspect of your agency.
    Most people might think about it instantly, the Office of
    Foreign Assets Control (OFAC), and it oversees economic
    sanctions against targeted foreign countries and regimes,
    terrorists, and other threats to America.
        So, I would like to ask you, is work being done relative to
    the situation in Sudan by your Department?
        Secretary Geithner. Absolutely, and I thank you for drawing
    attention to this part of the Treasury.
        This part of the Treasury is responsible for designing and
    executing these financial sanctions we have in place with many
    countries around the world. And in Sudan, we have in place the
    most powerful sanctions available to us. They are very
    comprehensive, and I think they have been a pretty powerful
    incentive to reinforce the broader objectives of the State
    Department and the President in Sudan.
        OFAC's work goes well beyond Sudan, and, of course, a big
    part of their work today surrounds Iran where we are making
    tremendous progress in bringing more pressure on Iran from
    countries around the world.
        Could I just take this moment to convey my best wishes to
    Senator Kirk, who I know has been such a champion of a tougher
    approach in Iran. I want him to know as he recovers that we are
    making extraordinary progress using the authority he has helped
    give us at the Treasury working with countries around the world
    to bring more pressure to bear on Iran. We are having, we
    think, a big impact economically on them.
        Senator Durbin. I will make sure he gets that message.
        One of the witnesses before the Foreign Relations Committee
    last, when we asked about Sudan and what we could do, said that
    there are at least three Sudanese leaders who have been found
    guilty of war crimes before the International Criminal Court:
    President Bashir, Defense Minister Hussein, and Government
    Minister Harun. And they asked whether we could and whether we
    are tracking their financial assets.
        Secretary Geithner. Well, I would be happy to take a look
    at that more specifically and talk to my colleagues about it.
    The sanctions we have in place cover the government as a whole,
    but, of course I welcome that suggestion and I'm happy to
    consult with my colleagues. We will get back to your staff on
    whether we think that makes sense.
        Senator Durbin. I would like to ask you at the same time to
    consider the situation in Belarus with Viktor Lukashenko, the
    last dictator in Europe, as well as the Syrian dictator, Bashar
    al-Assad. If you would like to say another word or two about
    the situation in Iran. The President has told us and others,
    Secretary Clinton and others, that the sanctions regime is
    making an impact. Can you give us any testimony today about
    what you think the impact has been on the Iranian economy?
        Secretary Geithner. Yes. All evidence suggests, and you can
    see it in what has happened to their exchange rate, the rate of
    inflation, and the difficulty they are having, frankly, trading
    with the rest of the world and selling their oil, that it is
    having very substantial economic effects.
        You have seen 10 countries in Europe and Japan announce
    that they are going to substantially reduce imports of oil from
    Iran. The Europeans are going to cut them off completely.
    Countries around the world are in the process of taking
    additional steps to reduce their imports of oil. But beyond
    that, these financial sanctions are making it very difficult
    for countries to do business with Iran, very difficult for Iran
    to get paid for the oil they do ship, and to get paid for other
    things. And that is absolutely having an effect on the economy
    as a whole.
        Now, we do not know, of course, what effect that is going
    to have on their nuclear ambitions. Of course, our ultimate
    objective is to convince Iran that they should join the
    consensus of the international community to renounce those
    ambitions. We think these sanctions are necessary, and we hope
    will be an effective path to achieve that.
        I want to say in the Belarus context--happy to report in
    more detail--but we have put sanctions in place in Belarus on a
    number of senior government officials, including Lukashenko and
    others.
        Senator Durbin. Thank you.
        Senator Moran.
        Senator Moran. Mr. Chairman, you started me down another
    line of questioning, and one of the areas--I think both of the
    areas we agree upon. I just would encourage the Treasury
    Department to fully implement, to enforce the sanctions as
    authorized by the Congress in regard to Iran, and I would
    encourage you to do that.

                       SALE OF AGRICULTURAL GOODS TO CUBA

        On the topic of Cuba, one that the chairman and I have
    dealt with in the past, the administration has made--the Obama
    administration has made changes in our relationship, bilateral
    relationship with Cuba in regard to travel and regard to money
    being sent to Cuba. But you have not done anything in regard to
    the sale of agriculture commodities, food, and medicine.
        And going back to the year 2001, the Congress passed
    legislation that authorized the sale for cash up front of those
    items. We had regulations developed by the Treasury Department
    that were in place for a number of years. The Bush
    administration Treasury Department changed those regulations,
    made it more difficult for those cash sales to occur in really
    two ways: third-party financing and the definition of when the
    shipment arrived or left the United States, the determining
    factor of when the cash had to be paid. Prior to those
    regulatory changes, it had to be paid when the ship landed in
    Havana. The Treasury Department changed the rules and said it
    had to be paid before the ship left the United States, making
    the United States' sales significantly less competitive.
        And other countries' exports to Cuba have increased, for
    example, to Brazil. Ours following those Treasury regulation
    changes were reduced, diminished. And as--this goes back to my
    days in the House of Representatives, Representative Peterson
    and I wrote the administration asking, if you are going to do
    those other two things, why do you refuse to take the steps
    necessary to deal with the agricultural sales--it is not even
    trade--agricultural sales for cash up front, and return us at
    least to the days that pre-existed the change by the previous
    Treasury administration.
        I would be happy to know your response, but mostly I want
    to ask you to encourage the administration to do that, and to
    work with us as we try to craft legislation if you will not.
        Secretary Geithner. I will be happy to work with you on it.
    And, as you know, there are Members of the Congress who have a
    somewhat different view than you on this, and they have
    occasionally tightened----
        Senator Moran. I have met them.
        Secretary Geithner [continuing]. The things you are trying
    to loosen. And we have to be guided by what they put into law.
        Senator Moran. But the same thing could be true--be said
    for the other two aspects of trade in regard to the money being
    sent and the opportunity to travel to Cuba. And it just seems
    odd this is the one that there seems to be--there is an
    unwillingness for the administration to make the changes.
        Secretary Geithner. Again, happy to listen to your concerns
    on this and to work with you on it. We try to hew closely to
    the line that Constitution draws, and when you change the law,
    then we move. But we are happy to talk to you.
        Senator Moran. I think we have had this conversation
    before. Your happiness to talk to me has been demonstrated
    previously, but the rules remain the same.

                 TAXPAYER SUPPORT OF FREDDIE MAC AND FANNIE MAE

        The only--I think, Mr. Chairman, the only other question I
    would ask is, this is a question that Senator Kirk asked me to
    ask in regard to taxpayers being made whole in their
    investments and the rescue of Freddie Mac and Fannie Mae. And I
    think the point he wanted me to raise with you is that in the
    Senate Banking Committee, February of this year, Secretary
    Donovan estimated that the taxpayer exposure to the bad loans
    of Fannie Mae and Freddie Mac could exceed $1 trillion. Do you
    agree with that assessment?
        Secretary Geithner. No, and I do not think it is likely he
    said it that way. Let me tell you how we look at this.
        FHFA does a regular periodic assessment of what future
    losses might be even in the event we face another recession or
    another crisis, those are put in the public domain, and they
    periodically revisit those.
        But I will tell you what they show. What they show is that
    all the losses they face going forward now are really the
    legacy problem of the choices they made during the financial
    boom. And today, because of the changes put in place since the
    crisis under the legislation the Congress passed, they have
    much more conservative underwriting standards and much more
    conservative lending practices.
        Most independent economists assessing their book of
    business would say that the new business they are doing today,
    which is still very important--the housing market--is done on
    much more conservative financial terms and looks relatively
    profitable. And over time, those profits are helping reduce the
    losses we inherited.
        But what FHFA does, and which is appropriate, is to
    periodically publish estimates of what those losses might be in
    the future to the taxpayer under even a significantly worse
    economic scenario. But the estimates out there, including the
    ones made by CBO, are nothing close to $1 trillion.
        We will lose some money, but I think the current estimates
    are more in the range of $100 billion. And even those losses
    look like they are going to be largely offset by the
    Government's return on the range of other things that we did as
    part of the financial rescue done by the Federal Reserve and
    the Federal Deposit Insurance Corporation (FDIC) and the
    Treasury.

                         ADDITIONAL COMMITTEE QUESTIONS

        But, you know, we got some ways to go, and really at the
    very early stage of putting in place reforms that will make the
    housing finance system work better in the future. We are pretty
    far advanced on the broader financial reforms, but not very far
    along on the reforms to the housing finance system.
        Senator Moran. Mr. Secretary, thank you.
        Senator Durbin. Mr. Secretary, thank you for your time and
    your valuable testimony.
        Secretary Geithner. 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

        Question. What is the Department of the Treasury doing in its role
    as manager of the Senior Preferred Stock Purchase Agreements--through
    which the Government-sponsored enterprises (GSEs) have received about
    $170 billion in taxpayer assistance--to ensure the GSEs are engaging in
    behavior such as principal reduction that, as Secretary Geithner has
    stated, when appropriately used would ``limit the futures losses of the
    GSEs''?
        Answer. The Federal Housing Finance Agency (FHFA), as Conservator
    of Fannie Mae and Freddie Mac, is responsible for the oversight and
    management of the activities at Fannie Mae and Freddie Mac.
        As part of the Senior Preferred Stock Purchase Agreements, Treasury
    has certain protections on its investment, which include approval
    rights over any asset sales not at fair value.
        Treasury assisted the FHFA in its analysis of the effects of
    principal reduction when made in connection with a Home Affordable
    Modification Program (HAMP) loan modification. In July 2012, after
    months of deliberation, FHFA announced it would not allow Fannie Mae
    and Freddie Mac to provide borrowers with principal reduction in
    connection with a modification. Treasury is ready to consult with the
    FHFA if they wish to continue a further analysis of principal
    reduction.

                           DOMESTIC FINANCE--HOUSING

        Question. Who at Treasury is in charge of managing and overseeing
    the Senior Preferred Stock Purchase Agreements?
        Answer. The Under Secretary of the Treasury for Domestic Finance is
    responsible for the management and oversight of the preferred stock
    investments under Senior Preferred Stock Purchase Agreements.
        Question. How many Treasury employees work on a daily basis to
    oversee the financial assistance provided to FHFA?
        Answer. Treasury takes very seriously its responsibility to oversee
    the financial support it provides under the Senior Preferred Stock
    Purchase Agreements. Employees of a number of Treasury offices,
    including the Office of Financial Markets, the Office of Financial
    Institutions, the Office of the Fiscal Assistant Secretary, and the
    Office of the General Counsel, provide support to the Under Secretary
    for Domestic Finance for the management and oversight of the financial
    support provided under the Senior Preferred Stock Purchase Agreements.
        Question. What information, if any, is Treasury receiving from the
    GSEs to ensure that the billions in financial assistance they have
    received under the Purchase Agreements isn't being misused?
        Answer. The respective management and Boards of Directors of Fannie
    Mae and Freddie Mac are responsible for the proper use of the financial
    support they each received under the Senior Preferred Stock Purchase
    Agreements. FHFA, as Conservator of Fannie Mae and Freddie Mac, is
    responsible for the oversight and management of the activities at
    Fannie Mae and Freddie Mac. Both Fannie Mae and Freddie Mac submit
    annual risk management plans to Treasury which provides information
    about the enterprise risk management at both firms.
        Question. What is Treasury doing to ensure FHFA completes its
    principal reduction analysis in a timely manner and that FHFA does not
    indefinitely delay its results?
        Answer. In 2012, Treasury assisted the FHFA in its analysis of the
    effects of targeted principal reduction on underwater mortgages owned
    or guaranteed by Fannie Mae and Freddie Mac in connection with payment-
    reducing loan modifications under HAMP. Treasury believes that
    principal reduction should be assessed as part of a payment-reducing
    modification, and the overall economic result compared to a
    modification without principal reduction. This approach ensures that
    principal reduction is implemented where it produces the best result
    from an economic standpoint. FHFA, as Conservator of Fannie Mae and
    Freddie Mac, is responsible for the oversight and management of the
    activities at Fannie Mae and Freddie Mac. In July 2012, FHFA announced
    it had concluded its analysis and it would not allow Fannie Mae and
    Freddie Mac to provide borrowers with principal reduction in connection
    with a modification. Treasury is ready to consult with the FHFA if they
    wish to continue a further analysis of principal reduction.
        Question. Has Treasury done its own analysis about the benefits of
    the GSEs participating in principal reduction? Who at Treasury would be
    responsible for completing this analysis?
        Answer. Treasury assisted FHFA in its analysis of the effects of
    principal reduction when made in connection with a HAMP loan
    modification. The assistance was provided by Treasury staff within the
    Office of Domestic Finance and the Office of Economic Policy.
        Question. Does Treasury have access to the necessary information,
    including the books of the GSEs, to conduct its own analysis about the
    benefits of the GSEs participating in principal reduction?
        Answer. Treasury assisted the FHFA in its analysis of the effects
    of principal reduction when made in connection with a loan
    modification, however Treasury does not have access to the detailed
    data of the GSEs to conduct our own analysis. Treasury is ready to
    consult with the FHFA if they wish to continue a further analysis of
    principal reduction.
        Question. Isn't it true that the GSEs could target principal
    reduction to those homeowners for which it makes the most business
    sense, which would address most of the concerns critics and those with
    philosophical objections have with principal reduction?
        Answer. Treasury believes that principal reduction should be
    assessed as part of a payment-reducing modification, and used in those
    cases where it produces a better overall economic result when compared
    to a modification without principal reduction. This targeted approach
    ensures that principal reduction is implemented where it produces the
    best result from an economic standpoint. The application of principal
    reduction to an underwater loan can, in many cases, help reduce a
    struggling borrower's monthly payment to a level where the borrower can
    sustain this lower, modified monthly payment and is less likely to
    default going forward. Currently, of all of the eligible underwater
    non-GSE loans receiving a HAMP modification in December 2012, for
    example, Treasury has reported that 71 percent included some principal
    reduction.
        As noted, FHFA announced in July 2012 it had concluded its analysis
    and it would not allow the GSEs to provide borrowers with principal
    reduction in connection with a modification. Treasury is ready to
    consult with the FHFA if they wish to continue a further analysis of
    principal reduction.
        Question. How does Treasury interpret FHFA's conservatorship
    mandate?
        Answer. FHFA placed each of the GSEs into conservatorship on
    September 6, 2008. At that time, FHFA set out the purpose and goals of
    conservatorship as follows:

        ``The purpose of appointing the Conservator is to preserve and
    conserve the Company's assets and property and to put the Company in a
    sound and solvent condition. The goals of the conservatorship are to
    help restore confidence in the Company, enhance its capacity to fulfill
    its mission, and mitigate the systemic risk that has contributed
    directly to the instability in the current market.''

        Question. Does anything in FHFA's conservatorship mandate prohibit
    Acting Director DeMarco from allowing the GSEs to engage in activity
    such as principal reduction that even private investors are using to
    reduce losses?
        Answer. FHFA is an independent Federal regulator and as such, it
    would not be appropriate for Treasury to comment on FHFA's mandate.
        Question. Has FHFA shared their resource concerns with Treasury
    about implementing principal reduction as indicated in FHFA's January
    20 letter to Representative Cummings? Has Treasury offered to help
    address resource issues?
        Answer. In January 2012, Treasury announced that it was willing to
    pay principal reduction investor incentives to servicers participating
    in HAMP who were modifying underwater GSE loans, if the FHFA permitted
    the GSEs to participate in the HAMP Principal Reduction Alternative
    program (HAMP-PRA). After that announcement, Treasury engaged with FHFA
    regarding their concerns with resources needed to implement principal
    reduction and offered to pay additional administrative costs required
    to implement HAMP-PRA. As noted, FHFA decided in July 2012 not to allow
    GSEs to provide borrowers with principal reduction in connection with a
    modification. Treasury is ready to consult with the FHFA if they wish
    to continue a further analysis of principal reduction.
        Question. What is Treasury doing to ensure that the tax
    consequences of principal reduction do not outweigh the benefits of
    principal reductions?
        Answer. Treasury worked closely with Congress to ensure that the
    Mortgage Debt Relief Act of 2007 was extended through December 31,
    2013. The Mortgage Debt Relief Act of 2007 generally allows taxpayers
    to exclude income from the discharge of qualified mortgage debt on
    their principal residence. Principal residence mortgage debt reduced
    through mortgage restructuring, as well as mortgage debt forgiven in
    connection with a foreclosure, can qualify for the relief.
        In addition, Treasury worked closely with the Internal Revenue
    Service on recent IRS guidance (Revenue Procedure 2013-16) addressing
    principal reduction. Under this guidance issued on January 24, 2013,
    principal reduction is excluded from homeowners' income to the extent
    the holders of the loan receive Government-paid incentives. Homeowners
    may elect whether to treat any principal reduction from non-Government
    sources as income in the year of the permanent modification or as the
    principal is reduced on the loan. Additionally, the guidance permits
    homeowners to amend returns filed in previous years. As a result of
    this guidance, homeowners' compliance with their tax obligations should
    be improved and homeowners' access to existing exclusions from taxable
    income should be simplified.

       DOMESTIC FINANCE--FINANCIAL INSTITUTIONS/FEDERAL INSURANCE OFFICE

        Question. Treasury's Federal Insurance Office (FIO) has a
    significant workload, particularly in international forums like the
    International Association of Insurance Supervisors (IAIS). FIO's work
    at the international level, in conjunction with state insurance
    supervisors, is important to the competitive standing of U.S. insurers
    and will help ensure that the United States gets the best outcome in
    reviews of international insurance standards. Please provide a progress
    report on the work that FIO is undertaking, including what the
    Department is doing to stand up and provide resources to this office
    and how many staff are expected to be in place by the end of each of
    fiscal year 2012 and fiscal year 2013.
        Answer. By virtue of the Dodd-Frank Wall Street Reform and Consumer
    Protection Act, the Department of the Treasury's FIO is authorized to
    coordinate and develop Federal policy on prudential aspects of
    international insurance matters, including representing the United
    States at the International Association of Insurance Supervisors
    (IAIS). FIO became a full member of the IAIS in October 2011. FIO
    became a member of the IAIS Executive Committee in February 2012, and
    the FIO Director was selected to chair the IAIS Technical Committee in
    October 2012. FIO also represents the United States on the IAIS
    Financial Stability Committee, the Macro-Prudential Surveillance
    Working Group, and numerous subcommittees.
        In January 2012, FIO initiated an insurance dialogue project
    (Project) with State regulators and European Union (EU) insurance
    officials in order to identify those subject regulatory matters
    appropriate for improved convergence and compatibility between the EU
    and the United States. The Project will conclude in 2018.
        FIO has participated in the Insurance and Private Pensions
    Committee of the Organization for Economic Cooperation and Development
    (OECD). In this capacity, FIO supports the leadership of the U.S.
    Department of Commerce.
        FIO has developed numerous bilateral relationships with insurance
    supervisors from around the world. For example, FIO participated in the
    U.S.-China Strategic and Economic Dialogue and the U.S.-China Joint
    Economic Committee. FIO also participated in the 2012 NAFTA Financial
    Regulatory Dialogue, and has initiated a joint semiannual insurance
    supervisory discussion with the lead insurance supervisors of Canada
    and Mexico, in addition to State regulators.
        In addition to its authorities relating to international insurance
    matters, the Director of FIO also serves on the Financial Stability
    Oversight Council. FIO has been actively engaged in the work of the
    Council, and expects to increase its engagement as staff resources
    increase. FIO has also been preparing a number of studies and reports
    that will be issued in 2013.
        As of February 20, 2013, FIO has 11 full-time employees and is
    building to a staff of 15 employees. The Treasury Department supports
    FIO with the additional support resources needed to fulfill its
    statutory authority.

      TERRORISM AND FINANCIAL INTELLIGENCE--FINANCIAL CRIMES ENFORCEMENT
                                    NETWORK

        Question. The Financial Crimes Enforcement Network (FinCEN)
    collects Suspicious Activity Reports from financial institutions.
    Patterns in the data allow FinCEN to identify criminal ``hot spots''
    that can be addressed through enforcement and coordination among law
    enforcement entities. In fiscal year 2010, FinCEN began a second
    attempt to upgrade the IT system that hosts this data.
        When will the final product be available, and how will it improve
    financial intelligence efforts?
        Answer. The Bank Secrecy Act (BSA) Information Technology (IT)
    Modernization Program is a 4-year program, which began in fiscal year
    2010, that has delivered multiple products that fundamentally improve
    FinCEN's information technology infrastructure, applications, and
    ability to provide support to users from hundreds of Federal, State,
    and local law enforcement, regulatory, and intelligence agencies. The
    Program has continuously and successfully delivered products on time
    and within budget, meeting the rapid incremental milestones established
    by the Office of Management and Budget (OMB).
        Question. What improvements have FinCEN and the Department made to
    the planning and implementation process that will avoid problems that
    plagued the previous failed upgrade?
        Answer. The BSA IT Modernization Program has continuously and
    successfully delivered products on time and within budget, meeting the
    rapid incremental milestones established by OMB. Treasury's Office of
    the Inspector General (OIG) has produced two reports on the program and
    in the most recent of those, OIG had no recommendations.
        Question. How have FinCEN and Treasury involved the wide variety of
    stakeholders in the planning for this IT overhaul--including banks,
    Federal law enforcement, State and local law enforcement, and other
    Federal intelligence agencies?
        Answer. Throughout the modernization effort, FinCEN has consulted
    with a Data Management Council (DMC), which is comprised of
    representatives from more than a dozen Federal law enforcement and
    regulatory organizations. In addition, FinCEN collaborated with the
    Bank Secrecy Act Advisory Group, which includes both public and private
    sector participants, to obtain feedback on various aspects of the
    program.
                                     ______

               Questions Submitted by Senator Frank R. Lautenberg

                           DOMESTIC FINANCE--HOUSING

        Question. Opponents of principal forgiveness for struggling
    homeowners have argued that lowering the amount owed on underwater
    mortgages would cost taxpayers too much.
        However, analysis by the Federal Housing Finance Agency suggests
    that forgiveness would save taxpayers money.\1\ What has your analysis
    of Treasury's principal forgiveness program revealed about the benefits
    of principal forgiveness for taxpayers and homeowners?
    ---------------------------------------------------------------------------
        \1\ See February 8, 2012 Letter from House Oversight Committee to
    FHFA Director DeMarco, which reads, in part, ``according to the latest
    report you provided from December 2011 . . . implementing principal
    reduction programs for borrowers who are Net Present Value (NPV)
    positive would reduce overall losses by $28.3 billion, while principal
    forbearance programs for these borrowers would reduce overall losses by
    $27.9 billion compared to the cost of taking no action.''
    ---------------------------------------------------------------------------
        Answer. Treasury supports using principal reduction on a targeted
    basis where it makes economic sense to do so. When used in combination
    with a payment-reducing loan modification such as a Home Affordable
    Modification Program (HAMP) modification, principal reduction can be an
    effective way to help underwater borrowers avoid foreclosure and help
    housing markets to recover. The application of principal reduction to
    an underwater loan can, in many cases, help reduce a struggling
    borrower's monthly payment to a level where the borrower can sustain
    this lower, modified monthly payment and is less likely to default
    going forward. Currently, of all of the eligible underwater non-
    Government-sponsored enterprises (GSEs) loans receiving a HAMP
    modification in 2012, nearly three-quarters included some principal
    reduction.

                           DOMESTIC FINANCE--HOUSING

        Question. Some have suggested that principal forgiveness on Fannie
    Mae and Freddie Mac mortgages would enrich banks that hold second
    liens.\2\
        But principal forgiveness is essential for struggling homeowners
    and for restoring the health of our housing market. How can the
    Congress help homeowners while preventing a windfall for banks?
    ---------------------------------------------------------------------------
        \2\ See, for example, ``A Bailout by Another Name'', New York
    Times, March 24, 2012.
    ---------------------------------------------------------------------------
        The concern that principal reduction could offer a benefit to large
    financial institutions that hold subordinate second liens is addressed
    HAMP through the associated Second Lien Modification Program (2MP).
    Servicers participating in 2MP are contractually obligated to
    proportionately modify each eligible second lien that is matched to a
    first lien HAMP modification. In the case of any first lien that has
    principal reduced in connection with a HAMP modification, the
    participating servicer is required, at a minimum, to reduce a
    proportional amount of principal on the associated second lien. Most
    major servicers are participants in 2MP (including the five largest
    mortgage servicers), so instead of providing a windfall to the banks,
    if Fannie Mae and Freddie Mac's (the GSEs) allowed principal reduction
    in connection with HAMP modifications on GSEs loans, it would compel
    the largest banks to help homeowners even further by writing down more
    second liens through 2MP.
        Prior to the launch of 2MP, it was often difficult to even
    determine the owner of a second lien on a property subject to a first
    lien modification. Treasury facilitated the creation of a nationwide
    system to match first and second liens, thereby facilitating and
    ensuring that second liens are modified when there is a first lien
    modification, whether or not the modification involves principal
    reduction.

                                ECONOMIC POLICY

        Question. In 2006, Christopher Bryski, a constituent of mine,
    passed away after not regaining consciousness from an injury he
    suffered 2 years prior. His Federal student loans were discharged by
    law when he passed, but his private loans were not, so his father is
    still paying them off. Do you believe that private student loans should
    have the same borrower protections as Federal loans?
        Answer. Treasury defers to the Consumer Financial Protection Bureau
    (CFPB) on the issue of private student loans. CFPB issued a report in
    July 2012 that discussed borrower protections for private student
    loans.
                                     ______

                    Questions Submitted by Senator Mark Kirk

                           DOMESTIC FINANCE--HOUSING

        Question. In your response to a question during the March 28
    hearing, you indicated that you were not familiar with the statements
    made by Department of Housing and Urban Development Secretary Shaun
    Donovan during a hearing before the Senate Banking Committee on
    February 28. Secretary Donovan replied to questions from Senator
    Johanns as follows:

        ``Senator Johanns. Let me ask you about that, because I think
    you're making my point. How much today would the taxpayers be on the
    hook for when it comes to Fannie and Freddie? Everything, right?
        ``Secretary Donovan. There--there is no question that taxpayers are
    at risk for those loans being made. What I would also say, though, is
    all the evidence that we have is that the new loans being made are
    safe, good loans; that the exposure that taxpayers have is to the
    legacy loans that were made before they went into conservatorship.
        ``Senator Johanns. How much----
        ``Secretary Donovan. This is where the confidence issue is
    important. The single-most important thing we can do to protect
    taxpayers is ensure that those old loans, which we can't make go away,
    perform in a way that improves their value, rather than continue as
    their value decline. In that sense, improving the housing market more
    broadly, keeping confidence in the securities that are issued by Fannie
    and Freddie, is critical going forward.
        ``Senator Johanns. How much are those legacy loans? If you're the
    average taxpayer out there, and you're tuned into this hearing, and you
    want to know how much you're on the hook for, how much is that?
        ``Secretary Donovan. I'm sorry, Senator. I don't have a number in
    front of me. Perhaps--I know that FHFA will be testifying on the next
    panel. I'm sure that they would have more specific details. But it's
    obviously substantial, in the over-trillion-dollar range.''

        Your specific response during the March 28 hearing was:

        ``The FHFA does a regular periodic assessment of what future losses
    might be, even in the event if we face another recession or another
    crisis. And those are put in the public domain and they periodically
    revisit those. But I'll tell you what they show. What they show is that
    all the losses they face going forward now are really the legacy
    problem of the choices they made during the financial boom. And today,
    because of the changes put in place since the crisis under the
    legislation Congress passed, they have much more conservative
    underwriting standards and much more conservative lending practices.
    And most independent economists assessing their book of business would
    say that the new businesses they're doing today, which is still
    important to the housing market, is done on much more conservative
    financial terms and looks relatively profitable. And over time, those
    profits are helping reduce the losses we inherited. But what FHFA
    does--and this is appropriate--is to periodically publish estimates of
    what those losses might be in the future to the taxpayer under even
    much--even, you know, a significantly worse economic scenario. And--but
    the estimates out there, including ones made by CBO are nothing close
    to $1 trillion.''

        To clarify the precise level of exposure, please provide Treasury's
    estimate of the value of outstanding mortgage loans that carry a direct
    or indirect Federal guarantee, broken down by ``legacy loans'' and
    ``loans since 2010'', accompanied with an estimate of taxpayer exposure
    to loss. Also respond as to whether you view debt forgiveness as part
    of a plan to minimize the taxpayers' long-term loss exposure.
        Answer. The majority of losses at the GSEs stem from loans
    guaranteed prior to 2009. FHFA has conducted stress tests in order to
    project potential GSE losses and draws from Treasury over a 3-year
    forward-looking window. However, it is important to note that these are
    modeled projections and can change over time as inputs and assumptions
    change.
        In the ``Projections of the Enterprises Financial Performance'',
    FHFA reported on October 26, 2012, FHFA projected results for the
    period of 2013-2015. These results estimated that the cumulative amount
    of draws from Treasury less the dividends paid to Treasury for FHFA
    baseline scenario since conservatorship and through 2015 was $53
    billion for Fannie Mae and $23 billion for Freddie Mac. Under a stress
    scenario, FHFA projected these amounts to be $94 billion for Fannie Mae
    and $38 billion for Freddie Mac.
        The administration uses these projections as the starting point for
    its budget estimate of the cost of Treasury support for Fannie Mae and
    Freddie Mac and will provide updated estimates in the fiscal year 2014
    budget. In the administration's fiscal year 2013 mid session review,
    net payments of senior preferred liquidity payments minus dividends
    were projected to be $12 billion through the budget window of 2009-
    2022. The lower figure reflects FHFA's projected stronger results and
    dividend payments to Treasury in the 2015-2022 period.
        Treasury supports using principal reduction on a targeted basis
    where it makes economic sense to do so. When principal reduction is
    used in combination with a payment-reducing loan modification such as a
    HAMP modification, it can be an effective way to help underwater
    borrowers avoid foreclosure and help housing markets to recover.
        Question. The debt limit increase approved as part of the Budget
    Control Act of 2011 is expected to accommodate the Treasury's borrowing
    needs until the end of this year. Following the Student Aid and Fiscal
    Responsibility Act of 2009, student debt issuances by the Federal
    Government have widely expanded to displace loans no longer made
    through the subsidized student loan market, adding new demands for
    Treasury funding.
        What is the numerical change in dollars to debt subject to the
    limit caused by this expansion in Government-issued student debt? How
    many days did student loan debt accelerate the need for a debt limit
    increase in 2011?
        Currently, the Government is recovering 85 percent of every student
    loan dollar that goes into default status.
        Are default rates greater than expected, and how is that affecting
    Treasury's ability to project its cash flow needs?
        Answer. Student loans are a critical part of the administration's
    goal to increase access to higher education. Treasury plays an
    important role in financing direct loans and supporting delinquent debt
    collection across the Government. Borrowing related to student loans
    and grants increased our overall borrowing needs in fiscal year 2011 by
    approximately $155 billion, which was one of the factors that
    contributed to the need for a debt limit increase in 2011. Treasury has
    been working with the Office of Management and Budget and the
    Department of Education to analyze the data relating to student lending
    in order to accurately ascertain the lending program's impact on cash
    flows. This is an important issue that Treasury will continue to
    analyze and monitor closely.

                             INTERNATIONAL AFFAIRS

        Question. A recent Federal Reserve paper concludes that Chinese
    foreign official flows into the United States and acquisition of United
    States Treasuries has had significant effects on Treasury yield,
    reducing interest rates.
        Should we be encouraging foreign holdings of Federal debt, rather
    than criticizing them?
        What are the risks related to foreign holdings of Federal debt that
    might offset our interest savings?
        Answer. The market for Treasury securities is the deepest and most
    liquid fixed income market in the world. As a result, Treasury
    securities have a diverse investor based--domestic and international,
    small and large. We view this as a source of confidence in our market
    and an indication of the status Treasury instruments occupy in global
    fixed income markets. More broadly, the United States has a
    longstanding open investment policy, which has been beneficial to our
    growth and employment.

    TERRORISM AND FINANCIAL INTELLIGENCE--TERRORIST FINANCING AND FINANCIAL
               CRIMES/OFFICE OF FOREIGN ASSETS CONTROL SANCTIONS

        Question. On February 27, 2012, the Treasury Department issued a
    fact sheet entitled ``Treasury Amends Iranian Financial Sanctions
    Regulations to Implement the National Defense Authorization Act'' in
    which you wrote, ``Beginning on February 29, 2012, privately-owned
    foreign financial institutions that knowingly conduct or facilitate any
    significant financial transaction with the CBI other than for the
    purchase of petroleum or petroleum products from Iran face U.S.
    sanctions, consistent with subsection 1245(d) of the NDAA.'' Nearly 1
    month later, no sanctions have been imposed pursuant to subsection
    1245(d) of the fiscal year 2012 National Defense Authorization Act
    (NDAA) (commonly known as the ``Menendez-Kirk'' amendment). As you
    know, unlike other sanctions law, the imposition of sanctions under
    ``Menendez-Kirk'' is not contingent on a Presidential determination.
    Simply put, under U.S. law, sanctions must be imposed when sanctionable
    activity is found.
        Why is the administration not complying with the ``Menendez-Kirk''
    amendment when it comes to the imposition of sanctions with regard to
    nonoil transactions conducted with the Central Bank of Iran?
        Answer. The Treasury Department is aggressively implementing the
    ``Menendez-Kirk'' amendment, along with the full range of sanctions
    that we administer against Iran, to disrupt the Government of Iran's
    incoming revenue streams and its access to its existing revenues. As a
    key part of these efforts, we will continue to target both oil and
    nonoil dealings with the Central Bank of Iran under all appropriate
    authorities.
        Question. Are you willing to report to us in writing that since
    February 29, 2012, the Treasury Department has found no evidence of
    activity sanctionable under subsection 1245(d) of the fiscal year 2012
    NDAA?
        Answer. The Treasury Department is aggressively implementing the
    ``Menendez-Kirk'' amendment, along with the full range of sanctions
    that we administer against Iran, to disrupt the Government of Iran's
    incoming revenue streams and its access to its existing revenues. As a
    key part of these efforts, we will continue to target both oil and
    nonoil dealings with the Central Bank of Iran under all appropriate
    authorities. Treasury will continue to work closely with the Congress
    as we implement the range of United States sanctions against Iran.
        Question. Are you willing to report to us in writing that since
    February 29, 2012, the Treasury Department has seen no intelligence
    indicating foreign financial institutions have conducted nonoil
    transactions with the Central Bank of Iran?
        Answer. Treasury is fully committed to targeting any foreign
    financial institutions engaged in sanctionable dealings with the
    Central Bank of Iran. However, it is longstanding Treasury policy not
    to comment on possible investigations.
        Question. My staff has repeatedly asked the Treasury Department to
    brief in classified session on current intelligence relating to these
    issues. Why is the Department unwilling to meet with members of the
    Senate or their staff to discuss the administration's failure to comply
    with subsection 1245(d) of the fiscal year 2012 NDAA?
        Answer. The Treasury Department is unaware of any outstanding
    briefing requests, but has been and remains willing to provide
    classified briefings as appropriate to the Congress.
        Question. Has the Treasury Department observed any financial
    transactions with Central Bank of Iran since February 29, 2012, or
    designated Iranian banks since July 1, 2010, that were deemed
    nonsignificant and for which sanctions under Comprehensive Iran
    Sanctions, Accountability, and Divestment Act of 2010 or the
    ``Menendez-Kirk'' amendment were not imposed? If so, on what basis were
    the determinations made that the transactions were not significant?
    What foreign financial institutions were responsible for processing
    these transactions?
        Answer. Treasury is fully committed to a robust implementation of
    the range of Iran sanctions that we administer to maximize their impact
    on the Government of Iran. However, it is longstanding Treasury policy
    not to comment on possible investigations.

                              SUBCOMMITTEE RECESS

        Senator Durbin. The subcommittee will stand recessed.
        [Whereupon, at 3:23 p.m., March 28, the hearing was
    concluded, and the subcommittee recessed, to reconvene subject
    to the call of the Chair.]

      FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR FISCAL
                                   YEAR 2013

                                  ----------

                           WEDNESDAY, APRIL 18, 2012

                                           U.S. Senate,
               Subcommittee of the Committee on Appropriations,
                                                        Washington, DC.
        The subcommittee met at 2:33 p.m., in room SD-138, Dirksen
    Senate Office Building, Hon. Richard J. Durbin (chairman)
    presiding.
        Present: Senators Durbin and Moran.

                        GENERAL SERVICES ADMINISTRATION

    STATEMENT OF DANIEL M. TANGHERLINI, ACTING
                ADMINISTRATOR

                 OPENING STATEMENT OF SENATOR RICHARD J. DURBIN

        Senator Durbin. Good afternoon. Today, we convene the
    hearing of the Appropriations Subcommittee on Financial
    Services and General Government, to discuss the report of the
    Inspector General of the General Services Administration (GSA),
    as well as budget issues facing the GSA.
        I welcome my colleague, Senator Jerry Moran of Kansas, the
    ranking member. I also welcome the Acting Administrator, Daniel
    M. Tangherlini. Did I pronounce that right, Dan? Thank you. And
    GSA Inspector General Brian D. Miller.
        Earlier this year, I made decisions about which of the many
    agencies under our jurisdiction--and we have quite a few of
    them--would actually appear for a formal public hearing for the
    fiscal year 2013 funding needs. GSA was 1 of the 4 that I
    designated, and we started preparing for this hearing some time
    ago.
        The inspector general's recent release of disturbing
    findings disclosing serious mismanagement deficiencies related
    to an internal conference have added a new dimension to this
    hearing. Today, we'll attempt to gain a clear understanding of
    what transpired and what is being done to change it.
        I was outraged and embarrassed to learn about the spending
    that occurred as a result of that conference, and I'm eager to
    hear how GSA will ensure that it never happens again.
        We'll also examine GSA's ability to fulfill its program
    obligations and the future space needs of Federal agencies
    during a time of debt reduction.
        Recently, the Office of Inspector General of GSA issued a
    management-deficiency report detailing an array of highly
    troubling findings resulting from the investigation into a 4-
    day internal staff conference held in October 2010. The report
    describes how a host of Federal contracting rules were skirted,
    ignored, or violated in the planning and execution of this
    event.
        Issuance of the report on April 2 sparked the immediate
    resignation of the GSA Administrator and two other key agency
    officials and the imposition of other personnel decisions for
    five other high-level regional management staff.
        It also has generated a flurry of attention here in the
    Congress. I think we're the fourth of four hearings in 4 days
    on this issue.
        Some of the more appalling lapses are not necessarily the
    activities that have caught a lot of media attention, some of
    the sensational events, such as renting a clown costume or a
    session featuring a mentalist.
        What's baffling to me is that there were apparently
    numerous examples of excessive spending and improper adherence
    to contracting rules, brazen finagling of event sessions to
    justify food and other expenditures, multiple occurrences of
    advance long-distance travel to the site and appalling lack of
    adherence to longstanding Federal law about holding Federal
    events in lodging facilities that meet fire-safety
    specifications.
        It's also mind-boggling that somewhere along the way during
    the year of planning for this conference that someone didn't
    say, ``Wait a minute. Isn't this going overboard?''
        What is most regrettable is that incidents such as this
    tarnish the public perception of the workings of the entire
    Federal Government, the services delivered by an otherwise
    dedicated workforce and the stewardship of precious Federal
    funds, taxpayers' dollars.
        In fact, the investigation began because the Deputy
    Administrator of the GSA asked the inspector general to examine
    the matter as soon as two employees mentioned to her activities
    that sounded improper. I expect action to be taken swiftly to
    ensure that all rules are explicitly followed in the future.
        This all contributes to my dismay as to how all of this was
    allowed to happen. And I look forward to hearing from the
    Acting Administrator and the inspector general about the
    situation that led up to these findings and corrective actions.
        While this fiasco in the western regions of the Public
    Buildings Service (PBS) deserves attention it's been receiving,
    and corrective measures, as I've mentioned, there are other
    issues relating to the GSA of importance as well. Those include
    the ability of GSA to fulfill its statutory responsibility and
    to meet the needs of Federal agencies across the board that
    depend on good management.
        Most GSA annual spending comes from a large revolving fund,
    the Federal Buildings Fund (FBF), which finances real property
    management of the U.S. Government. Through this account, GSA
    operates, maintains, and repairs federally owned and leased
    buildings and constructs Federal buildings, courthouses, and
    border stations. It is financed largely through proceeds from
    rental payments from other agencies.
        Prior to fiscal year 2010, typically between 10 and 20
    major construction and repair projects were requested by the
    President and funded. Most of the balance is used for rent
    payments to private landlords and building operations.
        Once debt-reduction efforts hit in fiscal year 2010, those
    accounts were dramatically reduced in order to stay within the
    subcommittee funding allocation.
        As GSA examines where it can spend less, certain bills,
    such as rent and utility charges, must be paid, and those have
    continued to increase.
        The FBF has two contractually obligated bills which
    continue to increase substantially. The biggest and fastest
    growing is the rental of space account and, to a lesser degree,
    the building operations account.
        When GSA does not receive full funding for these accounts
    to meet its contraction obligations, it is legally liable for
    default. Reductions within the FBF also impact other Federal
    agencies.
        I'm going to put the rest of my remarks in the record, but
    I'm going to be asking questions along the lines of what has
    been the impact of these budget and appropriations decisions on
    ongoing building projects that have been stopped or delayed.
    Will it cost us more when we resume? Are we actually saving any
    money by putting off the completion of some of these
    construction projects?

                               PREPARED STATEMENT

        In addition to the requested increases this year, the
    fiscal year 2013 request reduces spending by $16.2 million, 20-
    percent less than the fiscal year 2010 levels for certain
    administrative expenses and to keep consulting and advisory
    contract spending levels on GSA operations at $32.8 million (or
    15 percent) less than fiscal year 2010 levels.
        [The statement follows:]

                Prepared Statement of Senator Richard J. Durbin

        Good afternoon. Today, we convene this hearing of the
    Appropriations Subcommittee on Financial Services and General
    Government to discuss the report of the Inspector General (IG) of the
    General Services Administration (GSA) as well as budget issues of the
    GSA.
        I welcome Senator Jerry Moran, the ranking member, and other
    colleagues who have joined me on the dais today. I also welcome GSA
    Acting Administrator Daniel M. Tangherlini and GSA IG Brian D. Miller
    to the hearing.
        Earlier this year, I made decisions about which of the many
    agencies under the jurisdiction of this subcommittee should appear for
    a formal public hearing relating to their fiscal year 2013 funding
    needs. GSA was 1 of the 4 I designated, and my staff have been
    preparing for this hearing for a few months. The IG's recent release of
    disturbing findings disclosing serious management deficiencies relating
    to an internal conference have added a new dimension to our discussion.
        Today, we'll attempt to gain a clear understanding of what
    transpired with regard to the conference held a year-and-a-half ago by
    the western regions of the Public Buildings Service (PBS).
        I was outraged to learn about the spending that occurred as a
    result of that conference and I am eager to hear how GSA will ensure
    that it never happens again. We'll also examine GSA's ability to
    fulfill its program obligations and the future space needs of Federal
    agencies during a time of debt reduction.

    GENERAL SERVICES ADMINISTRATION INSPECTOR GENERAL REPORT ON THE WESTERN
                               REGIONS CONFERENCE

        Recently, the GSA IG issued a management deficiency report
    detailing an array of highly troubling findings as a result of an
    investigation into a 4-day internal staff conference held in October
    2010. The report describes how a host of Federal contracting rules were
    skirted in the planning and execution of this event.
        Issuance of this report on April 2 sparked the immediate
    resignations of the GSA Administrator and two other key agency
    officials, and the imposition of other personnel decisions for five
    other high-level regional management staff. It also has generated a
    flurry of attention here in the Congress with at least four hearings
    this week alone and others perhaps in the offing.
        Some of the more appalling lapses are not necessarily the
    activities that are garnering some of the sensationalized media
    attention such as the rental of a clown costume for a skit or a session
    featuring a mentalist. What is baffling to me is that there were
    apparently:
      --numerous examples of excessive spending and improper adherence to
            contracting rules;
      --brazen finagling of event sessions to justify the provision of
            food;
      --multiple occurrences of advance long-distance travel to the site;
            and
      --an appalling lack of adherence to long-standing Federal law about
            holding Federal events in lodging facilities that meet fire-
            safety specifications.
        It is also mind-boggling that somewhere along the way during the
    year of planning for this conference someone didn't say, ``Wait. Stop.
    This is out-of-line. This does not look right.''
        What is most regrettable is that incidents such as this tarnish the
    public perception of the workings of the entire Federal Government, the
    services delivered by its dedicated workforce, and the stewardship of
    precious Federal funds. In fact, the investigation began because the
    Deputy Administrator of the GSA asked the IG to examine the matter as
    soon as two employees mentioned to her activities that sounded
    improper. I expect actions will be taken swiftly to ensure that all
    rules are explicitly followed in the future and that proper oversight
    mechanisms are established.
        This all contributes to my dismay as to how all of this was allowed
    to happen, and I look forward to hearing from Acting Administrator
    Tangherlini and IG Miller today about the situation that led to the
    management deficiency findings and the forecast for corrective actions.
        While this fiasco in the western regions of the PBS deserves the
    attention it has been receiving, along with corrective measures to
    address it, there are other issues that deserve our attention as well.
    And those include GSA's ability to fulfill its program obligations and
    the future space needs of Federal agencies during a time of debt
    reduction.

                           THE FEDERAL BUILDINGS FUND

        Most GSA annual spending comes from a large revolving fund--the
    Federal Buildings Fund (FBF)--which finances real property management
    for the Federal Government. Through this account, GSA operates,
    maintains, and repairs federally owned and leased buildings and
    constructs Federal buildings, courthouses, and border stations. It is
    financed largely through proceeds from rental payments from other
    agencies (using appropriated funds).
        Prior to fiscal year 2010, typically, between 10 and 20 major
    construction and repair projects were requested in the President's
    budget and funded. Most of the balance is used for rent payments to
    private landlords and building operations. Once debt reduction efforts
    hit in fiscal year 2010, those accounts were drastically reduced in
    order to stay within the subcommittee's funding allocation, which
    couldn't provide for all the priority needs.
        As GSA examines where it can spend less, certain bills, such as
    rent and utility charges, must be paid and those have continued to
    increase.

                        WE MUST PAY THE OBLIGATORY BILLS

        The FBF has two contractually obligated bills which continue to
    increase substantially. The biggest and fastest growing is the rental
    of space account (the leasing of privately owned buildings) and, to a
    lesser degree, the building operations account (the cleaning,
    utilities, and maintenance expenses of leased and Government-owned
    space). When GSA does not receive full funding for these accounts to
    meet its contractual obligations, GSA is legally liable for default.
        Reductions within the FBF also impact other Federal agencies.
      effects of little construction and of no major repairs to buildings
        The construction and repair accounts have been drastically reduced,
    significantly impacting Federal agencies' abilities to operate
    efficiently.
        The near-elimination of construction projects also makes these
    projects more expensive by delaying them. It will have the effect of
    requiring more leasing of Federal buildings, which is more expensive
    over the long-term than federally owned space. A good example of this
    is the Department of Homeland Security (DHS) St. Elizabeths
    headquarters consolidation project, which has slowed to a crawl,
    prompting fears that not all Department elements will move and costing
    the Government more than planned as DHS agencies stay in leased space.
        The complete elimination of major repair projects for the past 2
    years has put some current projects on hold, such as the Daniel Patrick
    Moynihan U.S. Courthouse in New York, which is a top priority of the
    Federal judiciary. This Courthouse is one of the buildings housing the
    Southern District of New York--the busiest and largest Federal court in
    the country. Also, this has meant no funding for the requested main
    Interior Department building (currently under refurbishment, including
    hazardous material abatement) or the requested final phase of the State
    Department building (Truman Building).
        The American Recovery and Reinvestment Act allowed GSA to begin to
    reduce the backlog of $8.4 billion in buildings needing repairs or
    alterations by $1.4 billion, while creating more than 60,000 jobs in
    the process. Now, that backlog is growing again and how long that will
    continue is anyone's guess.
        I recognize that all agencies need to do their part to address our
    current economic situation, but we need to do it in a way that makes
    sense; not this drastic approach that leaves our agencies in
    substandard facilities or ill-equipped to carry out their missions
    efficiently, often costing the Government more money in the long run.
        Now, we turn to GSA's fiscal year 2013 budget request.

                        FISCAL YEAR 2013 BUDGET REQUEST

        The fiscal year 2013 request for GSA's appropriated accounts is a
    net increase of $33 million from the fiscal year 2012 enacted level,
    the majority of which ($21 million) is for modernization, upgrades, and
    continued operation of a Governmentwide information system. This new
    system will improve contract and grant award management and reporting.
        In addition to the requests increases, the fiscal year 2013 request
    reduces spending $16.2 million, 20-percent less than fiscal year 2010
    levels, for certain administrative expenses and keep consulting and
    advisory contract spending levels on GSA operations, at $32.8 million
    (or 15 percent) less than fiscal year 2010 levels.
        I now turn to my Ranking Member, Senator Moran, for any remarks
    that he would like to make.

        Senator Durbin. I'm now going to turn the floor over to my
    ranking member and friend, Senator Moran, for any remarks he'd
    like to make.

                        STATEMENT OF SENATOR JERRY MORAN

        Senator Moran. Chairman Durbin, thank you very much for
    conducting this hearing. As members of the Senate
    Appropriations Committee, our oversight of spending by Federal
    agencies, in my view, is our most-critical responsibility.
        I was appalled, as you said you were, to read the accounts
    of the inappropriate actions of some GSA employees outlined in
    the inspector general's report of abuses connected to a
    regional conference held in 2010.
        I have since learned that this was not an isolated incident
    of abuse of taxpayer dollars and that other questionable
    expenditures have come to light as a result of the inspector
    general's investigation.
        I would also add that it reminds me of the value of
    inspector generals and the investigations that they conduct on
    behalf of seeing that the right is wrong, that wrong is
    altered.
        This conduct on the part of these few Federal employees is
    an unacceptable abuse of the American taxpayers' trust. It is
    unconscionable that, at a time when our national debt stands at
    more than $15 trillion, individuals within the Federal
    Government completely ignore our country's fiscal reality and
    behave in ways that reflect an attitude that the funding of
    their particular agency belongs to them rather than to the
    American taxpayer.
        This is the kind of behavior that exacerbates opposition to
    Federal spending, even where that spending is legitimate. It is
    also important to note that every dollar misspent by GSA was
    funding that could have been used to fund other critical
    Federal programs.
        If Americans lack faith in the Federal Government as a
    responsible steward of taxpayer dollars, why would they ever
    support decisions related to Federal spending?
        I welcome this opportunity to ask our witnesses today for
    answers to how this type of conduct could happen. How can an
    agency responsible for providing guidance to the rest of the
    Federal Government on correct use of taxpayer dollars tolerate
    a lack of accountability?
        Those responsible should be held accountable. An agency
    culture which allowed such behavior to flourish must be
    altered.
        I hope that this is just not the tip of the iceberg.
    Billions in taxpayer dollars have been spent on Government
    conferences. We must have safeguards in place to ensure that
    this conduct, this spending pattern never happens again at GSA
    or any other Federal agency.
        I welcome the opportunity to work with my colleagues to
    determine whether legislative action is necessary to institute
    more stringent safeguards to ensure appropriate spending on
    legitimate Government functions, transparency and
    accountability.
        All Federal agencies have a duty to act as careful stewards
    of the taxpayer dollar, and those who disregard that duty
    should and will be held accountable.
        Senator Moran. Thank you, Mr. Chairman.
        Senator Durbin. Thank you, Senator Moran.
        Mr. Tangherlini, the floor is yours.

                   SUMMARY STATEMENT OF DANIEL M. TANGHERLINI

        Mr. Tangherlini. Thank you, Chairman Durbin, and thank you,
    Ranking Member Moran and members of the subcommittee.
        My name is Daniel M. Tangherlini and I'm the Acting
    Administrator of GSA.
        I appreciate the opportunity to come before the
    subcommittee today to discuss the GSA inspector general's
    report as well as the GSA fiscal year 2013 budget request.
        First and foremost, I want to state that the waste and
    abuse outlined in the inspector general's report is an outrage
    and completely antithetical to the goals of this
    administration.
        The report details violations of travel rules, acquisition
    rules, and good conduct. But, just as importantly, those
    responsible violated rules of common sense, the spirit of
    public service and the trust that the American taxpayers have
    placed in all of us.
        I speak for the overwhelming majority of GSA staff when I
    say that we are as shocked, appalled, and deeply disappointed
    by these indefensible actions as you are.
        We've taken strong action against those officials who are
    responsible and will continue to do so where appropriate. I
    intend to uphold the highest ethical standards at this agency,
    including referring any criminal activity to appropriate law
    enforcement officials and taking any action that is necessary
    and appropriate.
        If we find any irregularities, I will immediately engage
    GSA's Inspector General, Brian D. Miller, and, as indicated in
    the joint letter that the inspector general and I sent to all
    GSA staff, we expect an employee who sees waste, fraud, or
    abuse to report it. We want to build a partnership with the
    inspector general, while respecting their independence, that
    will ensure that nothing like this will ever happen again.
        There'll be no tolerance for employees who violate or in
    any way disregard these rules. I believe this is critical, not
    only because we owe it to the American taxpayers, but also
    because we owe it to the many GSA employees who work hard, who
    follow the rules and deserve to be proud of the agency that
    they serve.
        We have also taken steps to improve internal controls and
    oversight to ensure this never happens again. Already, I have
    cancelled all future Western Regions Conferences (WRC). I have
    also cancelled 35 previously planned conferences, saving nearly
    $1 million in taxpayer expenses.
        I've suspended the Hats Off stores and have already
    demanded reimbursement from Mr. Bob Peck, Mr. Robert Sheppard,
    and Mr. Jeff Neely for private, in-room parties.
        I've cancelled most travel through the end of the fiscal
    year GSA-wide, and I am centralizing budget authority and have
    already centralized procurement oversight for regional offices
    to make them more directly accountable.
        I look forward to working in partnership with this
    subcommittee to ensure that there's full accountability for
    these activities, so that we can begin to restore the trust of
    the American people.
        I hope that in so doing GSA can refocus on its core
    mission, saving taxpayers money by efficiently procuring
    supplies, services, and real estate and effectively disposing
    of unneeded property.
        We believe that there has seldom been a time of greater
    need for these services and the savings they bring to the
    Government and the taxpayer.
        There's a powerful value proposition to a single agency
    dedicated to this work, especially in these austere fiscal
    times. We need to ensure we get back to basics and conduct this
    work better than ever. And at GSA our commitment is to service,
    to duty, and to our Nation and not to conferences, awards, or
    parties.
        The unacceptable, inappropriate, and possibly illegal
    activities at the WRC stand in direct contradiction to the
    express goals of this agency and the administration. And I'm
    committed to ensuring that we take whatever steps are necessary
    to hold responsible parties accountable and to make sure that
    this never happens again.
        We need to refocus this agency and get back to the basics,
    streamlining the administrative work of the Federal Government
    to save taxpayers money. The goal is supported by the GSA
    fiscal year 2013 budget request. This will help to deliver a
    more effective and efficient Government.

                               PREPARED STATEMENT

        To conclude, I look forward to working with this
    subcommittee moving forward, and I welcome the opportunity to
    take any questions.
        Senator Durbin. Thank you.
        [The statement follows:]

                  Prepared Statement of Daniel M. Tangherlini

        Chairman Durbin, Ranking Member Moran, and distinguished members of
    the subcommittee: My name is Daniel M. Tangherlini, and I am the Acting
    Administrator of the General Services Administration (GSA). Thank you
    for inviting me to appear before you today to discuss the GSA Inspector
    General's (IG) report as well as the GSA fiscal year 2013 budget
    request.
        First and foremost, I want to state my agreement with the President
    that the waste and abuse outlined in the IG report is an outrage and
    completely antithetical to the goals and directives of this
    administration. We have taken strong action against those officials who
    are responsible and will continue to do so where appropriate. We are
    taking steps to improve internal controls and oversight to ensure this
    never happens again. I look forward to working in partnership with this
    subcommittee to ensure there is full accountability for these
    activities so that we can begin to restore the trust of the American
    people.
        At the same time I am committed to renewing GSA's focus on its core
    mission: saving taxpayers' money by efficiently procuring supplies,
    services, and real estate, and effectively disposing of unneeded
    Government property. There is a powerful value proposition to a single
    agency dedicated to this work, especially in these fiscal times, and we
    need to ensure we get back to basics and conduct this work better than
    ever.

                    PROMOTING EFFICIENCY AND REDUCING COSTS

        The shocking activities and violations outlined in the IG report
    run counter to every goal of this administration. The administration
    makes cutting costs and improving the efficiency of the Federal
    Government a top priority. On June 13, 2011, the President issued
    Executive Order 13576, ``Delivering an Efficient, Effective, and
    Accountable Government''. This Executive order emphasized the
    importance of eliminating waste and improving efficiency, establishing
    the Government Accountability and Transparency Board to enhance
    transparency of Federal spending and advance efforts to detect and
    remediate fraud, waste, and abuse.
        The President further established the goals of this administration
    in Executive Order 13589, ``Promoting Efficient Spending'', which set
    clear reduction targets for travel, employee information technology
    (IT) devices, printing, executive fleets, promotional items, and other
    areas. The President's fiscal year 2013 budget request for GSA would
    achieve $49 million in savings under this Executive order, including
    $9.7 million in travel.

                         HOLDING OFFICIALS RESPONSIBLE

        It is important that those responsible for the abuses outlined in
    the IG's report be held accountable. We are taking aggressive action to
    address this issue and to ensure that such egregious actions will never
    occur again. We have taken a series of personnel actions, including the
    removal of two senior political appointees. We have also placed 10
    career employees on administrative leave, including 5 senior officials.
        I intend to uphold the highest ethical standards at this agency and
    take any action that is necessary and appropriate. If we find any
    irregularities, I will immediately engage the IG. As I indicated in my
    joint letter with GSA's IG, I intend to set a standard that complacency
    will not be tolerated, and waste, fraud, or abuse must be reported.
        I believe this commitment is critical, not only because we owe it
    to the American taxpayers, but also because we owe it to the many GSA
    employees who conform to the highest ethical standards and deserve to
    be proud of the agency for which they work.

                                 TAKING ACTION

        I have taken a number of steps since I began my tenure on April 3,
    2012, to ensure this never happens again. GSA has consolidated
    conference oversight in the new Office of Administrative Services,
    which is now responsible for:
      --Oversight of contracting for conference space, related activities,
            and amenities;
      --Review and approval of proposed conferences for relation to GSA
            mission;
      --Review and approval of any awards ceremonies where food is provided
            by the Federal Government;
      --Review and approval of conference budgets as well as changes to
            those budgets;
      --Oversight and coordination with GSA conference/event planners and
            contracting officers on conference planning;
      --Review of travel and accommodations related to conference planning
            and execution;
      --Handling of procurement for all internal GSA conferences; and
      --Development of mandatory annual training for all employees
            regarding conference planning and attendance.
        Additionally, we have cancelled the 2012 Western Regions Conference
    (WRC) as well as a number of other conferences that only or primarily
    involved internal staff. To date, I have cancelled 35 conferences,\1\
    saving taxpayers $995,686. As we put in place greater controls and
    oversight, we are reviewing each event to make sure that any travel is
    justified by a mission requirement.
    ---------------------------------------------------------------------------
        \1\ A conference is ``a symposium, seminar, workshop, or other
    organized or formal meeting lasting portions of 1 or more days where
    people assemble to exchange information and views or explore or clarify
    a defined subject, problem or area of knowledge.''
    ---------------------------------------------------------------------------
        We have also begun review of employee relocations at Government
    expense, and will require all future relocations to be approved
    centrally by both the Chief People Officer and the Chief Financial
    Officer.
        To strengthen internal controls, we are bringing in all Public
    Buildings Service regional budgets under the direct authority of GSA's
    Chief Financial Officer. The autonomy of regional budget allocations
    is, in part, what led to this gross misuse of taxpayer funds on both
    the regional conference and the employee rewards program known as
    ``Hats Off''. The additional approvals and centralized oversight are
    intended to mitigate the risk of these problems.
        In response to concerns over spending on employee rewards programs,
    I have eliminated the ``Hats Off'' store that was operating in the
    Pacific Rim region, as well as all similar GSA programs.
        I am moving aggressively to recapture wasted taxpayer funds. As a
    first step, on April 13, I directed that letters be sent to Bob Peck,
    Jeff Neely, and Robert Shepard demanding reimbursement for private, in-
    room receptions at the WRC. I will pursue other fund recovery
    opportunities.
        I am engaged in a top-to-bottom review of this agency. I will
    continue to pursue every initiative necessary to ensure this never
    happens again and to restore the trust of American taxpayers.

                        FISCAL YEAR 2013 BUDGET REQUEST

        The GSA fiscal year 2013 budget proposal aligns with our value
    proposition: GSA helps agencies deliver more for their missions.
        Across a range of program areas including the move to cloud email,
    developing one-stop shop IT security protocols through Federal Risk and
    Authorization Management Program (FedRAMP), leveraging the bulk
    cooperative buying power of the Government with Federal Strategic
    Sourcing opportunities, and using the latest in real estate portfolio
    planning, GSA brings expertise and efficiency to the table in service
    of our customers and the taxpayer.

              COST SAVINGS AT THE GENERAL SERVICES ADMINISTRATION

        In accordance with Executive Order 13589, ``Promoting Efficient
    Spending'', our fiscal year 2013 budget would achieve $49 million in
    savings, including $9.7 million in travel. In addition, GSA will
    maintain consulting and advisory contract spending at $32.8 million
    less than fiscal year 2010 levels.

                TARGETED INVESTMENTS IN CRITICAL INFRASTRUCTURE

    Federal Buildings Fund
        Our fiscal year 2013 budget requests $8.6 billion in New
    Obligational Authority (NOA) for the FBF associated with $9.7 billion
    in estimated fiscal year 2013 revenue. This request includes a capital
    investment program of $551 million. GSA is not requesting an
    appropriation to the FBF, and would fund the fiscal year 2013 new
    obligation authority request from balances in the FBF. This year we are
    requesting a very limited amount of funding to support exigent need and
    high return on investment capital projects. Over the longer term, we
    will need to work with the Congress to ensure adequate investment in
    the capital program to ensure the Federal buildings portfolio does not
    deteriorate, and we complete critical construction projects already
    initiated such as the Department of Homeland Security consolidation at
    St. Elizabeths.
        Our request for $56 million in NOA for new construction and
    acquisition would allow GSA to acquire, through existing purchase
    options, two buildings under lease to the Federal Government in
    Martinsburg, West Virginia, and Riverdale, Maryland. The Government has
    the option to purchase both buildings at a set price prior to the lease
    expirations. Both facilities are fully utilized by the Federal
    Government, specifically the Internal Revenue Service in Martinsburg,
    West Virginia and USDA in Riverdale, Maryland--and both locations have
    been identified as a long-term Federal need. The execution of these
    purchase options would eliminate costly lease obligations and result in
    millions of dollars in out-year cost avoidance to the Government.
        GSA requests NOA of $495 million for repairs and alterations to
    Federal buildings. Our proposed repairs and alteration program
    includes:
      --Exigent needs projects in 20 Federal buildings to repair critical
            building and safety systems including elevators; fire and life
            safety, electrical, and heating and ventilation systems; and
            repairing structural deficiencies ($123 million);
      --Nonprospectus repairs and alterations projects ($341 million);
      --Energy and water retrofit and conservation measures ($15 million);
            and
      --Consolidation activities to alter interior space in the Daniel
            Patrick Moynihan Courthouse, New York, New York, and Peachtree
            Summit Federal Building, Atlanta, Georgia, to consolidate
            various agencies from lease space into federally owned space
            ($16 million).
        Like the lease purchase options outlined above, consolidation of
    Federal activities from leased to owned space will result in millions
    of dollars in annual cost avoidance.
        In addition to our capital program, GSA requests NOA for our
    operating program, in the amount of:
      --$5.5 billion for the Rental of Space program, which will provide
            for 199 million rentable square feet of leased space;
      --$2.4 billion for the Building Operations program; and
      --$120 million for the Installment Acquisition Payments program.
        We intend to assure PBS dollars will be spent on cost-effective
    projects and services that advance our customer's missions. We will not
    fund projects or services that have questionable returns or excessive
    overhead expenses.
    General Services Administration Operating Appropriations
        The GSA fiscal year 2013 budget requests $272 million for our
    operating appropriations that provide for the Office of Governmentwide
    Policy, the governmentwide programs of the Operating Expenses account,
    the GSA IG, the Electronic Government Fund, the pensions and office
    staffs of former Presidents, the Federal Citizen Services Fund, and, if
    needed, Presidential transition.
        Our budget requests an additional $23 million more than the fiscal
    year 2012 level for the Governmentwide policy appropriation, including
    $21 million for the continued modernization of the Integrated
    Acquisition Environment (IAE) investment in the Systems for Awards
    Management (SAM) project and $2 million for Information Sharing and
    Identity Management (ISIM). GSA is the program manager for the IAE, an
    Electronic Government (EGov) program. On behalf of all Federal
    agencies, GSA is managing 10 outdated, separate systems which will be
    consolidated into a single, integrated platform to support Federal
    acquisition, grants, and loans management. The first phase of the
    ongoing consolidation effort will launch May 2012. For fiscal year
    2013, GSA is requesting SAM investment funding to further consolidate
    and simplify the disparate systems. Further consolidation will improve
    Governmentwide reporting on how Federal tax dollars are spent, reduce
    redundancy and the burden on all businesses--in particular on small
    businesses who do work for the Federal Government, significantly
    improve data quality as well as the exchange of information across the
    acquisition, financial, grants, and loan communities.
        The ISIM program is providing the civilian agencies with standards
    for the Federal information-sharing environment. ISIM will establish
    capabilities for sharing information--grant, financial, acquisition,
    and other data--within and across Federal departments using secure,
    common standards. This investment is critical to allow Federal agencies
    to share and rapidly access secure information that supports mission
    delivery. GSA will develop common data standards or attributes in
    collaboration with agencies that complement our responsibilities for
    the Federal Identity and Access Management program and ensure security,
    privacy, and interoperability best practices.
        We have requested an increase of $4.3 million for the Electronic
    Government Fund to improve citizen engagement with the Government
    through innovative technologies and to improve delivery of Government
    services to the public. The additional funding will support expanded
    efforts to improve Government service by providing other agencies with
    technology and expertise to improve their interactions with the public.
    GSA will continue to build governmentwide capability to engage citizens
    in dialogues and challenges to solve complex issues directly impacting
    the public.
        In accordance with the Presidential Transition Act of 1963, as
    amended, GSA requests $8.9 million for an orderly transfer of Executive
    power in connection with the expiration of the term of office of the
    President and the Inauguration of a new President. This funding is
    required only in the event of a change in administration.
        GSA requests an additional $1 million for the IG. The request also
    includes $0.3 million for the fiscal year 2013 Federal pay raise and
    $0.1 million for benefits and contract support for former Presidents.
        The proposed fiscal year 2013 increases are offset by net
    administrative cost reductions of $2.1 million in operating expenses
    and $2.3 million in the Federal Citizen Services Fund.

                               SUMMARY STATEMENT

        The unacceptable and inappropriate activities at the WRC stand in
    direct contradiction to the express goals of this agency and the
    administration, and I am committed to ensuring that we take whatever
    steps are necessary to hold those responsible accountable and to make
    sure that this never happens again. At the same time, I believe that
    the need for a high-quality GSA is more acute today than in any time in
    its history. We need to refocus this agency and get back to the basics:
    streamlining the administrative work of the Federal Government to save
    taxpayers money.
        With that said, this goal is directly supported by the GSA fiscal
    year 2013 budget request as it will help to deliver a more effective
    and efficient Government.

                               CLOSING STATEMENT

        Mr. Chairman, this concludes my formal statement. I look forward to
    continuing this discussion on the GSA IG report and our fiscal year
    2013 budget request with you and the members of the subcommittee.

        Senator Durbin. Inspector General Miller, the floor is
    yours.

    STATEMENT OF BRIAN D. MILLER, INSPECTOR GENERAL
        Mr. Miller. Good afternoon, Chairman Durbin, Ranking Member
    Moran. Thank you for inviting me here to testify about our
    report.
        While my report details what went wrong at GSA in
    connection with the WRC, I want to take a moment to focus on
    what went right.
        The system worked. The excesses of the conference were
    reported to my office by a high-ranking political appointee,
    and our investigation ensued. Not one person prevented us from
    conducting that investigation or obstructed what turns out to
    be a lengthy investigation.
        As each layer of evidence was peeled back, we discovered
    that there was more to look into. So our investigation
    continued independently.
        While some have suggested that the investigation took too
    long to produce the final report, anyone familiar with law
    enforcement investigations understands that when you turn over
    one stone you often find more stones that need to be turned
    over as well.
        Most people also understand the need to be careful and
    certain before making public allegations such as those
    contained in the report, because careers and reputations are on
    the line, and my office does not take that lightly.
        Moreover, the then GSA Administrator ultimately had control
    over the date on which this report was released because it was
    the Administrator's response to the final report that triggered
    its public release.
        Finally, the system has been strengthened by the release of
    the report and by the public attention it has received in the
    media and from both chambers of the Congress.
        While not one of the many career employees and political
    appointees who were involved in the WRC came forward and
    reported the waste, fraud, and abuse that occurred there,
    perhaps for fear of reprisal, GSA's honest and hard-working
    employees now have been empowered to bring issues to our
    attention and they are doing so. We have more work than ever.
        And I'd like to take this opportunity to thank the numerous
    dedicated professionals from throughout the Office of Inspector
    General that worked so many long hours to ensure that the
    report was accurate and fair and drew no conclusions beyond
    those fully supported by the evidence. They do great work.

                               PREPARED STATEMENT

        And I would like to thank all the special agents, forensic
    auditors, and lawyers that worked on it.
        Thank you. I ask that you make my written statement and the
    report part of the record. Thank you.
        Senator Durbin. Without objection.
        [The statement follows:]

                     Prepared Statement of Brian D. Miller

        Chairman Durbin, Ranking Member Moran, and members of the
    subcommittee, I thank you for inviting me to testify here today. As you
    know, on April 2, 2012, the General Services Administration Office of
    Inspector General (GSA OIG) published a report regarding GSA
    mismanagement of its Western Regions Conference (WRC) in the fall of
    2010.
        It may be very difficult to find among all the bad news and
    repugnant conduct, but there is at least a glimmer of good news. The
    oversight system worked. My office aggressively investigated, audited,
    interviewed witnesses, and issued a report. No one stopped us from
    writing the report and making it public. Based on the final report,
    swift action has been taken, hearings have been scheduled, and the
    whole ugly event now lay bare for all to see. Justice Brandeis said
    that sunlight is said to be the best of disinfectants.
        Almost every Federal agency has an inspector general, someone
    watching and reporting fraud, waste, and abuse of taxpayer dollars. The
    Congress recently strengthened offices of inspectors general so that we
    can better perform our oversight work. We are often the last resort for
    protecting taxpayer dollars--unfortunately catching the fraud, waste,
    and abuse after the money is spent. More needs to be done to establish
    early warning systems. This is why Acting Administrator Daniel M.
    Tangherlini and I recently reminded GSA employees to alert us as soon
    as they see anything wrong. The WRC could only occur in an environment
    where the best lack all conviction while the worst skirt the rules.
        Benjamin Franklin warned us at our Nation's founding: ``There is no
    kind of dishonesty into which otherwise good people more easily and
    frequently fall than that of defrauding the Government.'' Those tempted
    to engage in fraud, waste, and abuse need to know they will be caught.
    The ultimate deterrence against fraud, waste, and abuse is criminal
    prosecution. We frequently partner with the Department of Justice in
    civil and criminal cases.
        The GSA OIG has about 300 employees to oversee an agency of more
    than 12,000 employees, who are responsible for almost $50 billion in
    civilian contracts, most Federal buildings, and the Federal automotive
    fleet. Despite the ratio of OIG personnel to GSA personnel, our office
    has achieved more than $6.5 billion in savings to the taxpayer since
    2005. In 2008, GAO found that the GSA OIG had an average return of $19
    per $1 budgeted (GAO Report 09-88, 2008).
        Our special agents, forensic auditors, and lawyers deserve the
    recognition for this report. But our office and other offices of
    inspectors general produce great work like this day after day. My own
    office has issued numerous audit reports relating to GSA's construction
    and renovation contracts under the American Recovery and Reinvestment
    Act. We discovered and investigated 11 Federal property managers and
    contractors taking bribes and kickbacks. All 11 are now convicted.
    Criminals selling counterfeit IT products were caught and convicted,
    and are now serving time in Federal prison, because of the work of our
    office and other law enforcement agencies. Federal contractors have
    paid back hundreds of millions of dollars, because of our audits. Most
    recently, Oracle paid $199.5 million to settle False Claims Act
    allegations.
        The core mission of GSA is to provide low-cost goods and services.
    When GSA wastes its own money, how can other agencies trust it to
    handle the taxpayer dollars given to them? GSA also has the sole
    responsibility for the Federal travel regulation, which governs travel
    and conference planning by agencies across the executive branch. 5
    U.S.C. 5707(a)(1). As detailed in my office's report, in putting on the
    WRC, GSA committed numerous violations of contracting regulations and
    policies, and of the Federal travel regulation. This is of special
    concern because other Federal agencies need to be able to look to GSA
    as a model of how to conduct their contracting and procurement efforts,
    and manage their travel and conference planning.
        In attempting to model the entrepreneurial spirit of a private
    business, some in the public buildings service seemed to have forgotten
    that they have a special responsibility to the taxpayers to spend their
    money wisely and economically. While a private business may use its
    profits to reward employees in a lavish fashion, a Government agency
    may not. Even so, this report should not obscure the fact that
    thousands of GSA employees work hard and do a great job for the
    American taxpayers. It is only a minority of employees that are
    responsible for this debacle.
        In preparing the WRC report, numerous dedicated professionals from
    throughout the OIG worked long hours to ensure that the report was
    accurate and that it drew no conclusions beyond those fully supported
    by the evidence. My office continued to receive documents relating to
    this report as late as this January. We are still receiving documents
    relating to ongoing investigations. It is my hope that these efforts
    will enable GSA to improve its contracting and conference planning
    practices in the future, so that GSA may not only be a better steward
    of taxpayer dollars, but act as a leader within the Federal Government
    in efficient procurement and conference planning.
        I thank you for an opportunity to discuss this important work of
    the OIG with the subcommittee. I request that the attached report and
    this statement be made part of the record, and I welcome your
    questions.

                          WESTERN REGIONAL CONFERENCE

        Senator Durbin. Mr. Tangherlini, far be it for me to
    suggest that people sitting on this side of the podium, in our
    profession, have not been guilty of bad judgment. It's
    happened. It's been recorded. It's been acknowledged.
        Some of us feel that maybe we had the right teachers in
    life along the way, and I was lucky to work for a number of
    people who I thought were as honest as could be, and I tried my
    best to follow their example.
        There was always this basic standard before you made a
    decision, how will it look on the front page of tomorrow's
    paper. And that has, in many ways, I think, brought me back
    down to Earth for something that wouldn't have looked very good
    at all. We decided we're not going there.
        My question is when it gets to this conference in region 9
    here, it appeared to be a much different mentality. It was, you
    know, we'll take care of our own. We'll keep quiet. And if it
    wasn't for the whistleblower sometime later, it appears that
    this pattern of regional conferences might have just continued.
        What have you found since you've been at the agency about
    that region or that experience or that attitude?
        Mr. Tangherlini. We're working very closely with the
    inspector general. We've learned that there is more than just
    this conference in this region we should be concerned about.
    And there are other issues that we should be concerned about
    across the agency.
        In fact, in the first week, after I had met with the
    inspector general, I did that on the first day, and we
    subsequently had other follow-up meetings.
        We agreed to do a joint letter to all 13,000, roughly
    13,000, GSA employees, asking them, in the future, to please,
    if you see something you suspect is wrong to talk to your
    fellow employees, talk to your supervisor, talk to your
    supervisor's supervisor, and/or, certainly, if you see waste,
    fraud, and/or abuse, call the inspector general. Reach out to
    the inspector general through their FraudNet Hotline.
        And then I think both of us are discouraged by the fact
    that there were 300 attendees that saw what was intentionally
    designed to be over the top and didn't raise a concern up to
    the inspector general.
        Senator Durbin. So how do you explain that after this
    occurred, after this event occurred, this Mr. Neely got more
    than $11,000 in bonuses? It was almost, not just a seal of
    approval, but it was congratulations, job-well-done bonuses.
        Tell me how the sequence of his decisionmaking didn't come
    to the attention of those higher up when they're deciding
    whether he should get even more taxpayers dollars for his
    malfeasance?
        Mr. Tangherlini. I regret, Mr. Chairman, I'm not sure I'm
    able to describe what happened. I have been there a short time.
    What I've learned I've simply learned through the hearings over
    the last several days, what I heard through the inspector
    general's report.
        So what I can say, though, is as we look at the agency, we
    go top-to-bottom. I think the performance appraisal system is
    one place that we have to start and make sure that we have
    strong controls in our performance evaluation system that
    emphasize integrity in our senior leaders, because, to your
    earlier comment, I think that people watch what their leaders
    are doing and they model that behavior.

                               INTERN CONFERENCE

        Senator Durbin. So what about this interns conference in
    Palm Springs? I mean, I love my interns. I started off as an
    intern in a Senate office. They do a great job. They don't get
    paid for it. So why would you hold or why would they hold an
    interns conference in Palm Springs, California?
        Mr. Tangherlini. I have no ability to explain what they
    were thinking in having that conference. I know my experience
    as an intern had really been about hard work, late hours, low
    or no pay----
        Senator Durbin. An occasional slice of pizza.
        Mr. Tangherlini. Which I bought. So, you know, I understand
    the value of interns. I'm just concerned that a conference like
    this was almost trying to implicate people from the beginning
    in this approach to that work.
        Senator Durbin. And the other thing that seemed, I mean,
    we're aware of advance teams with Presidential candidates and
    others. The advance work that was being done for these
    conferences involved lengthy trips, many employees being
    treated, you know, in kind of lavish circumstances. Was that a
    standard just in this region or did you find it to apply to
    other regions as well?
        Mr. Tangherlini. Again, we haven't had a chance to dig into
    other regions. What I understand was that certainly was a
    culture to the approach of this leader within that region.
        But I think what it really tells us is we need to look at
    the way we've structured ourselves, so that other people have a
    chance to raise the alarm if they see this kind of thing
    happening.
        And so, last week, I asked that all the regional offices'
    financial staff report up to our Chief Financial Officer (CFO),
    Alison Doone. In the past, they had been given a budget
    allocation and they were allowed, within the region, to work
    within that allocation entirely autonomously.

                          WESTERN REGIONAL CONFERENCE

        Senator Durbin. So, Mr. Miller, as I understand it, two
    people who attended the conference came forward to a GSA
    employee who had worked on Capitol Hill, and she, in turn,
    notified your office--if that sequence is accurate. I guess my
    question to you is the environment where a whistleblower feels
    safe enough to come forward with that kind of information is
    critically important.
        Mr. Miller. It is.
        Senator Durbin. For us to have oversight on taxpayer
    spending. What has been your experience before and after this
    particular investigation?
        Mr. Miller. Well, Mr. Chairman, the Deputy Administrator,
    Susan Brita, who did work on Capitol Hill, came to our office
    in December 2010. I believe she overheard conversations. I'm
    not aware of specific individuals coming to her to complain
    about it. But she came forward to our office.
        We immediately investigated and found a whole string of
    problems, not only with the WRC, but with other conferences,
    such as the intern conference and other conferences.
        Having whistleblowers is invaluable to our investigations.
    We rely on the good, hardworking, honest GSA employees who come
    forward and tell us that things are wrong. That often starts
    our investigation.
        Senator Durbin. I'm asking you if, before this event was
    reported to you, and since, can you tell me what the
    environment is? Do whistleblowers feel that they can come to
    you?
        Mr. Miller. We have been receiving a lot of whistleblower
    complaints since this report was released. It has gotten
    tremendously better in terms of complaints in terms of
    whistleblowers.
        The witnesses we interviewed in connection with this
    investigation reported an atmosphere where people were not
    encouraged to speak up. One witness said that when someone
    spoke up, they were ``squashed like a bug''.
        Others said that the regional commissioner had a way of
    putting people down in a very uncomfortable way when they would
    raise concerns about expenditures. And it came forward from a
    number of witnesses that there was an environment where people
    were discouraged from coming forward, raising questions,
    calling into question expenditures.
        And, as a result, there are a number of over-the-top
    conferences, not just the WRC, but the intern conference that
    you brought up, where they had a team-building exercise focused
    on a jeep tour and many other events.
        Senator Durbin. Senator Moran.
        Senator Moran. Mr. Chairman, thank you.

                      OFFICE OF INSPECTOR GENERAL REPORTS

        First of all, let me ask Mr. Miller, you have issued the
    inspector general's report dated April 2, 2012.
        Mr. Miller. Correct.
        Senator Moran. What is the extent of the problem that this,
    at GSA, that this report covers? Is this the sum total of the
    problems that you see at this agency or is this more the
    proverbial tip of the iceberg?
        Mr. Miller. Senator, it is one event. As an inspector
    general, we produce reports that we can verify every which way,
    and it's totally accurate. We did the report on the WRC. We
    have a number of ongoing investigations. We have not produced
    reports yet on the number of ongoing investigations, and there
    are many other ongoing investigations.
        Senator Moran. Can you quantify that, the magnitude of the
    investigations that you are now conducting?
        Mr. Miller. It's a little difficult because, as I said in
    my opening statement, every time we turn over a stone, we find
    50 more, and, you know, we find other instances.
        You know, even today we found out that the wife of the
    regional commissioner had a parking space throughout the entire
    year of 2012 at the Federal building. And, you know, we just
    find one thing after another, and it's difficult for me, even
    now, to quantify it.
        Senator Moran. Would we expect additional inspector general
    reports in the near future?
        Mr. Miller. Well, we are doing investigations. Our normal
    course would be to complete the investigation and then refer it
    for criminal prosecution, if it's merited.
        Civil liability, under the False Claims Act or under
    another civil statute or for administrative action, we
    sometimes will do the report, give it to the Administrator to
    take administrative action against individuals.

                               REGIONAL OVERSIGHT

        Senator Moran. Mr. Tangherlini indicated about the
    autonomous nature of the management policy, style, and conduct
    in this region. Mr. Miller, was that unique to that region?
        And I prefer to call you Dan, because I will struggle with
    your last name, but perhaps Dan would like to answer this
    question as well.
        And is that something that was new at GSA? You indicated
    now that you've centralized the process, that the CFO now is
    involved in the decision about paying bills as compared to
    relegating that authority to somebody in the field. Is that
    unique to this region, to GSA? And when did that begin? Is that
    something that occurred in Dan's predecessor's tenure?
        Mr. Miller. Well, there's a number of levels to the answer
    to that question. With region 9, the regional commissioner for
    PBS was also the acting regional administrator in charge of the
    entire region, because that is normally a political appointment
    and that was vacant. So he was acting regional administrator
    for the whole region.
        So, in that sense, region 9 was a little bit different. The
    other acting regional administrators had a shorter tenure
    because political appointments were made.
        But, generally, regions have a somewhat awkward
    relationship with the central office. They always have. That
    was exacerbated when Acting Administrator Paul Prouty, when he
    was acting during the interim before Martha Johnson was
    confirmed, he was a PBS regional commissioner for region 8, I
    believe, and he became Acting Administrator.
        One of the orders he put into place was to lower the
    regional administrator from a political appointment of an
    Senior Executive Service employee down to the equivalent of a
    GS-15 political appointment and restrict the duties of the
    regional administrator.
        The result was the regional commissioner for PBS had more
    authority within the region and the regional commissioner for
    the Federal Acquisition Service had more authority within the
    region. But, Dan, perhaps you'd like to----
        Senator Moran. Let me follow up before you respond. That
    would be a change in policy at GSA.
        Mr. Miller. Correct.
        Senator Moran. And that would have been at what point in
    time?
        Mr. Miller. It was before Martha Johnson was confirmed. I
    would say about 6 months prior, maybe 8 months prior.
        Senator Moran. Thank you.
        Mr. Miller. I can find the exact date.
        [The information follows:]

        The exact date was September 15, 2009.

        Mr. Tangherlini. My understanding of the timeline is as the
    inspector general described. But it gets to a bigger problem
    that we had allowed the regions to become almost fully
    autonomous to the purposes of budget authority and acquisition
    authority.
        One of the steps we've already taken is to centralize the
    CFO function and make all the regional CFOs, our financial
    management employees, report up the chain through the central
    CFO.
        We've also required, for conferences and for travel, our
    chief administrative officer, our Office of the Chief
    Administrative Officer, in headquarters, to review and approve
    justifications for conferences and conference travel.

                               REGIONAL OVERSIGHT

        Senator Moran. Is that because it's the best management
    practice, regardless of the evidence that you discovered how
    poorly things were managed, the problems that the inspector
    general determined?
        If you had come to this agency without the inspector
    general's report describing what had happened in this region,
    would this be the same policy that you would want to put in
    place as a new manager, regardless of the facts that the
    inspector general demonstrated?
        Mr. Tangherlini. The ability at a senior level to have
    visibility straight down into expenditures at the field level,
    at the ground level I think is key to any----
        Senator Moran. So you, as a manager, would have put those
    policies in place even if we didn't know about what went on in
    this region?
        Mr. Tangherlini. I don't know if we would have put the
    exact ones we put in place. Right now, we're trying to make
    sure that we get a handle on any kind of travel, any kind of
    conferencing, get a sense of what the expenditures are.
        But I believe that having good central office oversight
    into the expenditures and operations of a regional office is,
    frankly, just good, basic best practices management, yes.
        Senator Moran. I have additional questions, but I assume--
    --
        Mr. Miller. With the indulgence of the chairman, the year
    was 2009 that the order was entered changing the structure.
        Senator Moran. Thank you very much.

                          WESTERN REGIONAL CONFERENCE

        Senator Durbin. Mr. Miller, I don't know if this is for you
    or Mr. Tangherlini, but what's next? Are we going to get any
    taxpayers' money back from this fiasco? And, second, what's
    going to happen to the people who were responsible for it?
        Mr. Miller. Well, when Dan was appointed, we met
    immediately, and one of our first conversations was about
    sending demand letters to the officials that had parties in
    their room and for the excesses at the conference. And I'll let
    Dan tell you more about that.
        Mr. Tangherlini. As I mentioned in my testimony, we sent
    demand letters to three individuals who had inappropriate
    parties in their rooms.
        We also have, using the inspector general's report, started
    going through to try to identify those activities, extensions
    of activities, related activities for which we can very easily,
    well, very clearly seek reimbursement to the Federal
    Government, and we're working on that right now.
        Senator Durbin. Has there been a determination made as to
    whether what you've found so far merits review by the
    Department of Justice (DOJ) for criminal action?
        Mr. Miller. Mr. Chairman, we have met with DOJ, and we've
    made a criminal referral.
        Senator Durbin. I won't go into any further. I'm sure you
    can't either.
        Mr. Miller. Thank you.

                                  CONSTRUCTION

        Senator Durbin. Let me ask about some other issues related
    to the GSA as an agency. For many years, typically, GSA would
    spend about $700 to $900 million annually from the FBF to build
    buildings to house Federal agencies. Because of cutbacks in
    Federal spending, that funding reached a new low last year of
    $50 million, compared to the $700 to $900 million in previous
    years.
        I'm trying to establish what I mentioned at the opening.
    What do you believe is the real cost of delayed construction to
    specific projects? And I can get into those, the Department of
    Homeland Security (DHS), the Food and Drug Administration (FDA)
    and others. And what is the general impact on cost to the
    Federal Government, realizing that leased space is usually more
    expensive than an owned building?
        Mr. Tangherlini. Given that I have just come to this job
    very recently and have been working very much on the earlier
    issue we were discussing, I don't know if I'm best equipped to
    answer those questions fully today, but I would like to work
    with you and your staff.
        I will say, though, the fact that we have reduced our
    expenditures to the level we have has some concern about this
    incredibly large and valuable asset that we maintain. And
    that's something that, collectively, we have to work on to make
    sure that we are actually investing sufficiently to maintain
    the quality of those facilities.
        Building things, delaying construction can cost additional
    money, just through the sheer power of inflation and the costs
    of raw materials, and so that's an additional concern.
        Senator Durbin. I'm going to ask you, when you get back to
    me, if you would look specifically at the DHS project at St.
    Elizabeths here in Washington.
        The $3 billion project began in 2009 and now is limping
    along with limited funding. What will be the impact on the cost
    of this project to not bring it to conclusion and the cost to
    the Federal Government of delaying the expenditure?
        Same thing is happening in Denver, the Denver Federal
    Center, where there's substantial evidence of hazardous
    materials. And a remediation effort was underway, a protective
    effort, that I understand has either been slowed down or
    suspended as a result of budgetary issues.
        And the FDA--White Oak Campus. That's been going on for as
    long as I can remember. Definitely overdue, with FDA agencies
    spread around in many different leased buildings.
        So if you would get on those three, I would appreciate that
    very much.
        Mr. Tangherlini. Yes, Sir.
        [The information follows:]

        St. Elizabeths and the Denver Federal Center will be addressed in
    the questions submitted for the record.
        With regard to the Food and Drug Administration White Oak campus,
    General Services Administration (GSA) revised and reduced the project
    scope to accomplish portions of the campus with fewer funds. GSA
    originally requested funding for a parking structure on the campus in
    fiscal year 2012, but changed the plan to instead offer surface
    parking. The surface parking will provide approximately 1,600 fewer
    parking spaces than the original plan of a parking structure.
        Additionally, GSA will not be able to construct a distribution
    building that was included in the master plan in order to complete the
    project within the funding level provided. With the exception of this
    distribution building and the change in parking, the 2006 master plan
    will be complete in December 2013.

                       FEDERAL TRADE COMMISSION BUILDING

        Senator Durbin. This is kind of parochial, but it happens
    to relate to Capitol Hill and our Appropriations Committee.
        There has been a proposal from a Member of Congress to move
    or to acquire the Federal Trade Commission (FTC) building,
    which can be seen from the Capitol Complex here, and that it be
    given to the National Gallery of Art as an annex or a new
    facility. And, clearly, that suggestion comes with some
    controversy.
        Recently, the Commissioners at FTC sent us a statement--a
    bipartisan, unanimous statement--that stated serious concerns
    about the significant and unnecessary cost to the American
    taxpayer if the historic FTC building is given away to the
    National Gallery of Art.
        I happen to agree with the Commissioners in this regard. As
    I understand, the proposal is that FTC would be removed from
    this building, where I believe they started, and sent to some
    other location. Are you familiar with where that location might
    be or whether there is a Federal building currently vacant that
    could accommodate this agency?
        Mr. Tangherlini. I have met with a number of
    representatives from the FTC just to gain some initial
    awareness of this issue. I will actually be meeting with the
    interested Member of Congress tomorrow to hear that side.
        I'm not exactly sure what the proposal is for where the
    entirety of the FTC would go, because I haven't heard that
    version yet. But I do know that there is concern on the FTC
    side about moving out of the Apex Building.
        Senator Durbin. And the Federal Government owns the FTC's
    current headquarters?
        Mr. Tangherlini. Yes.
        Senator Durbin. And any replacement building, unless we
    have a vacant one ready to be moved into that the Federal
    Government owns, will be a lease expense, at whatever the costs
    of the lease may be?
        Mr. Tangherlini. From what I understand, one proposal
    that's being discussed would be a leased building.
        Senator Durbin. And there would typically be a cost in
    moving, physically moving the FTC? We have testimony from them
    that they believe that will be between $70 and $83 million.
        Mr. Tangherlini. Yes, that's what they told me. A large
    part of that, I gather, has to do with some high-tech equipment
    associated with the headquarters facility.
        Senator Durbin. It's my understanding they have forensic
    labs and a sophisticated information technology system that
    would have to be moved, relocated at considerable expense to
    the taxpayers.
        There's also this notion that if the National Gallery of
    Art moves into this building it will cost about $150 million to
    bring it up to whatever standards they expect to use the space.
        And the suggestion is that there would be a solicitation of
    charitable contributions to the Federal Government to the
    National Gallery of Art for that purpose, at least that is the
    proposal.
        I look out my window and look down the Mall and notice that
    there's some construction at the National Gallery of Art Annex.
    Are you familiar with that construction?
        Mr. Tangherlini. I am familiar with that construction.
        Senator Durbin. And they're replacing the marble veneer on
    the building.
        Mr. Tangherlini. Right.
        Senator Durbin. And I asked my staff to check how much was
    being paid for by charitable donations, and the answer is nada,
    nothing. This is all at taxpayers' expense.
        So the idea of tens, hundreds of millions of dollars
    flowing into the National Gallery of Art to renovate the FTC
    building seems to me to be speculative at least.
        So this notion of FTC leaving its traditional place at
    considerable expense, moving to another space at taxpayers'
    expense, and then the National Gallery of Art moving into the
    FTC building and remodeling it seems fairly inconsistent with
    the notion of a national deficit that has been motivating a lot
    of our budget decisions recently. You don't have to comment on
    that.
        I will just add that I understand work has been done at the
    FTC building recently, in terms of plumbing, electrical and
    such, and that it is in fairly good shape for a building of its
    vintage to continue to serve the FTC as is. Is that your
    understanding?
        Mr. Tangherlini. That's what I've heard from the FTC.
        Senator Durbin. Thank you.
        Senator Moran.

                          WESTERN REGIONAL CONFERENCE

        Senator Moran. Chairman, thank you.
        Mr. Miller, you indicated that there's been a referral to
    DOJ. Do you expect other referrals?
        Mr. Miller. We're working with DOJ every day. We're working
    very closely with them. When I say referral, I'm specifically
    being nonspecific. I think I've said everything I can say about
    it.
        We've met with DOJ. Our special agents are working closely
    with DOJ lawyers.
        Senator Moran. So when you say a referral, that doesn't
    necessarily mean an individual is under consideration for
    criminal charges by DOJ. It could be something broader than
    that.
        Mr. Miller. Well, let me----
        Senator Moran. Tell me what you mean by the word
    ``referral''.
        Mr. Miller. Okay. I will tell you what happens in the
    normal course, and that is that when we do an investigation
    generally, we will have a matter, we may have one individual.
    We may have a number of individuals, and they may be related.
    It may be a scheme. It may be a conspiracy. They may be related
    in many different ways.
        We bring the entire matter to DOJ or to the U.S. Attorney's
    Office, and DOJ will either accept or decline the case, and
    then we will do further investigation.
        And what we hope will come out of it is indictments against
    individuals, an individual or more than one individual, as a
    result of the criminal conduct that is the highest criminal
    charge that is the most readily provable by the evidence.
        Senator Moran. That answers my question for purposes of
    what you can answer.
        Mr. Miller. Thank you.

                      WESTERN REGIONAL CONFERENCE PER DIEM

        Senator Moran. I don't understand how, for example, Mr.
    Miller, the rooms got paid for. There's a per diem that I
    assume every Federal employee would be able to utilize when
    traveling, including to this location. I can't imagine that the
    per diem is sufficient to cover the cost of what the hotel
    rooms or at least some of those hotel rooms would cost.
        In fact, I understand when the inquiry was made of the M
    Resort, they indicated that some of the rooms that were
    utilized in this conference were reserved for their, ``high
    rollers'' in the casino.
        How is it that a Federal employee is able to be reimbursed
    for the room? How does the per diem that they receive cover the
    costs that they incurred?
        Mr. Miller. Okay. The per diem for Las Vegas, at that time,
    was $93. And the hotel then would, what they say is they comp
    the room. They will give an upgrade, theoretically, for free.
        And so what they did was instead of a regular room, they
    gave an upgraded room. And these rooms were upgraded to the
    very highest, which was a two-story loft room that normally
    goes for more than $1,100 a night. And so they were giving
    these loft rooms.
        Now, the hotel can afford to do that because they expect to
    do catering. And it's part of the overall negotiation with the
    hotel that the Government has with the hotel to try and get the
    lowest, theoretically, try and get the lowest price for the
    taxpayer.
        Senator Moran. Were any of the rooms available for $93 a
    night?
        Mr. Miller. Yes. Yes.
        Senator Moran. Okay. So some of them were within the per
    diem.
        Mr. Miller. Correct.
        Senator Moran. Others paid the per diem, other employees
    received the $93 and paid the hotel that $93, but they got
    better rooms than what a normal $93 room would be as a result
    of the inducement by the hotel to have the conference there?
        Mr. Miller. Correct. It was part of the negotiation.
    Certain upgrades were included. And the upgrades would be
    charged at the per-diem rate of $93. So even though it was a
    two-story loft, it was charged $93.
        Senator Moran. Did you discover in your investigation any
    inappropriate relationship between the vendors, the hotel or
    the caterers, the folks that GSA contracted with to provide
    services for this conference? Anything inappropriate between
    the vendor, any vendor and anybody at GSA in arranging for the
    conference to occur here and for the entertainment, et cetera
    to occur? No better word, is there some kind of kickback or
    inappropriate payment, inappropriate illegal gift provided to
    the folks who were organizing the conference?
        Mr. Miller. That is under investigation. As we talked about
    before, we have a criminal referral.
        Senator Moran. Thank you.
        Any suggestion in your investigation, when you talk to GSA
    employees or the management in the region, was there a defense
    that kind of this goes on everywhere all the time kind of
    thing, either within GSA or outside the agency?
        Mr. Miller. Yes. Many of the witnesses we talked to said
    that this conference was similar to previous WRC, and they
    cited a number of them that occurred in Oklahoma, New Orleans,
    and Lake Tahoe.
        And the witnesses we talked to said this was along the same
    lines, that each of the so-called hosts for the conference
    tried to outdo one another, and the regional commissioner for
    region 9 for this one said, ``I want this to be over the top. I
    want this to be the best and most lavish sort of conference.''
        Senator Moran. In your investigation, did people say, Well,
    this goes on at other Government agencies, not just the GSA?
        Mr. Miller. Not that I know of, but I'll check the
    transcripts of the interviews.

               TRANSITION AT THE GENERAL SERVICES ADMINISTRATION

        Senator Moran. And then, finally, this may be for you, Mr.
    Tangherlini. I've been practicing while I've been sitting here.
    Tell me about Ms. Johnson's resignation. What precipitated
    that? Was she asked to resign? Was this on her own volition?
    How did this vacancy occur and then you take that position, at
    least acting or interim?
        Mr. Tangherlini. And, Senator, Dan is fine.
        Senator Moran. Thank you.
        Mr. Tangherlini. But I can only speak to what I've heard
    former Administrator Johnson say at other hearings that I've
    participated in over the last couple of days. And from what I
    understand is that she made the choice herself to resign as a
    way to allow the agency to move forward.
        I was asked by the White House to step in the weekend
    before her resignation and began my job Tuesday. I guess that
    would be April 3.
        Senator Moran. So the White House was aware of her pending
    resignation and had come to you to ask if you would serve in
    that capacity, and then she ultimately resigned?
        Mr. Tangherlini. That's what I understand what led them to
    ask me over the weekend.
        Senator Moran. And do you have any understanding as to
    whether or not she was asked by the White House or
    administration officials to resign?
        Mr. Tangherlini. From what I understand, and this was based
    on what I heard at these other hearings, was that she made the
    choice herself.
        Senator Moran. Mr. Chairman, thank you.

                      CIVILIAN PROPERTY REALIGNMENT BOARD

        Senator Durbin. Mr. Tangherlini, one of the issues proposed
    by the administration is the Civilian Property Realignment
    Board. Are you familiar with that concept?
        Mr. Tangherlini. I'm familiar with it.
        Senator Durbin. Best I understand it, it's something like a
    base closure commission, where we'd find a way to sell unneeded
    Federal property. And there have been versions that have
    originated in the House, now, in the Senate with Senators
    Carper and Portman. So what is GSA's view of these bills?
        Mr. Tangherlini. So as far as I know, the GSA view is that
    the proposal that the administration put forward is our
    preferred approach, that it is the most-aggressive proposal.
    It's the one that will raise the most funds.
        I'm not familiar with the Senate draft, but I would be
    happy to work with my staff to come back and find out what our
    position is.
        [The information follows:]
      General Services Administration Position on Pending Legislation on
                         Civilian Property Realignment
        General Services Administration (GSA) supports the administration's
    proposal, which addresses the key challenges that exist in the current
    process and should streamline and accelerate the disposal process. With
    respect to the current bills being discussed in the Congress, GSA
    supports legislation that provides additional realty tools and
    incentives that encourage sound management of real estate portfolios.
    GSA supports, for example, retention of proceeds by individual agencies
    and their reinvestment in agency portfolios. Retention of sales
    proceeds allows landholding agencies to direct equity from unneeded
    assets to needed assets. Such incentives will foster portfolio
    management as opposed to individual asset management.

                      CIVILIAN PROPERTY REALIGNMENT BOARD

        Senator Durbin. As I understand it, and I may be wrong, and
    this is just a press report, that what they are suggesting is
    an alternative that would basically eliminate the board. I
    think our experience with BRAC has us a little shellshocked.
        Mr. Tangherlini. Okay.
        Senator Durbin. These boards that are supposed to be
    apolitical and turn out to be totally political, and that may
    be their motivation. I can't speak for them.
        But what are the safeguards that you think need to be
    maintained when we talk about the disposal of Federal property?
        Mr. Tangherlini. Again, that's an issue I'm going to have
    to get much further into, but I think one of the things we just
    need to make sure is that we have gone through a thorough and
    thoughtful process, so that we're not disposing of property
    merely to maximize revenue, but also thinking about the long-
    term needs of the Federal Government.
        Senator Durbin. And I hope also take into consideration the
    state of the real estate market at the time that this is taken
    into consideration.
        Mr. Tangherlini. Fair enough.
        Senator Durbin. Fair enough.
        I don't have any further questions. Do you, Senator Moran?
        Senator Moran. Mr. Chairman, I do not have any further
    questions.
        I just would compliment Mr. Miller and his staff, as he did
    in his opening statement. It appears to me that you've done a
    good and thorough job. I thank you for your service to the
    public.
        Mr. Miller. Thank you.
        Senator Moran. And, Mr. Tangherlini, I welcome you to the
    GSA at very difficult times. It's pleasing to me that there are
    individuals who are willing to step forward and perform public
    service. And I wish you well in your new position at what
    obviously is a very difficult time.
        Mr. Tangherlini. Thank you.
        Senator Moran. And I thank you both for your testimony
    today.
        Mr. Tangherlini. Thank you.
        Senator Durbin. And let me echo that sentiment, and also
    note the subcommittee has received a prepared statement for the
    record signed by all five members of the bipartisan FTC
    expressing serious concern about the significant cost to
    taxpayers resulting from proposals to gift FTC headquarters to
    the National Gallery of Art, and without objection, the
    statement will be placed in the record.
        [The statement follows:]

               Prepared Statement of the Federal Trade Commission

        At the subcommittee's invitation, we write as the five members of
    the bipartisan Federal Trade Commission (FTC)--Jon Leibowitz, J. Thomas
    Rosch, Edith Ramirez, Julie Brill, and Maureen Ohlhausen--to voice our
    serious concerns about the significant and unnecessary costs to the
    American taxpayer if the historic FTC building is given away to the
    National Gallery of Art and the FTC is forced to move into commercial
    leased space.
        Instead of saving the Government money, the proposed transfer would
    needlessly forfeit a valuable Federal building and could initially cost
    well more than $100 million, with substantial additional costs incurred
    for years to come. Such an unprecedented giveaway would be contrary to
    the interests of American taxpayers, especially in this time of fiscal
    austerity.
        First, under proposals in the House of Representatives, the Federal
    Government would simply give away a Federal building that was recently
    appraised at $92 to $95 million. In addition, appropriated funds still
    would be required to pay for the maintenance of the FTC building if
    given to the National Gallery of Art. Although the National Gallery of
    Art's East and West Buildings were acquired with private money, their
    maintenance and operations fall to taxpayers under the National Gallery
    of Art's charter. For example, over the past several years, the
    Congress has appropriated more than $80 million just for repairs to the
    marble facade of the East Building. More troubling, in its fiscal year
    2013 congressional budget justification, the National Gallery of Art
    identified $45 million in additional critical maintenance and repair
    needs for its East and West Buildings. Although the National Gallery of
    Art purports to have the ability to raise hundreds of millions of
    dollars to repurpose the FTC building, if this building is given to the
    National Gallery of Art, taxpayers would be responsible for paying to
    maintain and operate it.
        Second, American taxpayers would incur $70 to $83 million in
    estimated costs to move the FTC out of its headquarters building.
    Moving the FTC headquarters would require the replication of the FTC's
    sophisticated Internet and forensic labs, litigation support
    technology, and pre-merger filing databases, as well as the
    Commission's data center.
        The costs to move would represent about one-quarter of the FTC's
    annual appropriation. We would be extremely concerned if any of these
    costs had to be taken out of FTC's operational budget, and the
    Commission had to cut back on its critical work on behalf of American
    consumers. As this subcommittee knows, FTC has consumer protection and
    competition jurisdiction over broad sectors of the economy, including
    healthcare, privacy, technology, and energy. FTC is also working to
    protect consumers struggling with the economic downturn against all
    manner of schemes--bogus job opportunities, sham debt relief, and
    fraudulent mortgage modification plans. At a time when all Federal
    agencies face budget cuts, FTC is particularly concerned that the
    Commission might have to bear the wholly unnecessary cost of being
    moved out of the FTC building and into commercial space.
        Third, the latest proposal to transfer the FTC building to the
    National Gallery of Art would move FTC into privately owned space. To
    occupy its headquarters, FTC currently pays $6 million annually to the
    Federal Building Fund (FBF) in lieu of rent. If FTC headquarters were
    moved to commercial space and the FTC building given to the National
    Gallery of Art, the FBF would lose that revenue, and more of the FTC's
    appropriation would be needed to pay a substantially higher rent to a
    commercial landlord. Moreover, the move out of a Federal building into
    commercial space could mean that FTC costs to move, including the costs
    to replicate its technology systems, could recur periodically.
    Additional appropriations could be needed every 10 years or so as
    leases expire and are replaced, through the competitive bidding
    procurement process, with new leases.
        Finally, the facts do not support claims that the proposed FTC
    building giveaway would save taxpayers hundreds of millions of dollars
    in building repair expenses because the National Gallery of Art would
    pay them with private funds. The FTC building is in excellent condition
    and needs no significant renovation, repair, or maintenance. In
    particular, the 75-year-old building has up-to-date electrical,
    plumbing, and HVAC systems, which are in excellent working order. The
    General Services Administration has listed no major projects on its 5-
    year maintenance and renovation schedule for the FTC building.
        Any money that would be privately raised to pay for hundreds of
    millions of dollars in renovations to the FTC building apparently
    represents the costs of repurposing the FTC building to suit the
    specifications of the National Gallery of Art. This constitutes no
    savings to taxpayers, but is an estimate of the costs associated with
    remodeling the building for a completely different purpose than the one
    for which it was designed and built.
        We believe the most cost-effective plan for housing the FTC
    headquarters is the status quo--keep the FTC in the FTC building. There
    is no need to appropriate significant additional funds to move the FTC
    headquarters now and every 10 years or so--and there is no reason the
    Federal taxpayer should give away a valuable asset. The historic
    headquarters building was designed and built for the FTC,\1\ has been
    adapted to meet its evolving needs, and well supports the FTC's mission
    into the 21st century.
    ---------------------------------------------------------------------------
        \1\ When laying the cornerstone for the FTC building on July 12,
    1937, President Franklin Roosevelt stated: ``May this permanent home of
    the Federal Trade Commission stand for all time as a symbol of the
    purpose of the Government to insist on a greater application of the
    Golden Rule to the conduct of corporation and business enterprises in
    their relationship to the body politic.''
    ---------------------------------------------------------------------------

                         ADDITIONAL COMMITTEE QUESTIONS

        Senator Durbin. The record of the hearing will remain open
    for a period of 1 week, until noon on Wednesday, April 25, for
    subcommittee members if they wish to submit statements and/or
    questions.
        [The following questions were not asked at the hearing, but
    were submitted to the Administration for response subsequent to
    the hearing:]

                  Questions Submitted to Daniel M. Tangherlini
                Questions Submitted by Senator Richard J. Durbin

                 WAS TRAINING TO ENHANCE JOB SKILLS CONDUCTED?

        Question. There is a long-standing Governmentwide general provision
    carried in the Financial Services and General Government appropriations
    bill relating to funds permitted to be expended for training.\1\
    ---------------------------------------------------------------------------
        \1\ FSGG bill language:

        Sec. 714. (a) None of the funds made available in this or any other
    Act may be obligated or expended for any employee training that--
            (1) does not meet identified needs for knowledge, skills, and
    abilities bearing directly upon the performance of official duties;
            (2) contains elements likely to induce high levels of emotional
    response or psychological stress in some participants;
            (3) does not require prior employee notification of the content
    and methods to be used in the training and written end of course
    evaluation;
            (4) contains any methods or content associated with religious
    or quasi-religious belief systems or ``new age'' belief systems as
    defined in Equal Employment Opportunity Commission Notice N-915.022,
    dated September 2, 1988; or
            (5) is offensive to, or designed to change, participants'
    personal values or lifestyle outside the workplace.
        (b) Nothing in this section shall prohibit, restrict, or otherwise
    preclude an Agency from conducting training bearing directly upon the
    performance of official duties.
    ---------------------------------------------------------------------------
        To what extent did the General Services Administration (GSA) take
    this funding limitation into account in planning the Western Region
    Conference (WRC) for 2010, with respect to ensuring that training met
    identified needs for knowledge, skills, and abilities bearing directly
    upon the performance of official duties?
        Answer. GSA is aware of funding limitations listed in the Financial
    Services and General Government appropriations bill which outlines how
    funds can be expended for training. In light of what happened at the
    2010 WRC, Acting Administrator Daniel M. Tangherlini has taken a number
    of steps to ensure that training addresses identified needs for
    knowledge, skills, and abilities that are directly related to the
    performance of official duties since beginning his tenure on April 3,
    2012. The individuals responsible for the 2010 WRC conference are no
    longer employed by GSA, and GSA does not know whether or to what extent
    these limitations were taken into account.
        GSA has consolidated conference oversight in the Office of
    Administrative Services (OAS), which is now responsible for:
      --Oversight of contracting for conference space, related activities,
            and amenities.
      --Review and approval of proposed conferences for relation to GSA
            mission.
      --Review and approval of any awards ceremonies where food is provided
            by the GSA.
      --Federal Government.
      --Review and approval of conference budgets as well as changes to
            those budgets.
      --Oversight and coordination with GSA conference/event planners and
            contracting officers on conference planning.
      --Review of travel and accommodations related to conference planning
            and execution.
      --Handling of procurement for all internal GSA conferences.
      --Development of mandatory annual training for all employees
            regarding conference planning and attendance.
        Additionally, we have cancelled the 2012 WRC as well as a number of
    other conferences that only or primarily involved internal staff,
    saving taxpayers $995,686.

              GENERAL SERVICES ADMINISTRATION'S CORRECTIVE ACTIONS

        Question. On April 2, 2010, then Administrator Martha Johnson
    issued her response to the Inspector General's (OIG) February 12, 2010
    draft ``Management Deficiency Report.'' (As part of that response,
    Martha Johnson states how on August 9, 2011, she established OAS to
    provide greater oversight and accountability for all administrative
    functions of the agency.) How long do you expect it will take for GSA
    to determine whether it can recover funds improperly expended for
    nonemployee meals?
        Answer. We have formally initiated collection actions for some of
    the improper expenses incurred at the WRC, including the cost of food
    provided during in-room parties. We continue to review the invoices and
    records of the conference to determine whether additional actions are
    appropriate. GSA is required to conduct debt collection in accordance
    with the Debt Collection Improvement Act and 41 CFR parts 105-55 and
    105-56. These authorities require us to give individuals a minimum of
    30 days to examine documents and the right to request hearings
    regarding GSA's claims. If hearings are requested, it could be several
    months before the process is complete, and GSA is able to recover
    funds.
        Question. How long do you expect it will take the Senior
    Procurement Executive to determine whether any of the payment to Royal
    Productions (the conference A/V firm) can be recouped as a result of
    double-payment of the lodging charges?
        Answer. Royal Productions has already reimbursed GSA for lodging
    charges by check for $1,962 on April 17, 2012.
        Question. What are the procedures and processes that are underway
    internally within GSA to address disciplinary action against the 10
    officials that were placed on administrative leave following the
    publication of the OIG's report?
        Answer. Requirements for taking an adverse action against an
    employee are outlined in 5 CFR part 752, to which GSA is adhering. GSA
    placed individuals on paid administrative leave while the agency has
    been conducting internal reviews and following specified processes.
    Disciplinary actions have been proposed and employees have due process
    rights under applicable statutes and regulations.
        Question. When do you expect the new OAS to have fully functioning
    oversight of contracting for conference planning?
        Answer. Fully functioning oversight by OAS began as of April 15,
    2012.

                              IMPROPER CONTRACTING

        Question. What system or processes are currently in place to ensure
    that required contract terms are expressly included in documents
    executed by GSA?
        Answer. GSA currently uses two primary systems to ensure that
    required terms are included in its contracts. The Federal Acquisition
    Service uses the Solicitation Writing System to automatically insert
    required contract clauses in its Multiple Awards Schedules Program.
    GSA's Public Buildings Service (PBS) uses an acquisition system called
    Comprizon, in which contract clauses are added manually, using existing
    clause databases and templates. Comprizon is expected to be replaced by
    a new acquisition system starting in the second quarter of fiscal year
    2013. The new system will have automatic clause insertion capability
    and, as a result, will better ensure that PBS contracts contain all
    required clauses and provisions. The clauses and provisions will be
    maintained in the system to ensure that they are current at the time
    the solicitation is issued.
        Question. As you evaluate the omission of mandatory contract
    clauses, would a spot review in the approval chain or other checklist
    help flag this to avoid future incidents of this nature?
        Answer. Yes, spot reviews and checklists would serve to flag
    incidents. Moving forward, GSA will enhance information technology (IT)
    system capabilities to better manage the contract clause process. GSA
    is set to test a Web-based clause engine already developed by the
    Department of Defense's (DOD) Defense Procurement and Acquisition
    Policy organization. The Clause Logic Service is a centralized tool
    that will enable increased efficiency, consistency, and accuracy of
    clause selection in contracts. The use of this system will alleviate
    the need to develop and maintain similar systems for each service and/
    or office. The system will automatically include clauses and provisions
    in contract documents based on their particular prescriptions, and
    input from the contracting officer on contract attributes. The
    application of this system will reduce risk to the Government by
    ensuring all applicable clauses are included in each contract. GSA will
    work with DOD to add GSA-specific clauses to Clause Logic and commence
    system testing of the Graphic User Interface feature in October 2012.
    In the interim, GSA will take steps to strengthen management review of
    acquisitions to include a focus on contract clauses.

                          LOST CONFERENCE SURVEY FORMS

        Question. In the investigative interviews conducted by agents of
    the OIG, it is disclosed that the conference survey forms completed by
    the attendees at the final general session at the 2010 WRC to be boxed
    and shipped back for review cannot be accounted for, have never been
    found, and are apparently declared ``lost''. What procedures are in
    place to prevent future situations where valuable information including
    training evaluations can be safeguarded from loss?
        In general, GSA's National Records Program (NRP) establishes
    procedures, from a recordkeeping perspective, to safeguard agency
    information. Record maintenance and disposition procedures are
    documented in GSA Order CIO P 1820.1 (June 8, 2007). Within that
    directive, several key requirements for the successful execution of
    GSA's records program include:
      --Each Service and Staff Office (SSO) and each region is responsible
            for implementing and operating an effective records management
            program.
      --Heads of SSOs and Regional Administrators must designate a
            qualified records officer to operate the records management
            program within their area of jurisdiction.
      --Records officers are responsible for ensuring proper records
            maintenance and disposition within their program and for
            training, or arranging training for, associates. GSA's National
            Records Officer is responsible for planning, developing,
            administering, and providing oversight of records management
            agency-wide.
        During approximately the past 18 months, and continuing today, GSA
    is on a path to improving our NRP. Specifically, GSA is currently:
      --Modernizing our records management policies by updating them to
            take advantage of National Archives and Record Administration
            (NARA) bulletins and incorporating cloud computing.
      --Updating GSA's records schedules to take advantage of the NARA
            general records schedules and GSA's new cloud-based
            applications.
      --Rebuilding our records management program infrastructure.
      --Supporting GSA's increased usage of electronic documents.
        To accomplish these goals, GSA has:
      --Contracted with the NARA for expert assistance;
      --Requested all SSOs and regions ensure proper personnel are placed
            in Records Officer roles; and
      --Contracted with the Government Printing Office for digitization
            support to facilitate GSA's move to increased use of electronic
            documents.
        GSA understands the need for safeguarding agency records and
    information from improper destruction and loss. In addition to the
    remedial steps noted above, GSA conducts annual records officer
    training. GSA also conducts records management training for employees
    online at GSA Online University. GSA's goal this year is for all
    employees to have taken this training by September 30, 2012.

                               INTERNS CONFERENCE

        Question. What was the purpose of the conference held near Palm
    Springs for interns?
        Answer. GSA has determined that the conference for interns that was
    planned by then Acting Regional Commissioner Jeff Neely does not
    reflect the current priorities for GSA. Mr. Neely is no longer employed
    as GSA and the agency does not know what his purpose was.
        Question. Why would an off-site conference be held for interns?
        Answer. The conference was planned by then Acting Regional
    Commissioner Jeff Neely and does not reflect the current goals and
    priorities for GSA. As previously stated, Mr. Neely is no longer
    employed by GSA and the agency does not know what his purpose was. As a
    part of the Acting Administrator's top-to-bottom review of GSA
    operations, we concluded that all upcoming conferences should be
    reviewed in light of new controls over conferences and travel. Many
    conferences and meetings were cancelled as part of this review. All
    upcoming conferences must meet the new requirements which became
    effective on April 15, 2012.
        Question. Did the Region 9 Commissioner make that decision?
        Answer. Yes. The then Acting Region 9 Commissioner, Jeff Neely,
    made the decision to have the conference.
        Question. Have there been intern conferences before?
        Answer. To the best of our knowledge after a review of our records
    we have not found any evidence of other intern conferences in region 9
    or any other region or GSA central office.

           REGION 9 COMMISSIONER--HISTORY OF EXCESSIVE EXPENDITURES?

        Question. In one of the many documents from the OIG provided to the
    subcommittee, a special agent of the OIG asserts that the Region 9
    Commissioner's travel for almost 5 years is almost $250,000. What
    should the budget be for a regional commissioner for 5 years?
        It appears there may have been additional examples of region 9
    excessive expenditures:
      --``Interns Conference'' in Palm Springs at a cost of $60,000;
      --35 off-site visits conducted in 2010;
      --Episodes of lengthy travel while minimal work conducted (e.g., in
            connection with a ribbon-cutting and site visits); and
      --Spouse attended a GSA conference with registration paid by GSA.
        Answer. PBS headquarters budget office provides a funding
    limitation to each region for its building operations and maintenance
    budget. Within that amount, regional management makes decisions about
    funding priorities within the region, including travel and other budget
    items. Although the regions and PBS headquarters offices were issued
    targets for travel obligations starting in fiscal year 2011 in response
    to Executive Order 13589 ``Promoting Efficient Spending'', PBS does not
    set specific travel budgets for each office of the Regional
    Commissioners.
        The amount of necessary travel for a Regional Commissioner during
    the last 5 years would be dependent on various factors, including:
      --geographic composition of the specific region;
      --the number and type of construction or major leasing projects;
      --the number and type of initiatives or issues with customer
            agencies;
      --responsibilities with national initiatives or teams; and
      --the number of management meetings that they attended.
        Question. Apparently, the Chief Financial Officer (CFO) for PBS did
    not review the region's expenditures prior to expenditure. Which GSA
    official(s) should and will be responsible for catching excessive
    expenditures like this in the future?
        Answer. The GSA CFO is responsible for the expenditure of all
    funds, including travel costs, for PBS. In addition, the Acting GSA
    Administrator instituted several layers of review and approval for
    conferences and travel, including Head of Services or Staff Offices,
    Regional Administrators, Regional Commissioners, the Chief
    Administrative Services Officer, and CFO. Travel by a Regional
    Commissioner for normal business travel would be approved by the
    Regional Administrator.
        Question. How are we going to ensure that this never happens again?
        Answer. GSA is realigning financial overview and operations from
    PBS to the Office of the GSA CFO. GSA is working on the formal
    restructuring of this organization to achieve the additional levels of
    control to ensure that there is more oversight over budgeting and
    expenditures and prevent this type of spending.
        One of the first changes we made was to implement measures to catch
    excessive spending. Importantly, the Acting Administrator consolidated
    all PBS financial operations into GSA's Office of the Chief Financial
    Officer, which will ensure that there is more oversight over budgeting
    and expenditures. As soon as feasible, all GSA financial operations
    will be consolidated into the CFO's office.
        As of April 15, 2012, the Acting Administrator implemented new
    controls over travel and conferences. Under this policy, all travel is
    suspended unless it meets certain criteria. Only travel for designated
    GSA operational mission-related activities is permitted upon approval
    of the Regional Administrator or other approving office. Travel may
    also occur for an approved conference. Travel may be incurred for a
    routine management meeting upon waiver by the Deputy Administrator or
    Acting Administrator. Travel must be justified and approved, prior to
    the departure date, by the Head of Service or Staff Office. In
    addition, conferences must be approved by the Head of Service or Staff
    Office, Regional Administrator, the Chief Administrative Services
    Officer, and the CFO before any procurement activity takes place or
    cost is incurred by the organization sponsoring the event.
        GSA continues to work on our top-to-bottom review of its
    operations. As GSA goes through this review, it is deliberately looking
    for additional control mechanisms to implement so it can catch
    excessive spending, save taxpayer dollars, and ensure the most
    efficient delivery of services to GSA's customer agencies.

                PROBLEMS AT PUBLIC BUILDINGS SERVICE--SYSTEMIC?

        Question. Clearly, there has there been a culture of excessiveness
    and lax accountability within PBS, region 9, and perhaps even in some
    of the other regions. To what degree might this be a problem in other
    parts of GSA?
        Answer. GSA is committed to renewing our focus on our core mission.
    GSA currently is conducting a top-to-bottom review of the agency and is
    pursuing every initiative necessary to ensure this type of excessive
    spending does not occur in GSA. In the meantime we have taken the
    following steps to improve internal controls and oversight to ensure
    this type of excessive spending and lax accountability never happens
    again:
      --Established an OAS responsible for oversight and accountability of
            all administrative functions;
      --Require mandatory annual training for all employees regarding
            conference planning and attendance;
      --Canceled or reduced 35 conferences;
      --Suspended internal travel unless it is mission-critical;
      --Begun to move PBS regional budget under the direct authority of
            GSA's CFO;
      --Implemented new controls over travel and conferences as described
            above in response to question 14 (How are we going to ensure
            that this never happens again?); and
      --Realigned reporting lines for Regional Administrators directly to
            Deputy Administrator.
        In addition, GSA's Acting Administrator Daniel M. Tangherlini made
    it one of his priorities to ensure that there is a culture of integrity
    and responsibility at all levels of the agency and that any
    questionable activity be reported, investigated, and any appropriate
    disciplinary action taken. In a joint notice signed by himself and GSA
    Inspector General Brian D. Miller on April 11, 2012, he instructed all
    GSA employees that if they suspect any wrongdoing by any employee of
    the agency, they discuss it with their colleagues, supervisors, or
    higher levels in the organization. In addition, the notice stated that
    GSA will not tolerate retaliatory actions against anyone who raises
    concerns.

      EFFECT OF REDUCED SPENDING ON THE GENERAL SERVICES ADMINISTRATION'S
            ABILITY TO PAY BILLS AND THE EFFECT ON FEDERAL AGENCIES

        Question. In recent years, the amount of funding that the Congress
    has allowed GSA to spend (particularly with regard to amounts allowed
    from the Federal Buildings Fund [FBF]) has been drastically reduced
    from the budget requests. How have you been able to pay your
    contractually obligated bills such as rental of space and building
    operations, and what effect has this had on building projects, and
    Federal agencies?
        Answer. The administration directed agencies to make additional
    reductions in travel, administrative support, and contracts. To meet
    the goals of this Administrative Cost Savings Initiative GSA PBS began
    making reductions in fiscal year 2011 and continues to do so into
    fiscal year 2012. These efforts have made it possible for GSA to
    reallocate funds within our Building Operations account to maintain all
    essential services at current levels and avoid reductions to the number
    of Federal employees.
        In addition, through the joint efforts of GSA and our customer
    agencies to focus on consolidating current occupancies and curtail new
    space and expansions, where possible, GSA has been able to operate the
    Rental of Space program at the appropriated funding level.

                          EFFECT ON BUILDING PROJECTS

        While GSA has been able to pay our contractual obligations, the
    reduced funding in our Building Operations account has curbed our
    ability to make necessary and prudent investments in our buildings.
    Reduced funding in both the Building Operations and Minor Repairs and
    Alterations accounts have limited our ability to lead efforts to reduce
    space, which requires up-front costs associated with planning and
    delivering the optimal portfolio plan.
        The reduced funding in our capital program limits our ability to
    build out vacant or underutilized Federal space that could be used to
    consolidate agencies, assist agencies in reducing their overall space
    utilization, reduce the amount of costly leased space, and maximize the
    efficiency of our existing Federal assets. Reduced funding for repairs
    and alterations could also result in Federal agencies needing to move
    out of Federal buildings if they are unable to carry out their mission
    due to the repair and reinvestment needs of that building.

                           EFFECT ON FEDERAL AGENCIES

        Consecutive years of reduced levels of funding prevent GSA from
    reducing repair and alteration liabilities and could lead to major
    equipment failures and a need to conduct emergency repairs and
    replacements, which cost more than conducting ongoing repairs and
    maintenance. Emergency repair and alterations cost more than conducting
    ongoing repairs and maintenance. This could disrupt customer agency
    operations and potentially impede them from carrying out their
    missions.
        GSA's fiscal year 2012 Major Capital Program request included
    repairs at seven Federal buildings throughout the United States and was
    submitted in support of the operations and missions of several customer
    agencies including the operations for the Headquarter Offices for the
    Departments of Agriculture, State and the Interior, the Veterans
    Benefits Administration, the Federal Bureau of Investigation, and
    numerous other Federal agencies. The scope of work involved in these
    projects included space consolidations and interior construction,
    exterior renovations, roof replacements, mechanical, electrical,
    heating, ventilation, and air conditioning systems (HVAC) repairs, fire
    and life-safety upgrades, entrance screening security upgrades, and
    hazardous materials abatement. In addition to the impact to our minor
    and major building repairs and alterations, GSA is unable to undertake
    major life-safety and fire protection, energy and water conservation,
    and wellness projects in Federal buildings throughout the country.
        Finally, GSA will not be able to provide sufficient alterations to
    owned space to meet agency changing requirements; facilitate
    consolidation efforts on behalf of our customer agencies to reduce
    vacant Federal space, and reduce leased space needs, which is more
    expensive to the taxpayer.
        Question. What will be the effect, if this trend continues for
    long?
        Answer. Consecutive years of reduced levels of funding will prevent
    GSA from being able to fully fund those activities that are essential
    to our mission and to improving our financial performance. If this
    trend continues GSA will be unable to make needed repairs and
    alterations, which can lead to major equipment failures and a need to
    conduct emergency repairs and replacements, at a greater cost to the
    taxpayer than conducting ongoing repairs and maintenance. Making
    necessary investments in facilities extends the life of the equipment
    and buildings, while also improving overall customer satisfaction.
        The reductions in funding in recent years for both new construction
    and modernization projects prevents the Federal Government from being
    able to take advantage of the favorable pricing conditions of the
    current market. This will lead to increased costs as agencies are
    forced to remain in more costly leased space and higher costs when
    modernization projects are ultimately executed in the out years.
        In addition, GSA's inability to undertake construction and
    expansion projects at our land ports of entry (LPOE) is a critical
    concern and impacts both pedestrian and vehicular traffic at our
    Nation's borders. A majority of the Nation's LPOE facilities currently
    in operation were designed to accomplish legacy missions from decades
    ago and require significant refurbishment or replacement to function
    effectively. Some of these facilities were built more than 70 years ago
    and cannot fulfill today's increased traffic demands and additional
    safety requirements resulting from the 1994 North American Free Trade
    Agreement, the increasing security requirements after September 11,
    2001, and the increasing need for 24-hour operations.
        If this trend continues it will greatly affect GSA's ability to
    fund our Building Operations allocation. We need to invest in energy
    studies and equipment upgrades, such as advanced meters in order to
    identify ways to save utility costs and implement changes that will pay
    for themselves through utility savings. While travel costs have been
    greatly reduced, there is still a need for mission-critical travel,
    including that for inspectors to visit construction and repair sites to
    ensure that contractors are complying with contracts and regulations;
    inadequate oversight could lead to waste, fraud, and abuse. In
    addition, it is necessary for GSA to train our personnel in order to
    ensure all staff remains current on applicable laws, regulations, and
    policies.
        Substantial reductions in funding could also impact GSA's ability
    to meet contractual obligations in our Rental of Space account, of
    which approximately 98 percent is associated with existing contractual
    obligations for current leased space that require payment on a monthly
    basis.
        Question. What has GSA done to help lower costs?
        Answer. GSA is closely managing and monitoring spending with the
    goal of increasing efficiency and reducing costs.
        PBS has already achieved significant reductions in travel spending
    in fiscal year 2011, meeting a GSA-established 25-percent travel
    reduction goal based on the fiscal year 2010 level. GSA will continue
    to reduce travel in fiscal year 2012 with a cumulative reduction of 30
    percent in fiscal year 2013, in accordance with Office of Management
    and Budget (OMB) Memorandum M-12-12. The reductions have been and will
    continue to be achieved through implementing new GSA-wide travel
    approval procedures, leveraging technology where it makes sense, and
    limiting travel to that which is necessary to support of mission-
    critical needs of the agency and customer needs.
        PBS has taken an active role in reducing management support
    contracts. In early fiscal year 2012, PBS issued both guidance and
    reduction targets to the regions and units within the headquarters, and
    we will continue to monitor the progress toward meeting those targets.
    In addition, the PBS IT Governance Board currently reviews all IT
    expenses to ensure that they are meeting the PBS mission in the most
    cost-efficient manner. Systems reviews have targeted systems for
    migration or elimination as a means of streamlining business
    information and reducing operations and maintenance costs.
        PBS is looking at cost-savings measures in cleaning, maintenance,
    and utilities. For cleaning and maintenance, we are reviewing and re-
    evaluating current contract requirements and models to gain
    efficiencies and drive costs down. PBS is engaging industry partners
    and the vendor community to calibrate PBS practices against those used
    by private industry. We are placing a stronger emphasis on operational
    audits to ensure that buildings are running at optimum efficiency and
    that contract services are scoped properly.
        PBS is also achieving significant savings in its utility and
    operational budgets through energy and water reductions. Energy
    Independence and Security Act 2007 requires Federal agencies to reduce
    energy consumption by 3 percent per year in British Thermal Units (Btu)
    per gross square foot (gsf) compared to a baseline of fiscal year 2003,
    to reach a total of 30-percent reduction in fiscal year 2015.
    Additionally agencies are required under Executive Order 13423 to
    reduce water consumption on a gallon per gsf basis by 2-percent per
    year over a baseline of fiscal year 2007 to achieve an end result of
    16-percent reduction by 2015. Reducing agency's energy by the mandated
    3-percent Btu/gsf per year would result in approximately 425,230 mmBtus
    and $11.1 million savings annually. Additionally for each 2-percent
    reduction in gallons/gsf in water consumption, GSA will save an
    estimated $440,000 and 49.6 million gallons of water annually.
        GSA requested $40 million for Energy and Water line item project
    funding in the fiscal year 2012 budget request. If fully funded, GSA
    would realize an estimated annual savings of 400,000 million Btus and
    $6.4 million. The average payback for these projects is 6.25 years.
        PBS is also achieving savings through the energy reverse auction
    program, which provides a framework and a mechanism to assist more than
    300 Federal facilities to purchase natural gas. This real-time auction
    process allows PBS to receive bids for multiple-term lengths and
    pricing products in a matter of minutes as each auction only takes 5
    minutes in total while providing significant reductions in costs from
    the 2003 baseline. Based on the auctions held to date, GSA estimates
    $9.3 million in annual cost reductions comparing old contract rates to
    new contract rates, and $17 million over the full term of these
    contracts. From a percentage perspective, rates have decreased by 25
    percent comparing the old contract rate of $5.85 per decatherm (dth) to
    $4.40 per dth for fiscal year 2012 awards.
        Question. How does GSA determine agencies' rental costs?
        Answer. GSA's Fair Annual Rent (FAR) process establishes the rates
    Federal tenants pay for occupancy in federally owned (GSA) space. In
    federally owned space, rent is based on a rent appraisal specific to
    the building
        FAR appraisals are developed by independent professional appraisers
    with local market expertise, based on FAR appraisal instructions
    provided by GSA. They are intended to reflect rental rates that would
    be realized for occupancy in GSA buildings, from a private sector
    perspective, and account for characteristics of the building and its
    market. As markets are dynamic, GSA has the rental rates in every
    building appraised at least every 5 years. Every appraisal, developed
    and reported by independent professionals with local market expertise,
    is subject to a thorough, four-level review process, involving Regional
    and Central Office appraisers.
        For leased space, rent is a pass-through of the underlying lease
    contract rent, plus any standard operating costs not performed through
    the lease, the PBS lease fee (7 percent of the lease contract), and
    security charges.
        Question. I am hearing from some of the other agencies funded by
    this subcommittee, that they are being asked by GSA to ``improve
    utilization of their space'' or to reduce their rental space. But even
    reducing space has costs associated with it. Would you please discuss
    how improving space utilization can have costs?
        Answer. Improving utilization requires agencies to reduce their
    real estate footprint and possibly move to a mobile workplace
    environment, which necessitates up-front investments in up-to-date
    information technology, furniture solutions, and retrofitting of
    current Federal space at times. The entire Federal community must find
    ways to finance the investments needed to improve utilization and
    produce long-term savings.

          REDUCED FEDERAL BUILDING CONSTRUCTION AND EFFECT ON AGENCIES

        Question. For years, typically in a given year, we allowed GSA to
    spend about $700 to $900 million from the FBF in order to construct
    buildings to house Federal agencies. In the past 2 years, that funding
    has been drastically reduced, to a new low last year of only $50
    million. Will this result in agencies being required to move to leased
    space, which is more expensive for the Federal Government, and is
    contrary to OMB policy and Government Accountability Office (GAO)
    recommendations?
        Answer. In markets where no other suitable federally owned space
    exists and a Federal agency has a long-term space requirement, reduced
    funding in our construction budget could lead to increased occupancy of
    leased space, often times at a higher cost to the taxpayer.
        The reduction in repair and alterations funding also limits our
    ability to build out vacant or underutilized Federal space that could
    be used to consolidate agencies out of costly leased space, assist
    agencies in reducing their overall space utilization, and maximize the
    efficiency of existing Federal assets.
        Question. Aren't we being short-sighted by not doing Federal
    construction since the market is competitive now, resulting in lower
    costs than at other times, and projects will only get more expensive in
    the future?
        Answer. It always is preferable to house our tenants in federally
    owned space for long-term housing needs, as it is the best value
    overall to the Government and the taxpayer.
        GSA has realized significant savings during this competitive
    bidding climate, particularly through the American Recovery and
    Reinvestment Act (ARRA), which allowed GSA to fund needed new
    construction and renovation projects at a time when construction costs
    were at an all-time low. Building materials costs were rapidly
    escalating when GSA began identifying projects for ARRA funding.
    However, market conditions changed and GSA realized lower construction
    bid estimates, resulting in approximately $565 million in immediate
    savings from awarding contracts in this bidding climate. GSA's
    preliminary analysis reports that larger projects were awarded at 8-10-
    percent less than estimated cost.
        With the construction market still favorable, GSA could award
    additional modernization and new construction projects previously
    approved for design by the Congress, if construction funding became
    available. These projects are either fully or partially designed and
    could be procured for construction quickly. The work would support
    specific systems and modern workplace needs while creating new and
    durable jobs in a hard-hit sector of the economy.
        Question. Apart from some of the giant Federal department
    consolidations (such as the Department of Homeland Security's (DHS) St.
    Elizabeths campus and the Federal Drug Administration's White Oak
    campus), some of the larger Federal building construction projects have
    been courthouses. In recent years, through design guide requirements
    and courtroom-sharing policies, courthouse construction projects are
    now smaller. How else have you been working with the courts to reduce
    costs?
        Answer. GSA and the Administrative Office of the U.S. Courts
    (AOUSC) have taken numerous steps to reduce courthouse costs. After the
    Judiciary declared a moratorium on courthouse construction in 2004, the
    AOUSC, with GSA's participation, began an Asset Planning Process to re-
    examine all of the projects that previously were on the 5-year plan.
    The new process redefined the selection criteria used by the Courts to
    select projects for inclusion in the 5-year plan and has eliminated
    many projects that previously were on the 5-year plan for new
    construction.
        GSA and the AOUSC are reviewing projects to reduce scope and costs
    and discussing other ways to save on courthouse construction costs,
    including reducing the size of all projects currently in design or
    planned for design in the Courts' 5-year plan by eliminating courtrooms
    and chambers for future projected judges. Courtroom sharing among
    senior district, magistrate, and bankruptcy judges has dramatically
    reduced the cost of new courthouses. In addition, the AOUSC is
    considering limiting raised access flooring to the well of the
    courtroom, and introduction of flexible office environments where
    appropriate.

          EFFECTS OF SLOWING DOWN THE DEPARTMENT OF HOMELAND SECURITY
               HEADQUARTERS CONSTRUCTION PROJECT (ST. ELIZABETHS)

        Question. The consolidation of the DHS headquarters at St.
    Elizabeths has been the highest-priority construction project of this
    and the previous administration's, and is a $3 billion project that
    will consolidate DHS offices in the Washington area, many of which are
    in leased space.
        Construction began in July 2009, and typically, construction
    funding requests amounted to a significant investment. Now, this
    project is limping along, due to the reduced amount of funding the
    Congress is able to provide for GSA construction due to funding
    constraints. What are the effects of slowing down this huge project?
        Answer. Completion of the consolidated DHS headquarters project was
    projected for 2016, but curtailed funding of both GSA and DHS has
    delayed completion by at least 5 years. The Congress has appropriated
    $1.36 billion to the project through fiscal year 2012, and GSA and DHS
    will seek remaining appropriations in the coming fiscal years.
        GSA and DHS are working collaboratively to update the original
    project plan to reflect appropriations to date and the impact on cost
    and schedule for completion. GSA anticipates finalizing the revised
    project plans this summer and will provide the Congress with the
    revised plan once finalized.
        The effects of the schedule slowdown include increases in total
    project cost due to escalation, lack of project integration, inability
    to take advantage of bulk purchases, and continued lease payments in
    high rental rate submarkets in Washington, DC. For example, there is
    approximately 1.5 million square feet of leased space in the East End
    and another 1.9 million square feet in southwest D.C., two submarkets
    with the highest average rental rates in the Washington, DC area.
        The slowdown also affects DHS housing requirements. The DHS
    National Capital Region Housing Master Plan and the DHS Consolidation
    Headquarters Collocation Plan provide the mission and operational needs
    for headquarters campus. DHS is better able to answer questions about
    specific implications for DHS's mission.
        Question. What changes are you considering to the project as a
    result of construction funding levels?
        Answer. Due to the reduced fiscal year 2011 and fiscal year 2012
    funding levels for St. Elizabeths, GSA and DHS are working to finalize
    a revised project schedule. GSA and DHS currently are evaluating the
    overall consolidation program, including mission support within the
    national capital region and St. Elizabeths, in order to more
    efficiently utilize the space at St. Elizabeths.

                       DENVER FEDERAL CENTER REMEDIATION

        Question. Most of the buildings on the Federal Center were
    constructed in 1941 for the Denver Ordnance Plant that produced
    ammunition in support of World War II. The site has since been used by
    more than 27 different Federal agencies for more than 67 years.
        Since fiscal year 2004, GSA has received $39 million over 6 years
    in requested construction funds for remediation of the Denver Federal
    Center, a 640-acre secured Federal facility located west of Denver in
    the city of Lakewood, Colorado. GSA has identified more than 600 areas
    on the site that could be impacted by hazardous materials, so the
    Federal Government must conduct remediation under three Colorado State
    consent orders. Is GSA on track to meet the requirements of the consent
    orders and what will happen if GSA does not receive the funding?
        Answer. The $3 million identified in the fiscal year 2012 the
    reprogramming request that accompanied the fiscal year 2012 spend plan
    submitted to the Congress was adequate for GSA to continue to comply
    with the consent decree through fiscal year 2013 and until such time
    that future funds can be secured. Based on the consent order, no
    punitive action will occur if GSA requests funding from the Congress.
    However, if GSA cannot demonstrate that funding has been requested, the
    Colorado Department of Public Health and Safety can fine GSA $25,000
    per day per incident under the Resource Conservation and Recovery Act.
        Question. When do you expect the project to be finished?
        Answer. The original project schedule was fiscal year 2008 through
    fiscal year 2012. This schedule assumed all fiscal year 2012 funds
    would be provided in full. Due to the limited availability of funding
    in fiscal year 2012, GSA determined that a lower level of funding could
    be dedicated to continue the remediation and still adhere to the terms
    of the consent decress. GSA will need to request additional funds in a
    future fiscal year to complete the remediation efforts. We anticipate
    completion of the project 2 years after receipt of necessary funding,
    assuming that no new, unanticipated issues are discovered on-site
    during excavation for ongoing remediation.
        It is important to note that as investigation and remediation
    continue, the estimate of future needs may change as we may identify
    better defined areas requiring remediation as well as the volume of
    waste and/or contaminated soil.

                        REDUCED FEDERAL BUILDING REPAIRS

        Question. Prior to the enactment of ARRA, GSA had a backlog of $8.4
    billion in buildings needing repairs or alterations. Through ARRA, GSA
    has been able to reduce that backlog by $1.4 billion, while improving
    the energy-efficiency in 257 of the Nation's buildings, and creating
    60,326 jobs. However, for the past 3 years, we have not been able to
    meet the requested levels for repair projects. In fact, for the past 2
    years, no funding has been allowed for major repair projects. How has
    that affected the backlog and what is the effect on the health, safety,
    and mission of Federal agencies?
        Answer. Prior to the enactment of ARRA, GSA had identified $8.4
    billion in its 10-year investment liability, which is the funding GSA
    should invest in their buildings over the next 10 years. GSA's
    financial statements did not record a deferred maintenance backlog. In
    fiscal year 2012, GSA did not have the funds for major modernizations
    as we needed the allocated funds for minor repairs and alterations in
    order to maintain our buildings at a basic level. Consecutive years of
    reduced levels of funding prevent GSA from being able to reduce our
    current repairs and alterations investment liability of an estimated
    $4.7 billion, which will continue to increase without adequate funding.
    GAO has issued audit reports discussing the impacts and concerns over
    this large backlog estimate. While ARRA has helped, the pool of these
    needed repairs is still significant with an average age of buildings
    totaling 47 years. The inability to fund these needed repairs will lead
    to major equipment failures and a need to conduct emergency repairs and
    replacements, costing taxpayers more than conducting ongoing repairs
    and maintenance. These emergency repairs could disrupt customer
    operations and potentially impede them from carrying out their mission.
        Question. What are some of the critical repair projects not able to
    be addressed?
        Answer. GSA's nonprospectus basic repairs and alterations program
    funds alterations in 1,599 Federal buildings nationwide. Enacted
    budgets cut GSA's minor repair and alterations budget request by nearly
    20 percent in fiscal year 2011 and approximately 35 percent in fiscal
    year 2012, limiting our ability to do necessary upkeep to maintain the
    condition of GSA PBS's portfolio.
        GSA's fiscal year 2011 Major Capital Program request included
    repairs at eight Federal buildings throughout the United States and was
    submitted in support of the operations and missions of such Federal
    agencies as the Department of State, the Internal Revenue Service, the
    Social Security Administration, the U.S. Courts, Federal Bureau of
    Investigation (FBI), and Immigration and Customs Enforcement. The scope
    of work for these projects included space consolidations and interior
    construction; exterior renovations; roof replacements; repairs to
    mechanical, electrical, and HVAC; fire and life-safety upgrades;
    entrance screening security upgrades; and abatement of hazardous
    materials.
        In addition to preventing GSA from making minor and major building
    repairs and alterations, these cuts affected our ability to undertake
    major life-safety and fire protection, energy and water conservation,
    and wellness projects in Federal buildings throughout the country.
        For example, the proposed but unfunded fiscal year 2012 project at
    the Major General Emmett J. Bean Federal Center in Indianapolis,
    Indiana provides for security upgrades to bring the complex into
    compliance with the DOD's Unified Facilities Criteria standards which
    is necessary in order for DOD's continued occupancy of the Federal
    Complex. The project includes important security features such as the
    introduction of a setback, the installation of blast-resistant windows,
    the relocation of the loading dock and mailroom, and protection of air
    intakes. Additionally, the project would remedy drainage deficiencies
    that plague the complex through the installation of an underground
    storm water drainage system. GSA has utilized stop-gap measures to
    address the problem, but prospectus level funding is required to
    resolve the root cause of the problem. This project is critical to
    ensure the Bean Federal Center remains occupied by DOD as a safe, well
    maintained asset within the GSA portfolio.

                    GSA'S SPEND PLAN BASED ON ENACTED LEVELS
                            [In thousands of dollars]
    ------------------------------------------------------------------------
                                                President's
              Repair and alteration               budget       Enacted level
    ------------------------------------------------------------------------
    Nonprospectus basic repairs and                  335,297         271,724
     alterations............................
    Indianapolis, Indiana--Major General              65,813  ..............
     Emmett J. Bean Federal Center..........
    Van Nuys, California--James C. Corman             11,039  ..............
     Federal Building.......................
    New York, New York--Daniel Patrick                28,000           2,031
     Moynihan U.S. Courthouse \1\...........
    Richmond, California--Frank Hagel                113,620  ..............
     Federal Building.......................
    Washington, District of Columbia--West             6,245           6,245
     Wing Design Phase II...................
    Los Angeles, California--Federal                  51,217  ..............
     Building/Parking Garage [FBI]..........
    San Diego, California--Edward J.                  22,336  ..............
     Schwartz U.S. Courthouse and Federal
     Building [ICE].........................
    Washington, District of Columbia--E.              22,900  ..............
     Barrett Prettyman U.S. Courthouse......
    Energy and water retrofit and                     20,000  ..............
     conservation measures..................
    Fire Prevention Program.................          20,000  ..............
    Wellness and fitness program............           7,000  ..............
    Washington, District of Columbia--West    ..............          46,000
     Wing/East Wing Infrastructure Systems
     Replacement \2\........................
    NOA repairs and alterations.............         703,467         326,000
    ------------------------------------------------------------------------
    \1\ Design only
    \2\ Reprogrammed funds

        GSA's fiscal year 2012 Major Capital Program request included
    repairs at seven Federal buildings in support of operations and
    missions of the Department of Agriculture, the headquarters operations
    for the Departments of State and the Interior, the Veterans Benefit
    Administration, the FBI, and numerous other agencies. The scope of work
    for these projects included space consolidations and interior
    construction; exterior renovations; roof replacements; repairs to
    mechanical, electrical, and HVAC systems; fire and life-safety
    upgrades; entrance screening security upgrades; and abatement of
    hazardous materials.
        In addition to preventing GSA from making minor and major building
    repairs and alterations, these cuts affected our ability to undertake
    major life-safety and fire protection, energy and water conservation,
    and wellness projects in Federal buildings throughout the country.

              GSA'S FISCAL YEAR 2012 REPAIR AND ALTERATIONS PROGRAM
                            [In thousands of dollars]
    ------------------------------------------------------------------------
                                                President's
              Repair and alteration               budget       Enacted level
    ------------------------------------------------------------------------
    Non-Prospectus Basic Repairs and                 402,388         260,000
     Alterations............................
    Washington, District of Columbia--Main            50,400  ..............
     Interior Building......................
    Washington, District of Columbia--Harry           11,039  ..............
     S Truman Building......................
    Honolulu, Hawaii--Prince J. Kuhio                198,650  ..............
     Kalanianaole Federal Building and
     Courthouse.............................
    San Francisco, California--Phillip                49,900  ..............
     Burton FBI Consolidation...............
    Overland, Missouri--Prevedel Federal              24,386  ..............
     Building...............................
    Washington, District of Columbia--                17,000  ..............
     Eisenhower Executive Office Building
     Pennsylvania Avenue screening facility.
    Los Angeles, California--Federal                   9,478  ..............
     Building [ICE] Design..................
    Energy and water retrofit and                     40,000  ..............
     conservation measures..................
    Fire prevention program.................          15,000  ..............
    Wellness and fitness program............           7,000  ..............
    Judiciary capital security program......  ..............          20,000
    NOA repairs and alterations.............         868,902         280,000
    ------------------------------------------------------------------------

      PROPOSAL TO MOVE THE FEDERAL TRADE COMMISSION FROM ITS HEADQUARTERS
                                    BUILDING

        Question. H.R. 2844 would require GSA to transfer ownership of the
    current headquarters of Federal Trade Commission (FTC) to the National
    Gallery of Art. Please provide a status update on the condition of the
    FTC headquarters building, including the most recent upgrades and the
    cost of such upgrades. Please include specific detail on the following:
      --the electrical system;
      --the plumbing system;
      --the HVAC systems;
      --the roof;
      --the windows; and
      --any other items GSA deems critical for proper maintenance of the
            building.
        Answer. The administration opposes legislation that would require
    GSA to transfer ownership of the current headquarters of the FTC to the
    National Gallery of Art. The FTC headquarters is fully utilized and
    does not require significant renovation. Investment in FTC headquarters
    by both FTC and GSA has exceeded $30 million over the last decade. This
    work entailed capital improvements to the building such as a new roof,
    a new chiller plant, repairs to the air handling system, new security
    windows, a new energy management and control system, and upgrades to
    the building's fire alarm system. This also includes sizable
    information technology investments made by FTC in its data center and
    technology labs. Repairs to building plumbing and electrical systems
    have been minor.
        Question. Does GSA have any major projects on its 5-year
    maintenance and renovation schedule for FTC headquarters?
        Answer. GSA has no major projects on its 5-year maintenance and
    renovation schedule for FTC headquarters building.
        Question. Does the current FTC headquarters space fit the needs of
    FTC, now and in the future?
        Answer. Yes. FTC is very satisfied with their current headquarters
    space and it fits their requirements, including special space and
    hearing rooms. Currently, the building is in relatively good condition
    and is therefore not included in GSA's 5-year plan for renovation.
        Question. FTC Commissioners submitted unanimous testimony for the
    record stating that physically moving FTC headquarters operation would
    cost $70 to $83 million. Are these costs in line with typical moving
    costs for agencies? What other costs are associated with physically
    moving an agency?
        Answer. Based on FTC's requirements to relocate headquarters
    components and associated special space (including their data center,
    technology laboratories, and hearing rooms), these costs are within the
    average range for agency moving costs.
        The cost of physically moving an agency may include moving
    services, tenant fit-outs, furniture, fixtures and equipment,
    information technology, and telephone needs. If the agency is moving
    from federally owned to leased space, the rent revenue flows to a
    third-party lessor rather than another Government agency. Finally,
    there may be additional costs if the moving agency is displacing a
    current or intended occupant as a result of the move.
        Question. GAO, Congressional Budget Office, and OMB have found that
    it is more cost-effective to house agencies in federally owned space
    rather than leased space. Does GSA concur with this assessment?
        Answer. Yes. Ideally, GSA would use Federal construction to meet
    all long-term Federal agency space needs, as leasing is the most
    expensive form of space acquisition for long-term requirements. GSA
    relies on the FBF to operate, maintain, and reinvest in all of its
    owned assets in the Federal inventory, to meet all current lease
    commitments, and to fund the acquisition of new leased or owned assets.
    Funds to acquire new assets for emerging Federal agency space
    requirements are limited to the FBF resources that remain available
    after GSA meets all existing commitments for its owned and leased
    assets. The long-term cost advantages of ownership are preferable to
    leasing.
        Question. If the FTC headquarters building is given to the National
    Gallery of Art, is there vacant federally owned space for the FTC to
    occupy, or, would GSA be forced to move the agency into leased space?
    Would this impose an increased cost on the taxpayer?
        Answer. There is no vacant federally owned space available and
    suitable for housing FTC. In order to accommodate FTC in Federal space,
    another Federal agency would be forced to move out of the space, and
    this would be a significant increase in the cost to taxpayers.
        Question. Given these findings, what does GSA believe is the best
    use for the FTC headquarters building?
        Answer. GSA believes the taxpayer is best served by maintaining the
    FTC headquarters' current location. A forced move of FTC would increase
    the net amount of Government leased space and incur relocation costs
    and rent, both of which would occur if the building was given to a
    quasi-governmental entity such as the National Gallery of Art.
        Additionally, whenever a federally owned property is transferred to
    a quasi-Governmental entity, existing laws and regulations require that
    entity to compensate the Federal Government for the full value of the
    property involved. In this instance, the value of the FTC headquarters'
    current location is $92.8 million. Thus the Federal Government risks
    the potential loss of the building, plus relocation expenses and
    dislocation costs, if any.
        Given the overall negative impact to the American taxpayer, the
    administration opposes proposed legislation that would direct the
    transfer of the FTC headquarters.

             FISCAL YEAR 2013 BUDGET FOR THE FEDERAL BUILDINGS FUND

        Question. Your request for rental of space is a $338.4 million or a
    6.5-percent increase. What will you do if forced to be on a continuing
    resolution of significant duration?
        Answer. Typically, obligations for rental of space are higher in
    the second half of the fiscal year as leases are renewed. Over the last
    4 years, obligations through March have only amounted to 47.7 percent
    of the annual obligations. Unobligated balances and recoveries of prior
    year obligations, along with the timing of the obligations will allow
    the Rental of Space account to operate for several months while on a
    continuing resolution.
        Question. Last year, you requested almost $470 million for seven
    construction projects and this year, you are requesting $56 million for
    two acquisition (building purchase) projects. Does this represent a
    shift in your thinking?
        Answer. GSA has proposed a responsible budget reflective of the
    current budget climate. We are prioritizing our existing financial
    obligations and the most critical and exigent investment needs in our
    inventory. While there remain additional valuable investments in
    consolidations like the acquisition of the currently leased buildings
    in Martinsburg, West Virginia, and Riverdale, Maryland, we must
    acknowledge the reality of the budget climate.
        Question. How much funding do you expect to save with the
    acquisition of these buildings?
        Answer. Purchasing the two buildings at Martinsburg, West Virginia,
    and Riverdale, Maryland, will eliminate costly lease obligations and
    result in millions in out year cost avoidance to the Government. The
    purchase of Riverdale alone could save the Federal Government more than
    $10 million in annual rent. For Martinsburg, the Congress authorized
    the appropriations for acquisition, through an existing purchase
    option, of this building as part of the fiscal year 2011 Capital
    Investment and Leasing Program. GSA has continued to lease the building
    and since fiscal year 2011 has spent more than $6 million in rental
    payments. The current lease expires in 2015, and if it is allowed to
    expire GSA will lose the purchase option. If GSA is required to extend
    the lease versus purchasing the building it is anticipated that the
    rental rate for continued occupancy will be as much as $6 million, or
    approximately double the current rent rate.
        Question. In a departure from your typical requests for major
    Federal building repair projects, instead, this year you are requesting
    $123 million for ``Exigent Needs'' at 16 Federal buildings. Can you
    give us a few examples of the highest-priority and most-critical needs?
        Answer. GSA considers all of the projects requested in the fiscal
    year 2013 Exigent Needs program to be of high priority and a critical
    need. GSA is requesting a limited amount of funding to support exigent
    need projects in 20 Federal buildings to repair and update critical
    building and safety systems including elevators; fire and life-safety,
    electrical, and heating and ventilation systems; and to repair
    structural deficiencies.
        The program addresses such essential work items as fire alarm
    system replacements on antiquated and irreparable systems that could
    jeopardize the safety of occupants and the building if left
    unaddressed. The program also intends to secure the facade and parking
    structure at two facilities that could pose hazards to building
    occupants and the general public if unrepaired, and remove hazardous
    materials at two other locations. Upgrades and repairs to electrical
    and elevator systems are designed to ensure continued operations of
    several Government-owned facilities and prevent disruption to agency
    missions and service to the American taxpayer.
        Question. Do you expect that these types of acquisition and repair
    projects will become a trend in the short-term (in lieu of construction
    and major repair projects)?
        Answer. GSA will continue to assess and prioritize the conditions
    and needs of our assets, as well as the needs of our Federal tenant
    agencies. We will work with OMB to discuss these needs in relation to
    competing priorities from other executive branch agencies. GSA's budget
    requests for FBF obligational authority will reflect efforts to balance
    our needs with those of other agencies within the overall Federal
    budget framework.

                             COST-CUTTING MEASURES

    Buyouts
        Question. Of the buyouts GSA is offering, what percentage of
    employees do you believe will accept them and what will be the effect
    on the agency?
        Answer. GSA implemented a buyout program in March 2012 with an 18-
    percent take rate. GSA is considering additional requests for Voluntary
    Early Retirement Authority/Voluntary Separation Incentive Payment
    authority. If that authority is granted, GSA expects the take rate to
    be in the same 18-percent range. The agency will be able to reduce the
    workforce commensurate with the decline in the workload. Also, where
    the nature of the work has shifted and requires new skills due to
    process improvements, technology and changing business delivery models,
    GSA intends to recruit and hire people with the skills required to
    accomplish the mission.
        Question. How will you avoid or mitigate the loss of knowledge when
    workforce reductions occur?
        Answer. The buyout is targeted and focused on specific
    organizational components or occupations across the enterprise. GSA
    balanced the need to acquire different skills with the need to avoid or
    mitigate the loss of knowledge by offering buyouts to a percentage of
    the organization/population, not the organization/population as a
    whole.
    Effort To Streamline Acquisitions and Reduce Costs
        Question. In 2001, OMB established a Governmentwide initiative, to
    be carried out by GSA, to bring together different acquisition data
    systems in a unified and fully integrated manner. This effort, called
    the Integrated Acquisition Environment (IAE), will enable Federal
    agencies to share data and make informed decisions, make it easier for
    contractors to do business with the Government, and result in cost
    savings to the taxpayer. In 2008, GSA began consolidating its own
    portfolio of 10 stove-piped systems with different contractors into one
    integrated system called the System for Award Management (SAM), under
    IAE.
        GSA has requested various levels of funding for the past 3 years
    for IAE.\2\ While some costs have increased due to lack of funding in
    fiscal year 2012, since 2009, development costs for the System for
    Award Management have increased significantly. Why is this?
    ---------------------------------------------------------------------------
        \2\ Fiscal year 2013 request of $21 million; fiscal year 2012
    request of $38 million (received zero); and fiscal year 2011 request of
    $15 million (received $7 million).
    ---------------------------------------------------------------------------
        Answer. The SAM program encompasses a range of activities beyond
    just the specific development of the SAM application itself. These
    activities include requirements definition, architecture and technical
    design, consolidation of help desk support, transition planning,
    coordination, and execution for the legacy IAE systems, interface
    design, and associated support services.
        The projected development costs remain substantially the same;
    however, the overall program costs have increased. For example, GSA has
    needed to expand the scope and level of support services to meet the
    needs of the Federal grants and loans communities and incorporate new
    requirements that were not anticipated at the onset of the SAM planning
    and costs have increased as a result of needing to incorporate changes
    to the Federal Acquisition Regulations (FAR) and other legislative
    changes. Funding limitations have also delayed GSA's ability to meet
    the originally scheduled objectives, which has resulted in the need to
    retain contract support longer than anticipated for our legacy systems,
    as well as for SAM program management and integration support. In
    addition, several contracts were inflexibly structured and payments for
    services were not well-aligned to the actual work being performed and
    delivered. GSA is presently taking corrective action to address this.
        Question. Do you believe that your current acquisition strategy is
    the most cost-effective alternative or have you reassessed your plans--
    where does this stand?
        Answer. GSA is actively reassessing its plans, including the
    acquisition strategy. A GSA conducted ``TechStat'' to review the
    current project management and governance structure to determine what
    additional oversight or change in direction might be needed, in light
    of the GAO findings. The TechStat validated the findings of the GAO and
    identified gaps in governance. As a result, GSA established an
    Integrated Project Team (IPT), comprised of technical, legal, program,
    and acquisition experts, to assess and ensure a more comprehensive,
    objective, and transparent understanding of current needs and
    challenges and to develop options and recommendations on the best way
    to move ahead. The IPT is in the process of further assessing program
    and project management, the SAM architecture, performance reporting,
    cost drivers and corresponding budget requirements, and other control
    processes.
        GSA management is committed to ensuring improved overall management
    of IAE/SAM. The objective is to develop a new executable vision of IAE/
    SAM that comprehensively addresses governance, business, technology,
    program and project management, contracting, and funding requirements.
        Question. While the subcommittee is supportive of initiatives that
    will enable agencies to share data, make it easier to conduct business
    with the Federal Government, and save taxpayer dollars, there is often
    an upfront cost as well as annual maintenance costs, as is the case
    here. You are requesting $21 million, but apparently, we need to fund
    all of it--it can't be broken into smaller funding amounts?
        Answer. The amount of funding that GSA receives directly impacts
    the schedule and scope of continuing to implement SAM, as well as GSA's
    ability to retire the legacy systems associated with the functionality
    that is incorporated into SAM. (For example, Phase One of SAM is
    focused on ``Entity Management'' functionality and, once in production,
    will allow GSA to decommission the Central Contractor Registration
    system, the Online Representations and Certifications Application
    system, and the Excluded Parties List System).
        That said, GSA is prepared to implement SAM in phases and revise
    its project schedules as necessary. However, implementing SAM in phases
    will extend the amount of time that GSA must continue to maintain
    parallel legacy. Operations and support services for the remaining IAE
    systems. In addition to increasing costs over the long-term, a phased
    implementation of SAM would:
      --result in the need to revise acquisition plans;
      --hamper GSA's ability to readily and more cost-effectively
            incorporate legislative and FAR changes;
      --negatively impact the acquisition workforce's ability to
            efficiently perform their duties due to the need to access
            multiple systems; and
      --limit how quickly we can move forward on improving data quality and
            transparency objectives.

                      CIVILIAN PROPERTY REALIGNMENT BOARD

        Question. The administration has proposed an independent entity--
    the Civilian Property Realignment Board, modeled after the Base
    Realignment and Closure (BRAC) process--which would sell unneeded
    Federal property in a streamlined manner. The funding requested for the
    Board and the Revolving Fund totals $57 million for fiscal year 2013.
    The House has passed two bills relating to Federal real property
    disposal and the Senate has introduced a bill on the topic. None of
    these matches exactly the administration's proposal. What is GSA's view
    of these various bills (please discuss each one)?
        Answer. GSA supports the administration's proposal, which addresses
    the key challenges that exist in the current process and should
    streamline and accelerate the disposal process. With respect to the
    current bills being discussed in the Congress, GSA supports legislation
    that provides additional realty tools and incentives that encourage
    sound management of real estate portfolios. GSA defers to OMB to
    address the administration's position on the various bills drafted.
        Question. What are the safeguards that must be maintained if an
    expedited disposal process is authorized?
        Answer. There are four important safeguards that must be maintained
    as part of the development of an expedited disposal process:
      --A process to ensure that disposals are authorized as a consolidated
            package, as opposed to one-by-one;
      --Methods to evaluate which assets are mission-critical and which
            assets are not;
      --Utilization of authorities, resources, and expertise available
            within the Federal Government to achieve asset repositioning
            objectives; and
      --Incentives such as retention or reinvestment of proceeds from the
            sale of real estate assets for all landholding agencies to
            promote broader portfolio management.
        Question. For several years, the figure of $15 billion in savings
    has been stated as the savings that could be achieved by ridding the
    Government's property inventory. Do you really believe that figure is
    still accurate?
        Answer. From fiscal year 2005 to the end of fiscal year 2011, PBS
    has disposed of approximately 286 assets, consisting of more than 13
    million rentable square feet of unneeded real estate. Proceeds from
    fiscal year 2005 to fiscal year 2011 were approximately $244 million.
    PBS estimates that through these disposals, the agency avoided
    approximately $298 million in reinvestment needs and liabilities during
    this time period.
                                     ______

                    Questions Submitted by Senator Mark Kirk

        Question. At a House Oversight and Government Reform Hearing on
    April 16, 2012, you testified: ``Well, I think we definitely had a
    cultural problem in region 9. Probably tied to a leadership problem.
    But I can't say that I know enough--enough about General Services
    Administration (GSA) to say whether we do or do not have a cultural
    problem across the organization when it comes to these issues.'' In
    your testimony for this subcommittee you said, ``. . . I am committed
    to renewing GSA's focus on its core mission: saving taxpayers' money by
    efficiently procuring supplies, services, and real estate, and
    effectively disposing of unneeded Government property.''
        The ``Mission, Vision and Goals'' of GSA, as listed on the Web
    site, use the word ``green'' three times and some variant of the word
    ``sustainable'' three times. However, the words ``budget'' and ``cost''
    never appear, nor does any variant of the word ``spending''. The word
    ``waste'' appears, but in the context of environmental waste, not
    wasted tax dollars. There are passing mentions of efficiency, but it is
    unclear if this refers to the environment or efficient use of tax
    dollars.
        Do you believe the failure of the ``Mission, Vision, and Goals'' of
    the GSA to clearly make cost efficiency or low spending the top
    priority is indicative of a broader ``cultural problem'' or
    ``leadership failure''? I recommend that you begin at the top, and
    rewrite your ``Mission, Vision, and Goals'' statement so that cost
    efficiency is your top priority.
        Answer. GSA is currently conducting a top-to-bottom review of our
    operations and goals with the objectives of streamlining the way we do
    our business, saving taxpayer dollars, and ensuring the most-efficient
    delivery of services to our customer agencies and American citizens. We
    are continuing to pursue every initiative necessary to restore the
    trust of the American taxpayer.
        Question. In the wake of the scandal surrounding the 2010 Western
    Regions Conference (WRC), you canceled all GSA conferences, creating
    fairly substantial cost savings. Why were these conferences approved in
    the first place if they were nonessential enough to be canceled and
    could create substantial cost-savings?
        Answer. As part of the top-to-bottom review of GSA operations, it
    was determined that all upcoming conferences should be reviewed in
    light of new controls over conferences and travel. Many, but not all,
    previously scheduled conferences and meetings were cancelled as a
    result of this review, saving $995,000. The conferences that were
    cancelled either did not meet the new standards or were cancelled
    because we did not have adequate time to conduct the review. All
    upcoming conferences must meet the new requirements which became
    effective on April 15, 2012.
        Question. What is the oversight protocol for compliance with the
    terms of Blanket Purchase Agreements (BPAs)? Specifically, what actions
    does GSA take to ensure that purchases from vendors under BPAs are made
    at prices matching the bid prices? What protocol is followed if a
    payment to a BPA vendor substantially in excess of the bid price is
    reported to the GSA? What, if any, enforcement measures have been taken
    against BPA vendors whom have charged in excess of their bid prices?
        Answer. GSA has risk-management controls in place to ensure that
    the prices contractors propose when establishing BPAs or placing task
    and delivery orders are at or below the GSA Multiple Award Schedule
    (MAS) price. Specifically, Acquisition Management has the Supplier
    Management Division which has approximately 100 Industrial Operation
    Analysts (IOAs) who perform contract-compliance reviews of MAS
    contracts every 2-3 years through the life of the contract. One of the
    areas the IOAs review for compliance is adherence to GSA schedule
    pricing. These reviews are performed by taking a sample of the BPA or
    order information. Review findings are documented in a report that is
    sent to the Contracting Officer (CO) and Administrative Contracting
    Officer (ACO) to take action, if necessary as appropriate. The possible
    actions the CO or ACO can take in response to findings of mischarging
    could include requesting a postaward audit from the GSA Office of
    Inspector General (OIG), requiring the vendor to perform a self-audit
    and develop an action plan to take corrective action measure, and
    seeking recoveries of overcharges and sending it back to customer
    agencies or the Treasury.
        As an example, GSA recently issued an instructional letter (IL
    2011-07) entitled ``Procedures for Reviewing Contractor Compliance with
    prompt Payment Discount (PPD) Terms on Federal Supply Schedules (FSS)
    contracts''. This IL specifically addresses noncompliance with prompt
    payment discount terms as a result of a GSA audit. The same process
    will be followed for overcharges to the GSA schedule price.
        Question. In a March report, OIG found that some cost-reimbursement
    contracts entered into by GSA were not in compliance with regulations
    and that such contracts provide no incentive for contractors to control
    costs. What does GSA estimate the excess cost of such contracts have
    been over the past several years? What steps is GSA taking to
    transition to more cost-effective and regulation compliant contracting
    processes?
        Answer. As a result of the OIG findings, GSA will continue to take
    steps to ensure that proper incentives are in place to control costs
    for current and future contracts. The OIG audit did not identify any
    estimate of excess costs for these types of contracts.
        In addition, the July 2009 Office of Management and Budget (OMB)
    Memorandum M-09-25, ``Improving Government Acquisition'' and the Office
    of Federal Procurement Policy's (OFPP) October 27, 2009 guidance,
    ``Increasing Competition and Structuring Contracts for the Best
    Results'' called for heightened management attention on agency use of
    various types of high-risk contracts and provided strategies for
    reducing their use. OFPP defined high-risk contracts as those that are
    awarded noncompetitively, received only one bid in response to a
    competitive solicitation, are cost-reimbursement awards, and/or are
    time and material labor awards.
        To date, GSA has taken a number of actions to comply with the OMB
    and OFPP guidance and ensure more cost-effective and regulation-
    compliant contracting processes, which include:
      --Developed a Governmentwide working group team (AcqStat) comprised
            of representatives from GSA's Office of Governmentwide Policy,
            Public Buildings Service (PBS) and Federal Acquisition Service
            (FAS), which has been meeting regularly since fiscal year 2010.
      --Conducted quarterly Federal Procurement Data System reporting,
            which is reviewed by FAS and PBS and discusses high-risk
            reduction and any specific areas that require attention or
            training emphasis.
      --Established FAS and PBS action plans, which are updated based on
            quarterly reviews.
      --Developed a yearly Competition Advocate report, which summarizes a
            variety of best practices, lessons learned, and necessary
            actions.
      --Issued an Acquisition Alert (2012-01), which increases awareness
            among the Acquisition community.
      --Developed a training webinar for the acquisition workforce.
      --Continued review of high-risk action plans by the Procurement
            Management Review (PMR).
      --Releasing an Acquisition Planning Wizard to aid execution of the
            acquisition planning process.
      --Established a FAS ``ask competition advocate'' link that allows and
            encourages contracting professionals to ask questions related
            to increasing competition and reducing high risk.
      --Issued a FAS IL (July 27, 2011), regarding the reduction of high-
            risk contracting. The instructional letter was intended to
            provide directions to acquisition personnel for adhering to the
            new FAR rule on managing cost reimbursement activities--to
            include requiring documentation on why a contract type was
            selected, how it will manage and mitigate risk, whether
            consideration was given to firm-fixed price, and sets rules for
            appropriate approval and staffing of the contract.
      --Continued training to the workforce on high-risk contracting
            through FAS Acquisition Industry Days.
      --Implemented a BPA for strategic sourcing aimed to provide
            efficiency, lower costs, and reduced environmental impact,
            while improving competition and reducing high-risk contracting.
      --Continued emphasis on proper acquisition planning as outlined in
            the (OFPP Myth Busting memorandum), to include:
        --early engagement with industry;
        --development of sound requirements packages;
        --ensuring sufficient time for proposals/quote responses;
        --challenging brand name specifications;
        --limiting period of performance on sole-source/noncompetitive
                awards;
        --encouraging industry days to communicate requirements; and,
        --releasing requests for information and proposals, through GSA
                eBuy and FedBizOpps, as appropriate.
        Question. I am encouraged to see that GSA has moved to dispose of
    excess Federal buildings, a step that will raise revenues and encourage
    more efficient use of high-cost buildings. What congressional actions
    could expedite the sale of excess buildings?
        Answer. Based on our experience, we believe that a reform to real
    property asset management must address these central challenges:
      --Incentivizing disposals by enabling agencies to realize the
            benefits of proceeds.
      --Addressing the upfront costs associated with disposals and
            consolidations.
      --Resolving competing stakeholder interests that can slow down or
            prevent good asset management decisions.
        To address these challenges the President proposed a bill last year
    that would usher in a new approach to Federal real estate. The
    President's proposal would create an independent board of experts to
    identify opportunities to consolidate, reduce, and realign the Federal
    civilian real estate footprint as well as expedite the disposal of
    properties.
        This proposal would utilize bundled recommendations, a fast-track
    congressional procedure, streamlined disposal and consolidation
    authorities, and a revolving fund replenished by proceeds to provide
    logistical and financial support to agencies in their disposal of high-
    value properties. It would serve as a comprehensive solution to key
    obstacles that hinder the Federal Government's progress on improving
    real estate management decisions. The proposal expands upon the June
    2010 Presidential Memorandum that directed Federal civilian agencies to
    increase efforts to dispose of unneeded Federal real estate and to
    maximize the utilization of the current inventory to achieve billions
    in savings.
        GSA supports the administration's goals and those of this
    subcommittee and other Members of Congress to dispose of unneeded
    Federal real property and streamline the current disposal process.
        The administration's efforts anticipate working with the Congress
    to create a successful program, and GSA welcomes the efforts of this
    subcommittee and other Members of Congress to successfully reform and
    improve Federal real property management.
        Question. According to OIG's report on the 2010 WRC, there were
    multiple violations of contracting regulations resulting in wasted
    taxpayer dollars. Given the GSA's central role in the procurement
    process for the Government as a whole, it is very troubling that
    oversight and controls did not prevent these violations, which included
    disclosing a competitor's proposal price to a favored contractor,
    contracting to a large business in violations of small-business set-
    asides and disclosing to a contractor GSA's maximum budget for 1 day of
    training, then agreeing to pay the contractor that amount.
        What steps is GSA taking, both internally and Governmentwide, to
    ensure these types of violations do not happen going forward?
    Specifically, what changes are going to be made to improve contracting
    oversight, ensure access to contracts for small business and prevent
    overpayments?
        Answer. Internally, GSA has taken corrective action to ensure these
    violations do not happen going forward. To improve contracting
    oversight, small business, and overpayment concerns GSA will take the
    following steps:
      --Increase resources devoted to the PMR function to assess the
            effectiveness of oversight measures and to mandate corrective
            action where needed.
      --Explore changes to the GSA Head of Contracting Activity structure.
      --Provide refresher training to Heads of Contracting Activities on
            key roles and responsibilities.
      --Conduct training on ethics and procurement integrity, conference
            planning, and contracting.
      --Continue to encourage employees to report waste, fraud, and abuse.
      --Redouble efforts to ensure that small-business set-aside protocols
            are followed.
      --Realign management of Chief Financial Officer (CFO) regional
            functions to report to the GSA Central Office CFO to provide
            greater ability to detect and prevent improper payments.
      --Centralizing oversight of GSA internal travel activities in the
            Office of Administration.
                                     ______

                     Questions Submitted to Brian D. Miller
                Questions Submitted by Senator Richard J. Durbin

                 WAS TRAINING TO ENHANCE JOB SKILLS CONDUCTED?

        Question. Based on your year-long probe of this event, can you
    identify any specific seminars or sessions from the Western Regional
    Conference (WRC) that had the objective of enhancing job skills for the
    attendees?
        Answer. We made the decision not to assess the quality or substance
    of the training seminars or sessions held at the WRC, but instead
    focused our investigation on the excessive costs and impermissible
    contracting actions associated with the planning and execution of the
    WRC.

                              IMPROPER CONTRACTING

        Question. In your report, you describe the circumstances
    surrounding the execution of the original agreement with M Resort as
    the conference site. You state that, among the weaknesses, ``the
    agreement was missing many clauses that statutes and regulations
    required to be included in contracts with the Federal Government.'' Can
    you elaborate on what particular necessary contract terms were omitted?
        Answer. Our investigation revealed that the WRC event planner
    simply signed and returned the M Resort's standard-form contract as
    opposed to a Government standard-form contract, which would have
    included the Federal Acquisition Regulation (FAR 12.301) and the
    General Services Administration Acquisition Regulation (GSAR 512.301
    and 552.212-71) clauses (or equivalents) required for the acquisition
    of commercial items by the Government. The original agreement with the
    M Resort also failed to include a clause that should per diem rates
    change for the selected site, the hotel will honor the Government's
    prevailing per diem rate. The inclusion of such a clause, while not
    required by the FAR, would be necessary to preserve the Government's
    interest, because, as GSA should be well aware the per diem rates are
    subject to change.
        Question. What problems arise as a result of omitting required
    clauses?
        Answer. These clauses are intended to protect the United States
    Government. For example, FAR 52.212-4, one of the required clauses,
    states the Government's rights under a termination for convenience,
    sets forth the terms of payment, and requires the contractor to keep
    its Central Contractor Registration entry up to date, which
    correspondingly binds the contractor to those representations. It does
    not appear that GSA needed to use these particular provisions. If,
    however, GSA had needed to terminate the contract, or had encountered a
    dispute regarding timely payment, it would have lacked the protection
    of these clauses. As you are aware, GSA did encounter problems with a
    change in the Government per diem rate. Had GSA included a clause to
    anticipate this problem, it might not have felt a need to increase
    catering in order to cover the ``loss'' to the M Resort.
        Question. Were you able to determine whether omission of the
    required clauses was negligent or was it deliberate/intentional?
        Answer. We do not have sufficient evidence to make a determination
    as to whether the omission of the required clauses and the use of the
    hotel's standard contract were negligent or willful.
        Question. Based on your experience, was this omission an unusual
    aberration or have you detected any similar omissions and cited the GSA
    for them?
        Answer. We are currently reviewing other conferences on a case-by-
    case basis and will examine whether these clauses have been omitted in
    other contracts with conference vendors.

                       NONCOMPLIANCE WITH FIRE SAFETY ACT

        Question. You also explain that ``Federal conferences may only be
    held at a hotel that is on FEMA's list of Fire Safety Act-approved
    accommodations.'' You note that the GSA conference site--the M Resort--
    is not on that list. While the requirement may be waived, you find no
    evidence in the contract documents indicating that a waiver was
    granted. Does the curriculum for contracting officers include a
    discussion of this? If not, shouldn't it?
        Answer. The provision of the Fire Safety Act which mandates that
    Federal conferences be held at a hotel that is on FEMA 's list of
    approved accommodations is in section 301-11.11 of the Federal Travel
    Regulation. We do not believe this requirement is discussed in the
    curriculum for contracting officers. We also believe, however, that
    this provision should be known to contracting officers and event
    planners responsible for selecting a hotel.

                PROBLEMS AT PUBLIC BUILDINGS SERVICE--SYSTEMIC?

        Question. Clearly, there has there been a culture of excessiveness
    and lax accountability within the Public Buildings Service (PBS) Region
    9, and perhaps even in some of the other regions. To what degree might
    this be a problem in other parts of GSA?
        Answer. Since the release of the WRC report, our Office of
    Investigations has seen a noteworthy increase in hotline tips and
    complaints, and our agents are diligently looking into these. Our
    office is also looking into other conferences. We would not want to
    make generalizations about other regions or components without the
    necessary supporting facts. We do note, however, that systemic changes
    can be put into place to eliminate opportunities for excessive,
    impermissible, and unchecked spending in the future. We have proposed
    that the Chief Financial Officer's (CFO) office be centralized to
    assure that the CFO has direct authority over all regional and service
    budget offices as well as visibility into all agency budgeting, down to
    the dollar level. In his testimony before the Subcommittee on Financial
    Services and General Government, Acting Administrator Daniel M.
    Tangherlini stated his intention to pursue these reforms. We also
    believe that the agency should separate the contracting function from
    the program function--a contracting officer should not report to the
    program officer. We believe that, if implemented, these steps could
    produce the necessary checks and balances to ensure top-down
    accountability in GSA's financial operations.

                 ``HATS OFF'' PROGRAM--EMPLOYEE REWARDS PROGRAM

        Question. PBS Region 9 developed an awards program store known as
    the ``Hats Off Store'' in 2001. The Hats Off program initially
    maintained items of nominal value such as mugs, mouse pads, and
    backpacks, labeled with GSA logos or insignia. However, over time,
    high-value items such as iPods, digital cameras, GPS devices, and other
    electronics were introduced into the program. The budget for this
    program went from $45,000 in fiscal year 2007 to $212,000 in fiscal
    year 2009 and the Inspector General found significant control
    weaknesses, plus the loss of $20,000 worth of Apple iPods. What began
    with nominal reward items and gift cards turned into high-value items,
    and store and restaurant gift cards. Did anyone other than in region 9
    have oversight over this program?
        Answer. Our investigation identified a serious lack of oversight
    over this program. In fact, our major concerns with the Hats Off
    program were the lack of oversight of the inventory and on the exchange
    of awards between employees. The abuse of the Hats Off employee award
    store is another example of the importance of a centralized CFO. If
    GSA's CFO has greater visibility into regional spending, down to the
    dollar level, these types of abuses might not occur as easily.
        Question. What did you find with regard to the employees who
    received the awards--how many and what types benefited from the
    program?
        Answer. We identified many problems with the exchange of awards.
    First of all, employees appeared to ``swap'' awards, meaning that
    within minutes of one employee receiving award cards, the employee
    returns the same or nearly the same number of award cards back to the
    original employee. This occurred no fewer than 300 times. Second, we
    found that on at least one occasion, a supervisor accepted an award
    from a subordinate. Additionally, we found that some of the top
    receivers of awards were actually involved with the awards store
    administration.
        Question. Did you examine what types of actions employees performed
    to receive awards?
        Answer. Exhibit 9 of our Hats Off Report of Investigation lists
    some of the reasons or justifications for points-swapping, including
    ``taking charge'', ``promoting fun in the workplace'', and ``thrilling
    the customer''. We question the value and substance of these
    justifications, particularly because of the ``swapping'' patterns we
    found between employees.
                                     ______

                    Questions Submitted by Senator Mark Kirk

        Question. At a House Oversight and Government Reform Hearing on
    April 16, 2012, Acting Administrator Daniel M. Tangherlini testified:
    ``Well, I think we definitely had a cultural problem in region 9.
    Probably tied to a leadership problem. But I can't say that I know
    enough--enough about GSA to say whether we do or do not have a cultural
    problem across the organization when it comes to these issues.''
        In your experience as Inspector General at the General Services
    Administration (GSA), and in light of the events surrounding the 2010
    Western Regions Conference (WRC), would you say the GSA has a cultural
    problem across the organization? Do you believe any such problems are
    tied to a leadership problem?
        Answer. We hesitate to make generalizations about other regions or
    components without the necessary supporting facts and sufficient
    evidence. We do note, however, that systemic changes can be put into
    place to eliminate the opportunities for excessive, impermissible, and
    unchecked spending in the future that were abused by some in region 9.
    We have proposed that the Chief Financial Officer's (CFO) office be
    centralized to assure that the CFO has direct authority over all
    regional and service budget offices as well as visibility into all
    agency budgeting, down to the dollar level. In his testimony before the
    Subcommittee on Financial Services and General Government, Acting
    Administrator Daniel M. Tangherlini stated his intention to pursue
    these reforms. We believe, if implemented, these steps could produce
    the necessary checks and balances to ensure top-down accountability in
    GSA's financial operations.
        Question. In your testimony, you mentioned numerous investigations
    of Federal property managers and contractors taking bribes and
    kickbacks under the American Recovery and Reinvestment Act (ARRA),
    specifically saying, ``My own office has issued numerous audit reports
    relating to GSA's construction and renovation contracts under the
    American Recovery and Reinvestment Act. We discovered and investigated
    eleven Federal property managers and contractors taking bribes and
    kickbacks.'' Did the rapid manner in which projects under ARRA were
    selected and funded increase the likelihood of malfeasance and corrupt
    practices?
        Answer. ARRA provided GSA with $5.5 billion to convert Federal
    buildings into ``High Performance Green Buildings'' as well as to
    construct Federal buildings, courthouses, and land ports of entry. As
    you know, ARRA mandated that $5 billion of the funds be obligated by
    the end of fiscal year 2010, with the remaining $0.5 billion obligated
    by the end of fiscal year 2011. This short timeframe strained the
    capabilities of project teams, even with the addition of contract
    support staff, and forced the acceleration of planning and executing
    multiple large-scale projects simultaneously. This resulted in
    contracting irregularities, Federal Acquisition Regulation and
    Competition in Contracting Act (CICA) requirement violations, and
    improper negotiations. Our Offices of Audits and Investigations are
    currently conducting oversight activities related to ARRA-funded
    projects. We anticipate these activities will continue for the next
    several fiscal years.
        Question. In your testimony you mentioned, ``The core mission of
    GSA is to provide low-cost goods and services. When GSA wastes its own
    money, how can other agencies trust it to handle the taxpayer dollars
    given to them?'' Do you think that GSA's current statement of
    ``Mission, Vision, and Goals'' is consistent with a core mission of
    providing low-cost goods and services or does it provide greater
    emphasis on other priorities? Do you think this is indicative of a
    larger culture of departing from cost efficiency as a central mission
    and instead focusing on parochial or political priorities?
        Answer. We believe that GSA should get back to basics and align its
    programmatic activities and strategic goals with the core mission of
    providing low-cost goods and services, as stated by the Acting
    Administrator. During our WRC investigation, we found that many agency
    contracting personnel did not fully understand fiscal law or the
    Federal Travel Regulation, or were unaware of the existence of agency
    policies that directly governed their daily work. We also believe that
    the accountability requirement associated with the Anti-Deficiency Act
    (ADA) should be applied to CICA. Currently, agencies that violate the
    ADA must ``report immediately to the President and Congress'', as well
    as the Comptroller General, the facts surrounding each violation and
    the actions taken to remedy the program (31 U.S.C. 1517(b)). If
    agencies fail to ``obtain full and open competition through the use of
    competitive procedures'' as mandated by CICA, they should be held to
    the same accountability standards for violating the ADA. An emphasis on
    contracting knowledge and the implementation of these accountability
    standards could achieve greater cost savings. Additionally, GSA must
    separate its contracting function from its program functions--a
    contracting officer should not report to the program officer.
    Furthermore, as mentioned earlier, centralizing the CFO's office could
    produce the necessary checks and balances to ensure top-down
    accountability in GSA's financial operations. These steps, and a
    continued emphasis by the Acting Administrator on cost savings, would
    help bring GSA back to its core mission.

                              SUBCOMMITTEE RECESS

        Senator Durbin. At this point, the hearing stands recessed.
    Thank you.
        [Whereupon, at 3:23 p.m., Wednesday, April 18, 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 was received
    subsequent to the hearing for inclusion in the record.]

                        Addendum on Agency Improvements

        To build on a familiar General Services Administration (GSA) theme
    as emphasized by previous Administrators, the Administration needs to
    become ``One GSA.'' One GSA, with top-to-bottom control and
    accountability should replace a system of diffused ``matrix''
    management that has led to fiefdoms and feudal kingdoms. No
    Administrator should have to plead ignorance or weakness when the
    public trust is being abused. If GSA's senior leaders are going to be
    held accountable for the work of the agency--and they will be as recent
    events show--leadership must have the authority and tools for carrying
    out their responsibility. As it is, with senior regional leadership
    having two supervisors, accountability becomes divided and diffused.
    The supervisory matrix really becomes a sieve through which oversight
    is lost. This is the problem with a weak Chief Financial Officer's
    (CFO) structure. One GSA accountable to the Administrator, as the
    Western Regions Conference failures attest, also requires One CFO. When
    financial responsibilities are so dispersed they fall beyond the
    control of the CFO, there is no CFO--and the Administrator is deprived
    of one of an agency head's lead reins to control spending and provide
    leadership over agency programs. A theme of a unified GSA leads to a
    unified CFO and a unified CIO. Diffused information systems lead to
    redundancies, cost, and barriers that are inimical to the concept of
    accountability and transparency.

                    CENTRALIZE PROGRAM AND BUDGET MANAGEMENT

        GSA's CFO testimony before the Subcommittee on Economic
    Development, Public Buildings and Emergency Management of the House
    Committee on Transportation and Infrastructure indicated that the CFO
    is essentially a figurehead.
        The CFO should have direct authority over all regional and service
    budget offices (and should be the only employee with the title
    ``CFO''). The CFO should have visibility into all agency budgeting,
    down to the dollar level.

                    CENTRALIZE AGENCY INFORMATION MANAGEMENT

        Likewise, the Office of the Chief Information Officer (OCIO) should
    have control over all agency information systems. Currently, it is not
    clear that the OCIO is even aware of the full list of the agency
    information systems that exist. The OCIO should have final authority to
    access and manage all systems.
        Despite the Inspector General Act's requirement that the Office of
    Inspector General (OIG) is authorized ``to have access to all records''
    of the agency that relate to the OIG's responsibilities, currently
    requests by the OIG for read-only access to agency information systems
    are often met with extraordinary delays (sometimes more than a year) or
    are never fulfilled. GSA systems ``owners'' who fail to provide access
    to the OIG within 14 days should be required to make an explanation of
    that failure to the Administrator, with a copy to the Inspector
    General, by the end of the 14-day period.

                               GET BACK TO BASICS

        As the Acting Administrator has stated, GSA needs to re-focus on
    its core missions--procurement and building operations. We found that
    many agency contracting personnel did not understand fiscal law or the
    Federal Travel Regulation, or were unaware of the existence of agency
    policies that directly governed their daily work. This is unacceptable.
        The agency must separate its contracting function from its program
    functions. That is, the Contracting Officer should not report to the
    program officer.

                           GET OUT OF THE ``MATRIX''

        As the former GSA Administrator testified, GSA employee supervision
    is not presently linear; it is a ``matrix''. Because many high-level
    personnel report to two supervisors, each supervisor can deflect
    supervisory responsibility onto the other, or claim to. The matrix is
    really a sieve.

                       REQUIRE PROCUREMENT ACCOUNTABILITY

        Currently, agencies that violate the Anti-Deficiency Act must
    ``report immediately to the President and Congress'', as well as the
    Comptroller General, the facts surrounding each violation and the
    actions taken to remedy the problem (31 U.S.C. 1517(b)). This same
    accountability requirement should be added to the Competition in
    Contracting Act, which requires that agencies ``obtain full and open
    competition through the use of competitive procedures in accordance
    with the requirements of (CICA) and the Federal Acquisition
    Regulation.'' (41 U.S.C. 3301(a)(1)). This accountability would
    indicate that the agency takes seriously the concerns of businesses,
    particularly small businesses, that have not received a full and fair
    opportunity to compete for Federal contracts.

      FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR FISCAL
                                   YEAR 2013

                                  ----------

                             WEDNESDAY, MAY 9, 2012

                                           U.S. Senate,
               Subcommittee of the Committee on Appropriations,
                                                        Washington, DC.
        The subcommittee met at 3:48 p.m., in room SD-138, Dirksen
    Senate Office Building, Hon. Richard J. Durbin (chairman)
    presiding.
        Present: Senators Durbin, Moran, and Lautenberg.

                       FEDERAL COMMUNICATIONS COMMISSION

    STATEMENT OF JULIUS GENACHOWSKI, CHAIRMAN

                 OPENING STATEMENT OF SENATOR RICHARD J. DURBIN

        Senator Durbin. My apologies. What can I say? There is no
    excuse. I'm sorry. Let me just put my opening statement in the
    record.
        Thanks to those for attending this hearing of the
    Appropriations Subcommittee on Financial Services and General
    Government. Thank you, Senator Moran. Thank you, Senator
    Lautenberg, and Chairman of the Federal Communications
    Commission (FCC), Julius Genachowski.
        And, let me at this point, defer to Senator Moran. I'll put
    my opening statement in the record.

                        STATEMENT OF SENATOR JERRY MORAN

        Senator Moran. Mr. Chairman, I'll just have a brief opening
    statement. I want to do that because I requested that you have
    this hearing, and I appreciate your honoring my request.
        This is the first time that the FCC Chairman has appeared
    before this subcommittee since 2002, and incredible
    advancements in technology and communications have occurred in
    the past decade. And I'm thankful to have this opportunity to
    explore some of those topics with the Chairman.
        As we all know, our country faces many challenges, the
    greatest of which is we have a crippling debt. In my view,
    there are two steps to get our fiscal house in order, and the
    Congress must make some responsible decisions to rein in
    Government spending. And, of course, in the appropriations
    process, we have that opportunity.
        But, second, we need to grow our economy, and because when
    more people are working, more revenue is generated. And one of
    the best ways we can do that is to encourage entrepreneurship
    and certainly our Nation's communications policies are critical
    to creating a platform for that entrepreneurial innovation that
    grows the economy.
        Economic growth is central to both addressing our debt and
    providing our children with a bright future. One of the fastest
    growing sectors of our economy is technology, and much of that
    growth is dependent upon advanced telecommunications
    infrastructure.
        I recently met a former National Aeronautics and Space
    Administration (NASA) engineer, now in the technological world,
    who described the principles of getting a rocket to launch or
    an airplane to fly. And he described two forces--thrust and
    drag.
        And we often spend lots of time in the Congress talking
    about thrust, how to make things happen, and spend more money,
    create programs. But, it's also important that we eliminate the
    drag, and our regulatory environment has a lot to do with how
    much drag that rocket or that airplane experiences.
        So much of the focus of Government and the Congress is
    about generating thrust. I want to make sure that we're
    reducing all the drag that we can and our economy can grow and
    people can earn a living and our children can experience the
    American dream.
        So I look forward to exploring a number of issues with the
    Chairman. I'm very interested in spectrum, and I appreciate
    you, Mr. Chairman, coming to my office and having a
    conversation about that, as well as a recent FCC order related
    to broadband deployment and the Universal Service Fund (USF).
        And I have some concerns about the consequences of that
    order on particularly small and rural providers of broadband
    services.
        So, Mr. Chairman, I thank you for the opportunity that we
    have to learn more about these topics.
        Senator Durbin. Thank you, Senator Moran. Senator
    Lautenberg, do you have an opening statement?

                    STATEMENT OF SENATOR FRANK R. LAUTENBERG

        Senator Lautenberg. Yes, and I'll try to be short, Mr.
    Chairman.
        I am pleased to see Chairman Genachowski here. He was in
    New Jersey a few weeks ago at a technology conference on apps
    making at one of our universities, and we learned something.
    That therein lies a major area of interest in innovation and
    that is with the ``Apps''.
        And so we went through innovation, a cornerstone of our
    economic development, and I introduced new legislation that's
    going to invest in America's technology innovators.
        The American Innovates Act will create a bank to provide
    capital for researchers and companies to turn their discovery
    into marketable products. But we will also make sure that our
    science and technology students get practical training in areas
    like business development.
        And we think that this bill will help support and expand
    our Nation's innovation economy in which the FCC plays an
    important role. FCC also plays a vital part as one of the
    guardians of our democracy.
        Increasingly, fewer and fewer companies control what
    Americans see and hear in the media, and one of those companies
    was recently found to have misled the British Parliament in
    order to cover up its wrongdoing.
        So it's never been more important to have a strong FCC
    acting in the public interest to make sure that broadcasters
    are held to high standards, are held accountable to their
    communities they are supposed to serve.
        And as Chairman Genachowski knows, local service has been
    an ongoing problem in New Jersey, and I look forward to
    discussing this issue further. And, we also want to help
    provide access to communications technology and the opportunity
    that comes with it.
        But it must be done efficiently. And I'm pleased to see the
    FCC moving the USF reforms. As the FCC updates the funds for
    the digital age, one of the agency's primary goals would be
    bringing relief to States like New Jersey where consumers
    contribute significantly more than we get back.
        And I applaud FCC's work on this important issue. I look
    forward to seeing additional reforms. And, finally, after years
    of hard work, the Congress has authorized the FCC to devote
    resources and spectrum to the creation of a public safety
    network. The 9/11 terrorist attack demonstrated the need to
    provide our police, firefighters, and rescue personnel with
    dedicated lines of communication.
        And I look forward to hearing more about FCC's progress in
    ensuring that our first responders are our first priority. So I
    thank Chairman Genachowski for being here, and I look forward
    to hearing his testimony.
        Thanks, Mr. Chairman.
        Senator Durbin. Thank you, Senator Lautenberg.
        Once again, Mr. Chairman, and all those in the audience, I
    apologize for my tardiness. Please proceed.

                    SUMMARY STATEMENT OF JULIUS GENACHOWSKI

        Chairman Genachowski. Chairman Durbin, thank you, Ranking
    Member Moran, and Senator Lautenberg. I appreciate this
    opportunity to be the first FCC Chairman to appear before you
    since 2002.
        I'm proud to say that few, if any, Federal agencies deliver
    a higher return on investment than the FCC. Spectrum auctions
    have raised more than $50 billion for the U.S. Treasury in the
    past two decades.
        And economists place the economic value created by FCC
    auctions as being about 10 times that number, about $500
    billion in economic value.
        Shortly after FCC delivered its budget, the Congress
    authorized the Commission to create, develop, and conduct
    voluntary incentive auctions--a new market-based mechanism to
    repurpose underutilized spectrum for flexible use such as
    mobile broadband.
        Incentive auctions are an opportunity to unleash vitally
    needed additional spectrum for mobile broadband and create
    tremendous value for American consumers while raising billions
    of dollars for deficit reduction.
        It's a key part of the puzzle to unleashing the mobile
    broadband opportunity. And, it's a privilege for the FCC to be
    entrusted with this responsibility which of course will require
    a great deal of work and effort by the agency.
        Incentive auctions are unprecedented. The United States
    will be the first country in the world to conduct them. It will
    be a complex task affecting major parts of our economy and
    involving many challenging questions of economics and
    engineering.
        FCC staff is hard at work planning for the challenges
    ahead. We recently announced steps to begin implementing the
    law which are outlined in my written statement.
        Incentive auctions are part of our overall agenda to
    unleash the opportunities of modern communications technology,
    to benefit our economy, create jobs, bring opportunity to all
    Americans.
        Just yesterday at the wireless industries annual conference
    I presented FCC's mobile action plan. This plan will help
    ensure that America maintains the position it has now regained
    as the global leader in mobile.
        It includes incentive auctions, but recognizes that we must
    have an all-of-the-above strategy that includes removing
    barriers to spectrum use, harnessing emerging technologies like
    small cells and accelerating spectrum sharing between
    Government and commercial users.
        On the latter, I was pleased to announce that we're moving
    ahead in partnership with National Telecommunications and
    Information Administration (NTIA) at the Commerce Department to
    test spectrum sharing between commercial and Government users
    in the 1755 to 1780 megahertz band, a band that's of particular
    interest to commercial carriers.
        This work reflects FCC's focus on broadband communications,
    wired and wireless. In 2009, we developed America's first
    national broadband plan which identified key challenges and
    opportunities throughout the broadband ecosystem and proposed
    solutions to ensure that the United States lead the world in
    broadband access and innovation.
        In fact, one of those proposed solutions was incentive
    auctions. We've been working hard on implementing the broadband
    plan. Together with my colleagues at FCC, we've made tremendous
    progress in the past 3 years taking many steps to unleash
    investment, innovation, and job creation.
        These include freeing spectrum for both licensed and
    unlicensed use, modernizing and reforming major programs like
    the USF and removing barriers to broadband buildout. Indeed,
    investment, job creation and innovation are up across the
    broadband economy.
        These metrics are up both when looking at the broadband
    applications and services and when looking at broadband
    providers and networks.
        Our work is helping create jobs across the country, from
    workers constructing broadband infrastructure, to agents at new
    broadband enabled customer contact centers, to employees of
    small businesses using broadband to expand to new markets, to
    engineers and other innovators inventing the new digital
    future.
        And, in the past 3 years, the United States has regained
    global leadership in mobile innovation. American-designed apps
    and services are being adopted faster than any other. Our
    mobile innovation economy has become the envy of the world.
        We're also now ahead of the world in deploying 4G mobile
    broadbanded scale with 64 percent of the world's 4G LTE
    subscribers, the next generation of mobile broadband, here in
    the United States.
        These next-generation networks are projected to add more
    than $150 billion in gross domestic product growth over the
    next 4 years, creating an estimated 770,000 new American jobs.
        The health of our broadband economy would be enhanced by
    closing broadband gaps. My written statement highlights FCC's
    progress addressing the broadband deployment and adoption gaps.
        Public safety, as was mentioned, is a core mission of FCC,
    and the agency is working to harness the power of
    communications to make our communities safer.
        As part of our longstanding role in helping ensure the
    security and reliability of our communications networks, an
    FCC-led panel recently issued a series of recommendations to
    address three critical threats to our cyber security: botnets;
    Internet route hijacking; and domain name fraud.
        Internet service providers serving roughly 90 percent of
    all U.S. broadband subscribers will implement these proposals.
    FCC also provides value by protecting and empowering consumers.
        For example, smart phone theft is on the rise and poses a
    real threat to consumers. Last month, together with the
    wireless industry and law enforcement from around the country,
    we announced the launch of a new database that will allow
    consumers and carriers to disable stolen smart phones,
    dramatically reducing their value on the black market.
        We've also made progress tackling consumer issues like bill
    shock and cramming, which are highlighted in my written
    statement. At the FCC, we're committed to smart, responsible
    Government, and we have taken steps to modernize our programs
    and insure that they are efficient and fiscally responsible,
    saving billions of dollars.
        In addition to our programmatic reforms, we've also
    reviewed the agency's rules and processes asking tough
    questions to make sure FCC is operating efficiently and
    effectively.
        In connection with this review, we've already eliminated
    dozens of outdated rules and five unnecessary data collections.
    We've identified two dozen more data collections for
    elimination, and we've done everything I've listed and more
    with the lowest number of full-time employees (FTEs) in 10
    years.
        Maximizing the ability of 21st century communications
    technology to deliver value to the American people, and doing
    so in a smart and responsible way. That's FCC's record in the
    past 3 years, and that's our plan for the year ahead as
    reflected in our fiscal year 2013 request in budget.
        To implement our responsibilities under the Communications
    Act, the budget requested a 2 percent more than the previous
    year level from about $340 million to about $347 million,
    essentially flat adjusting for inflation.
        As in previous years, this amount will be derived entirely
    from fee collections. The budget reflects savings in several
    areas and includes a few new initiatives, primarily, technology
    investments designed to save money, and public safety
    investments aimed at saving lives.
        The budget also provides a flat number of FTEs, despite
    increasing workloads in many areas.

                               PREPARED STATEMENT

        In conclusion, the wired and wireless broadband sectors are
    critically important to our economy and global competitiveness.
    I look forward to working with the subcommittee on implementing
    the new incentive auction law and unleashing the opportunities
    of communication technology for our economy and the American
    people.
        Thank you.
        [The statement follows:]

                    Prepared Statement of Julius Genachowski

        Chairman Durbin, Ranking Member Moran, and other members of the
    subcommittee, I appreciate this opportunity to appear before you on the
    Federal Communication Commission (FCC) fiscal year 2013 budget.
        I'm proud to say that few, if any, Federal agencies deliver a
    higher return on investment than the FCC.
        Spectrum auctions have raised more than $50 billion for the U.S.
    Treasury in the past two decades, and economists regard the economic
    value created by FCC auctions as being about 10 times that number, or
    $500 billion in value. FCC has conducted 80 auctions, granting more
    than 30,000 licenses. A few months ago, a group of 112 leading
    economists from across the ideological spectrum wrote, ``The original
    simultaneous, multiple-round auction system implemented in 1994 was
    novel, but the FCC was able to implement the path-breaking auctions
    that were the basis for successful auctions around the world.''
        Shortly after FCC delivered its budget, the Congress authorized the
    Commission to create, develop, and conduct voluntary incentive
    auctions--a new market-based mechanism to repurpose spectrum for
    flexible use such as mobile broadband.
        Incentive auctions are an opportunity to unleash vitally needed
    additional spectrum for mobile broadband and create tremendous value
    for American consumers, while raising billions of dollars for deficit
    reduction. It's a key part of the puzzle to unleashing the mobile
    broadband opportunity.
        At FCC, we're focused on faithfully implementing this new
    legislation and maximizing the opportunities of the new law for our
    economy and all Americans.
        It's a privilege for FCC to be entrusted with this responsibility,
    which of course will require a great deal of work and effort by FCC.
        Incentive auctions are unprecedented. The United States will be the
    first country in the world to conduct them. It will be a multifaceted
    task affecting major parts of our economy, involving many challenging
    questions of economics and engineering.
        FCC staff is analyzing the complex incentive auction law, assessing
    the challenges ahead, and last week we announced steps to begin
    implementing the law.
        We will run a process that is open, inclusive, fact-based, and
    guided by economics and engineering. We have already formed an FCC
    incentive auctions task force that has brought in staff from across the
    Commission.
        FCC's work will be assisted by world-leading experts, including
    some of the world's most distinguished auction-design experts.
        The work of our task force and staff will feed into a robust public
    process, which will include webinars, workshops, public notices, and
    rulemaking proceedings.
        In 2 days, FCC will take up its first policy action to put the law
    into effect--an order establishing a framework for broadcaster
    participation in a channel-sharing agreement with another station in
    conjunction with an incentive auction.
        We are aiming for Notices of Proposed Rulemaking under the new law
    by the fall of this year.
        Incentive auctions are part of our overall agenda to unleash the
    opportunities of modern communications technology to benefit our
    economy and all Americans.
        We have focused the agency on broadband communications--wired and
    wireless. In 2009, we developed America's first National Broadband
    Plan, which identified key challenges and opportunities throughout the
    broadband ecosystem, and proposed solutions to ensure the United States
    leads the world in broadband infrastructure and innovation. In fact,
    one of those proposed solutions was incentive auctions.
        Since the plan's release, we have been working on its
    implementation. Together with my colleagues at the FCC, we have made
    tremendous progress in the past 3 years, taking many steps to unleash
    investment, innovation, and job creation. These include freeing
    spectrum for both licensed and unlicensed use, modernizing and
    reforming major programs like the Universal Service Fund (USF), and
    removing barriers to broadband buildout.
        And indeed, investment, job creation, and innovation are up across
    the broadband economy. These metrics are up both when looking at
    broadband applications and services, and when looking at broadband
    providers and networks.
        In 2011, the U.S. information and communications technology sector
    grew three times faster than the overall economy. Broadband is helping
    create new jobs all across the country--and not just for engineers
    (although it's vitally important that we lead the world in engineering
    talent), but also for salespeople, construction workers, and small
    business owners increasingly using the Internet to boost sales and
    lower costs.
        The apps economy, which barely existed in early 2009, has already
    created almost 500,000 new jobs, according to expert estimates.
        And similar reports estimate that over the past several years
    wireless innovation and investment are responsible for more than 1.5
    million new jobs.
        In the past 3 years, the United States has regained global
    leadership in mobile innovation. American-designed apps and services
    are being adopted faster than any others. Our mobile innovation economy
    is the envy of the world.
        We are also now ahead of the world in deploying 4G mobile broadband
    at scale--with 64 percent of the world's 4G LTE subscribers here in the
    United States and these next-generation networks are projected to add
    $151 billion in GDP growth over the next 4 years, creating an estimated
    770,000 new American jobs.
        In 2011, overall investment in network infrastructure was up 24
    percent from 2010, with broadband providers investing tens of billions
    of dollars in wired and wireless networks.
        Internet start-ups attracted $7 billion in venture capital in 2011,
    almost double the 2009 level and the most investment since 2001.
        In today's hyperconnected, flat world, the success of American
    companies, as well as global prosperity, depends on a dynamic and open
    global Internet. And so we are working to preserve the Internet as a
    free-market globally, and oppose international proposals that could
    stifle Internet innovation. Working with our colleagues in government
    and stakeholders outside government, we are seeking to head off
    barriers to the global expansion of cloud computing, and encouraging
    free flows of data worldwide.
        And we are working to oppose proposals from some countries that
    could undermine the longstanding multi-stakeholder governance model
    that has enabled the Internet to flourish as an open platform for
    communication, innovation, and economic growth.
        If adopted, these proposals would be destructive to the future of
    the Internet, including the mobile Internet, and the U.S. Government
    has consistently and strongly opposed such proposals.
        This is why at the Organisation for Economic Co-operation and
    Development last year, I worked with my colleagues in the U.S.
    Government and in other countries to respond to significant threats to
    Internet-driven growth by adopting a broadly supported communique that
    emphasized the need for continued support of the multi-stakeholder
    model which has fostered innovation and opportunity worldwide.
        The health of our broadband economy would be enhanced by closing
    broadband gaps, and so the FCC has focused on bringing universal
    service into the broadband era.
        Today, millions of rural Americans live in areas with no broadband
    infrastructure. Our plan, adopted unanimously in October, to modernize
    the USF will spur wired and wireless broadband buildout to hundreds of
    thousands of rural homes in the near term, and puts us on the path to
    universal broadband by the end of the decade--while keeping the fund on
    a budget. Together with my colleagues, we crafted a set of reforms that
    honor fiscal responsibility and help bring broadband to unserved
    Americans around the country, in every State.
        In addition to the broadband deployment gap, we are making strides
    on the broadband adoption gap.
        Nearly one-third of Americans--100 million people--haven't adopted
    broadband. The Connect to Compete Initiative enlists government,
    nonprofit, and private sector leaders to tackle the barriers to
    adoption--one of several public-private initiatives driven by the
    Commission to promote solutions to major challenges.
        FCC's successful E-Rate program has already helped connect
    virtually every library and classroom in America, and in 2010 we
    adopted several important modernizations of the program, including
    removing barriers to wireless use, and removing barriers to schools
    opening their computer labs as hot spots for community Internet use
    when students aren't in school.
        Public safety is a core mission of FCC, and the agency is working
    to harness the power of communications to make our communities safer.
        We are working with multiple stakeholders to advance next-
    generation 9-1-1. And we accelerated the launch of Wireless Emergency
    Alerts that allows local, State, and Federal authorities to send
    targeted alerts to mobile devices of people who are in the vicinity of
    an emergency.
        As the Nation's expert agency on communications networks and
    technology, the FCC has always had as a fundamental part of our mission
    the security and reliability of communications networks. In early 2011,
    I charged a panel of stakeholders from across the broadband ecosystem
    with developing practical, nonregulatory solutions to three critical
    threats to our cybersecurity:
      --botnets;
      --Internet route hijacking; and
      --domain name fraud.
        This past month, the team issued a series of recommendations to
    tackle these challenges in a meaningful way. Internet service providers
    serving nearly 90 percent of all U.S. broadband subscribers have agreed
    to implement these recommendations that will promote greater security
    in our communications networks.
        Working with government, private-sector, and nonprofit partners, we
    also developed a Small Business Cyber Planner to help small businesses
    guard against cyber attacks, which are estimated to cost targeted small
    businesses an average of $200,000 in damages.
        FCC also provides value by protecting and empowering consumers.
        Smartphone theft is on the rise, and poses a real threat to
    consumers. In Washington, DC, New York, and other major cities roughly
    40 percent of all robberies now involve cell phones. Two weeks ago,
    together with the wireless industry and law enforcement from around the
    country, we announced the launch of a new database that will allow
    consumers and carriers to disable stolen smartphones and tablets
    dramatically reducing their value on the black market.
        Working with wireless providers, we found a common-sense solution
    to bill shock, a problem that has cost millions of consumers tens,
    hundreds, and sometimes thousands of dollars in unexpected charges, and
    just last week we introduced a new online tool to help consumers track
    implementation of the commitments made by wireless carriers to provide
    usage alerts.
        This coming Friday, FCC will consider an order to put an end to
    abusive, third-party charges on phone bills, what's commonly known as
    ``cramming''. Previously, FCC's Enforcement Bureau issued $12 million
    in fines against four companies that had engaged in widespread
    cramming, part of a record-breaking year for our Enforcement Bureau,
    which logged $67.2 million in monetary penalties and settlements on
    behalf of consumers in fiscal year 2011.
        I want to highlight not only what FCC has accomplished, but how we
    conduct our work. FCC is committed to smart, responsible government,
    and we have taken significant steps to modernize our programs and
    ensure that they are efficient and fiscally responsible--saving
    billions of dollars.
        Our work to modernize the USF and Intercarrier Compensation will
    not only spur broadband buildout, it also eliminates billions of
    dollars in hidden subsidies from consumers' phone bills.
        Our work to reform the Lifeline program is expected to save up to
    $2 billion over the next 3 years. Even before this order was adopted,
    we made changes that eliminated 270,000 duplicate subscriptions, saving
    $35 million.
        We reformed our Video Relay Service Program, which provides vital
    communications for people who are deaf or hard-of-hearing, saving $250
    million per year without reducing availability of service.
        In addition to our programmatic changes, we have also reviewed
    FCC's rules and processes--asking tough questions to make sure the
    agency is operating efficiently and effectively.
        In connection with this review, we've already eliminated more than
    200 outdated rules and five unnecessary data collections. We have
    identified two dozen more data collections for elimination.
        We estimate that internal reforms like consolidated information
    technology maintenance and new financial system have already saved the
    agency almost $8 million.
        And we've done everything I've listed and more with the lowest
    number of full-time employees (FTEs) in 10 years.
        Maximizing the ability of 21st century communications technology to
    deliver value to the American people, and doing so in a smart and
    responsible way. That's the FCC's record the past 3 years, and that's
    our plan for the year and years ahead, as reflected in our fiscal year
    2013 fiscal year budget request.
        To implement our responsibilities under the Communications Act,
    FCC's budget requests a 2-percent increase more than the previous year
    level, from $339,844,000 to $346,782,000. This proposal is essentially
    flat adjusting for inflation.
        As in previous years, this amount will be derived entirely from fee
    collections. These funds will ensure the successful operation of FCC's
    core activities, including the strategic goals outlined in the
    Performance Plan submitted with FCC's budget.
        The requested amount is based on internal cost savings applied to
    essential ongoing projects, and necessary adjustments to our baseline.
        The budget includes a few new initiatives--primarily technology
    investments designed to save money, and public safety investments aimed
    at saving lives.
        The budget also provides a flat number of FTEs, which represents
    the lowest number of FTEs in 10 years, despite increasing workloads in
    many areas. Last year, a senior Apple executive wrote FCC advocating
    for additional staffing for FCC's Office of Engineering and Technology
    (OET). This office certifies that wireless devices use spectrum
    efficiently and don't create harmful interference, among other things.
    The number of applications for certified devices has grown at an annual
    rate of nearly 12 percent each year--from 3,671 in 2001 to 13,645 in
    2011--and the explosive growth of complex devices like smartphones has
    significantly increased demands on OET staff in recent years. Apple's
    executive wrote, ``If OET can complete its work efficiently, companies
    building innovative devices can get those new products to customers
    quickly. But if applications for innovative devices are delayed because
    OET staff are overtaxed, consumers are the losers.''
        In conclusion, the wired and wireless broadband sectors are
    critically important to our economy and global competitiveness. I look
    forward to working with the subcommittee on implementing the new
    incentive auctions law, and unleashing the opportunities of
    communications technology for our economy and the American people.
        Thank you.

        Senator Durbin. Thanks, Mr. Chairman. Senator Moran had
    requested this hearing. Let me yield my opening round of
    questions to him.
        Senator Moran. Mr. Chairman, thank you very much.

                                SPECTRUM CRUNCH

        Let me start first with spectrum. You covered that in your
    written and oral testimony. But let me reiterate what I think
    is called out there, the crunch, the spectrum crunch. The
    demand is significant.
        And my question, Mr. Chairman is, are there any proceedings
    or options FCC can consider to more quickly address the need of
    spectrum in the private marketplace?
        Chairman Genachowski. It is a central focus of ours. It's
    why we push so hard for incentive auction legislation, and
    we've moved quickly to begin to implement it.
        There are other proceedings we have opened now that will
    free up additional spectrum. We have a proceeding that would
    eliminate unnecessary regulations on certain satellite spectrum
    so that could be made available for terrestrial use. It's
    called the S-band.
        We have other proceedings to open up new spectrum. I think
    one of the biggest opportunities is if we can move forward with
    Federal users of spectrum quickly to accelerate sharing between
    Federal users and commercial users.
        And I'd be happy to talk further about any of those topics.

                            UNIVERSAL SERVICE REFORM

        Senator Moran. Let me then raise the topic of USF, and the
    recent order on it and the Intercarrier Compensation Reform.
        We have the circumstance, Mr. Chairman, in my view, in
    which many companies have relied upon grant programs from the
    Rural Utility Services (RUS), from the stimulus funds, in which
    they have made significant investments in regard to deploying
    broadband in rural areas across the country.
        In my view, the order now handicaps, significantly, the
    revenue necessary for them to repay those loans and grants. And
    you and I had a conversation about this in my office in which
    you indicated that the waiver process would be an option for
    those companies.
        If they had the need, the waiver process would work in
    their benefit to see that they had the capacity to continue to
    deploy broadband, but also to pay for the loans and grants, to
    repay the loans and grants.
        It seems to me, first of all, that the threshold for a
    waiver being granted is a very high threshold.
        Because the words of the order say that, we permit any
    carrier negatively affected by USF reforms may file a petition
    for waiver that clearly demonstrates that good cause exists for
    exempting the carrier from some or all of those reforms, and
    that waiver is necessary and in the public interest to ensure
    that consumers in the area continue to receive voice services.
        And that threshold about voice services, that would be a
    pretty high threshold, in my view, for a waiver to be granted.
    And so, I'm concerned that while you indicated that waivers
    would be an option, my guess is that's not a practical option
    for most companies.
        Because voice is always, or almost always, going to be
    available. Am I missing something?
        Chairman Genachowski. Well, a few points, Senator. One----
        Senator Moran. You're polite not to say I'm missing
    something.
        Chairman Genachowski. Reforming the USF and intercarrier
    compensation was one of the hardest things that the agency has
    tackled. And we were able to do it on a bipartisan basis, and
    take a program that was wasting Government dollars, focus it on
    its central mission of getting broadband to people in rural
    America who are unserved.
        Across the country, there are about 18 million people who
    live in areas that are unserved. In Kansas, I think the number
    is about 90,000. And we made the commitment as a Commission to
    do that by reducing inefficiencies, waste in the existing
    program, operating within a budget, and funding new service out
    of that.
        It turns out that reining in Government spending, being
    serious about fiscal responsibility is hard work. We all know
    that. And we have the job now of implementing this in a way
    that's consistent with the three core principles we had when we
    put in place the order.
        One was getting broadband to rural Americans who don't have
    it. And the second was fiscal responsibility. And the third was
    being cognizant of business realities of existing companies.
        And there are existing companies that for whom this is
    challenging. And we have been and we will continue to work with
    them because we recognize that flash cuts don't make sense.
    That a waiver process is important. We have several waivers in
    front of us that we're considering.
        We've already adopted some modifications to our rules. My
    instruction to our staff was let's listen very carefully when
    we hear concerns and respond to all of the ones that are
    appropriate.
        Senator Moran. Mr. Chairman, is a waiver available even
    though voice services continue to be received?
        Chairman Genachowski. Well, the fundamental service that we
    thought was critical to preserve was voice service. And,
    certainly, anything that we did that would inadvertently shut
    off voice service to a local community is something that we
    wanted to make clear that's something that we will stop.
        We do think that in order to accomplish our goals, get
    broadband to unserved Americans consistent with fiscal
    responsibility, it will require flexibility on our part to deal
    with real legitimate issues and address them.
        Flexibility on the part of RUS in thinking about its loans.
    And, in my view, as long as we all focus together on these core
    objectives, getting broadband to people that don't have it,
    fiscal responsibility, and cognizance of business realities,
    we'll work through implementation and individual hard cases one
    by one, and we'll get them right.
        Senator Moran. I assume we'll have another round of
    questions.
        But I would indicate that Commissioner McDowell stated on
    March 19 here in Washington, DC that if your company looks like
    it won't survive, there's a waiver process.
        I still want to explore with you the threshold by which,
    what a company has to demonstrate, because I think there are
    serious issues here with the ability to continue to deploy
    broadband.
        And, the other fiscal aspect of this is the ability for a
    company to continue to repay its loans to RUS or others. And I
    want to explore with you the relationship that you've developed
    with the Department of Agriculture and the RUS program.
        So, thank you, Mr. Chairman.
        Senator Durbin. Senator Lautenberg.

                                LICENSE RENEWALS

        Senator Lautenberg. Mr. Genachowski, I know that you are
    aware of the fact that News Corporation controls 27 local
    television stations in the United States.
        And last week, I mentioned earlier, a British parliamentary
    committee found that News Corp. misled the committee in order
    to cover up the illegal activity.
        And its chairman and CEO Robert Murdoch, is, ``. . . not
    fit to run an international company.''
        Now, how do these findings affect your analysis of News
    Corp.'s license renewals in the United States?
        Chairman Genachowski. Well, Senator, a couple of points, if
    I may.
        As a general matter, it's not appropriate for me to comment
    on specific adjudications that might come before FCC. But here
    is how the law works, the Communications Act, and the FCC.
        Licensees do have to meet certain qualifications to be
    licensees. Those qualifications include technical, financial
    qualifications, and character qualifications.
        FCC has issued over the years policy statements and
    precedents that lay out what that entails. And, of course, if
    any issues arise, FCC has an obligation. We would take this
    very seriously. To look at the record, look at the facts, apply
    the precedent, apply the law.
        Senator Lautenberg. So that doesn't pass without notice by
    FCC? The British response.
        Chairman Genachowski. We're certainly aware of the serious
    issues that have been raised in the United Kingdom, the ongoing
    process that's going on there.
        Senator Lautenberg. And the code by which FCC functions, it
    does say, measure of the character of the applicant though, is
    to be considered.
        Chairman Genachowski. Character is one of the
    qualifications, and there are FCC policy statements that spell
    that out.
        Senator Lautenberg. Okay. So I assume, therefore, I won't
    get your word, but I'll take the intent, of the position that
    FCC has to have, and that is, that character flaw, a character
    flaw, will be in consideration of any decisions that are made,
    affecting new or renewal--brand new or renewal applications for
    license.
        Chairman Genachowski. FCC has serious responsibilities that
    it applies across the board consistent with our policy
    statements and our precedent.

                            UNIVERSAL SERVICE REFORM

        Senator Lautenberg. New Jersey is a net contributor of
    close to $200 million a year to the USF. As the USF has grown,
    the burden on New Jersey and other donor States has gotten
    bigger and bigger.
        And I applaud the FCC for recognizing the need for the
    reform of the Fund. Now, will these reforms bring some balance
    to donor states like New Jersey?
        Chairman Genachowski. Well, and thank you for that. The USF
    is comprised of a high cost fund that's focused on rural areas.
    The E-rate fund which is focused on schools and libraries
    across the country.
        A lifeline fund which is focused on low-income Americans.
    One by one, we have been modernizing each of these programs for
    the broadband era, in each case, bringing accountability and
    fiscal responsibility to the programs and making sure that they
    tightly and effectively meet their mission.
        There is a compact in this country. We need to make sure
    that everyone, wherever they live, has a chance to benefit from
    the opportunities of the communications revolution.
        Whether it's someone in rural America. Someone in an urban
    center. Whether its seniors or small business owners. And
    that's the challenge that we've taken up.

                      FUNDING FOR RESEARCH AND DEVELOPMENT

        Senator Lautenberg. The too-often scientific breakthroughs
    sit on a shelf for the lack of investment. Last month, I
    introduced the American Innovation Fund which would provide
    funds for researchers to turn their discoveries into product.
        And has the early stage investment affected the
    telecommunications industry?
        Chairman Genachowski. The core idea behind new legislation,
    Senator, is something that's very, very important, and it's
    related to what Senator Moran said in his opening remarks.
        Innovation and entrepreneurship is at the core of how we'll
    create jobs in the United States. How we will lead the world
    globally. We have a series of challenges to meet in order to
    sustain our leadership position.
        Your legislation identifies one, which is, that we have in
    some cases research going on that is underfunded. In some cases
    research that's going on where some help is needed to
    commercialize a product that could be commercialized.
        And so I certainly applaud the focus on entrepreneurs,
    innovation, and look forward to working with you on the
    legislation and on these issues.
        Senator Lautenberg. And thank you.
        Because the cry that we hear from many would be company
    developments, and that is, that lack of funding slows things
    down. And perhaps then even diverts them from ever taking
    place. And we shouldn't be in that condition.

                             PUBLIC SAFETY NETWORK

        I'm proud that the Congress passed legislation to provide
    our first responders the spectrum and the resources needed to
    develop the public safety network.
        Since the 9/11 Commission report revealed an enormous
    communication problem 8 years ago, we fought to get the job
    done. And now, we finally have it. And we look at the FCC, look
    to the FCC, to implement the network.
        When can we expect our first responders to have the public
    safety network that they must have in order to function
    efficiently?
        Chairman Genachowski. As soon as possible. The Congress'
    action in passing that provision was extremely important and
    something that we'd been calling on for quite some time.
        And as you point out, the 9/11 Commission recommended it
    many years ago. The statute gives much of the responsibility to
    NTIA for implementation. FCC has responsibilities with respect
    to setting standards.
        We've already begun working very closely with NTIA. There
    are some early deadlines in the statute that have already been
    met in terms of setting up boards and processes and
    proceedings.
        It's extremely important, and I know that Assistant
    Secretary Strickling at NTIA and I are very committed to moving
    forward on the legislation and to getting our first responders
    what they need in terms of modern communications.
        Senator Lautenberg. It's essential that we press on with
    that because we knew, we learned unfortunately the worst that
    could happen. And for that not to be corrected by this time
    seems awfully slow.
        And so I look to you to make sure that we're moving at a
    faster pace.

                                LICENSE RENEWALS

        Last, in November 2007, FCC held a hearing in Newark on the
    license renewal of WWOR, which is one of the Murdoch-owned
    stations.
        New Jerseyans testified about the station's failure to
    cover New Jersey and events. Now, 4 years later, the station is
    still operating under an expired license. And there's evidence
    that its service to New Jersey has gotten even worse.
        And I certainly don't think that it ought to take that long
    to make a decision about whether or not we ought to close this
    out. And I would ask when we might expect FCC to make a
    decision on the WWOR license renewal application?
        Chairman Genachowski. Well, today, the staff is working on
    that as you know, and we talked about this. There's a complex
    history involving the station, and the issues of its particular
    obligations to provide service to New Jersey and moves the
    station facilities, et cetera.
        And so it's complex in a number of different ways, but the
    staff is working on it, and there will be a decision as soon as
    possible.
        Senator Lautenberg. Well, there are not many things that
    are easy to accomplish, and your structure of responsibilities.
    This one we ought to be able to get on with, and I look forward
    to hearing from you about where we stand with this.
        Thank you. Thanks, Mr. Chairman.

                                    PRIVACY

        Senator Durbin. Thank you very much, Senator Lautenberg.
        I'd like to address a couple issues of privacy. About every
    other week when I log into iTunes, they tell me I need to have
    a new agreement with them. A lot of terms and conditions.
        And I scroll through page after page after page until I get
    to the bottom where it says accept, decline, punch accept, go
    on about my business.
        I'm worried that I may have signed off all of my rights to
    any royalties from music that I produce in the future. I'm not
    sure what I've done here.
        So, tell me, is this your responsibility, to make sure that
    this kind of a thing is put in simple language and the most
    important parts of it are highlighted so consumers know what
    they're actually waiving or giving up in terms of privacy?
        Chairman Genachowski. The Federal Trade Commission (FTC)
    has taken the lead on the kind of issue you're raising, but it
    is an issue that we've been engaged with and interested in as
    well.
        One is, consumer protection with respect to communications
    providers, is part of our statutory mission, number one.
        Number two, in addition to the kind of core confusion and
    privacy issues that you raise, another concern is that the more
    that people distrust the Internet, the slower broadband
    adoption will be, which then undermines the economic
    opportunities of broadband.
        And so whether you look at this as just a basic privacy and
    rights issue, or whether you look at it as an economic issue,
    you get to the same place.
        Senator Durbin. So is FTC the cop on the beat here? Should
    they be deciding what should be highlighted, what's important
    for me to know if I'm about to sign off on something?
        Chairman Genachowski. And they've been doing excellent
    work.
        Senator Durbin. This isn't your bailiwick?
        Chairman Genachowski. Our statutory responsibility extends
    to the communications providers, and not to the applications.
        Senator Durbin. Let's talk about Google. They have quite an
    operation. One of the Fortune 500 companies. One of the top 20,
    I guess. And they invited me in several times to their
    headquarters in Chicago. Very impressive.
        And in one of the visits I made several years ago talked
    about how they were mapping America. They literally had
    vehicles driving all over the streets of America and they were
    gathering images. They were deployed everywhere.
        And they were gathering data and video and putting it into
    the Google map information and so forth. Turns out they were
    gathering even more. European and Canadian regulators found
    these Google vehicles were collecting and storing personal data
    from unencrypted home networks of private citizens without
    permission.
        The New York Times described the data as personal email
    messages, instant messages, chat sessions, conversations
    between individuals, and Web addresses revealing sexual
    orientation that could be linked by Google to specific street
    addresses.
        So they were collecting all of this as they were cruising.
    So FCC completed an investigation and came to the conclusion
    that Google had deliberately impeded and delayed the
    investigation. And you decided to impose a fine of $25,000 on a
    company worth $111 billion.
        So I would say that is somewhere short of a tap on the
    wrist. And could you tell me if you thought that what they had
    done was not that serious. You concluded, I think, that they
    didn't violate the Wiretap Act.
        It turns out a court in California reached the opposite
    conclusion. So how are you protecting our privacy with a
    $25,000 fine for that kind of collection?
        Chairman Genachowski. So there are two points. We launched
    an investigation because in this case there were concerns about
    using communications networks, Wi-Fi, to get access to
    personal, private information.
        And we did have an obligation to determine whether or not
    that violated any of our rules and laws. That was the reason
    for the investigation.
        The conclusion of our enforcement bureau and our general
    counsel's office was that as a legal matter, because it was
    unencrypted Wi-Fi that information was being obtained from, it
    wasn't a violation of the law as it was written.
        And we suggested that the Congress look at that and that
    consumers look at that because everyone should encrypt their
    Wi-Fi. And so as a matter of that issue, the career staff found
    that it wasn't a violation of law, but encouraged congressional
    action.
        The fine itself was for serious concerns that our staff had
    about the process itself. The investigation process itself. And
    the fine that the bureau imposed was one that's consistent with
    precedent in this area for companies that act improperly during
    our process.
        Clearly for the company, compared to its revenue and market
    cap, it's a small amount. On the other hand, the educational
    purposes that have been served by this, educating them and
    other companies, educating the Congress, educating consumers,
    certainly important benefits of the process that we ran.
        Senator Durbin. I guess what puzzles me, and maybe this
    really does come down to the Congress not doing its job as
    we're often reminded of that whenever we find fault with
    agencies and individuals, is the notion that my Internet
    activity out of my home, if it is not encrypted, is not
    protected.
        And that virtually anyone can tap into it for any purpose,
    commercial or otherwise, with impunity. It appears if they had
    cooperated with your investigation, you might not have even
    fined them in this circumstance.
        Now, this California court saw it quite differently, and
    said that they believe that it was at least analogous to a
    wiretap for them to be gathering this personal information
    about street addresses.
        So your legal counsel kind of leaned the other way and
    said, no, you have no rights for privacy if you're not
    encrypted.
        Can you tell me as a former Supreme Court clerk and such, I
    mean, is that the starting point on your investigation, that
    there is no protection if it is a close call?
        Chairman Genachowski. Well, I have great confidence in our
    general counsel, the chief of our enforcement bureau, who are
    both very experienced lawyers, former prosecutors, who take
    this as they take all matters, very seriously.
        So this was a serious effort, run by serious people, and I
    have complete confidence in their legal conclusions. I do look
    forward to working with the Congress on a way to address this
    because your central point no one can disagree with.
        People should, the law should protect people even if they
    have unencrypted Wi-Fi.
        Senator Durbin. I find it hard to believe that encryption
    is the threshold, and how in the world would the average person
    know that or be able to protect themselves.
        So, is it possible for you to share the legal memorandum
    that was the basis for your conclusion that this was not a
    violation of the Wiretap Act?
        Chairman Genachowski. We will share whatever we can share.
    So I would be more than happy to provide you with whatever you
    would like and whatever you would need.
        Senator Durbin. I appreciate it. Let's take a look at it
    because I think it's something that if it requires change in
    the law, I'd like to consider that.
        [The information follows:]

        For more information please access http://transition.fcc.gov/foia/
    Updated-Release-of-NAL.pdf.

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

                            UNIVERSAL SERVICE REFORM

        A threshold seems to be the operative word. I want to go
    back to what we were talking about earlier, Mr. Chairman.
        The order published on November 18 clearly states, and then
    I quoted what the criteria were for a waiver. And it seems to
    me that there's three components to that. The carrier must be
    first, negatively affected by the USF reforms.
        I assume that's a standard that could be met. It clearly
    demonstrates that good cause exists for exempting the carrier
    from some or all of the reforms.
        So, number two, there's good cause. And then number three
    is, that the waiver is necessary in the public interest to
    ensure that consumers continue to receive voice services.
    That's the one I want to again focus on.
        Because it seems to me you could meet the first two,
    assuming that I am analyzing the words of your order correctly.
    A carrier could be negatively affected. It could show good
    cause.
        But still, in most instances, provide voice services. Is
    that true?
        Chairman Genachowski. Well, I'd want to go back and look at
    the language myself. I certainly understand that you're looking
    at it there. If I could, let me explain what we're trying to
    accomplish.
        The kinds of steps that we think we need to take for fiscal
    responsibility, and emphasize again our openness to companies
    that have issues to come in and to continue to work with us on
    how to fine tune our reforms so that we can achieve our goals
    of serving unserved Americans and being fiscally responsible.
        So one of the things that the program had supported, for
    example, there might be an area where USF subsidies, money that
    comes from consumers, Government programs, were subsidizing a
    telephone company in an area that was also being served by
    another unsubsidized company.
        And the decision that we had to make is, can a Government
    program continue to support those kinds of subsidies? And we
    answered that unanimously at FCC, no.
        And we have to back away from that kind of funding. We had
    a principle of no flash cuts, and we don't want to turn off
    anything in a day. But some of the examples that you might be
    getting at might fit into that bucket.
        There are many different kinds of examples where it is
    simply impossible to justify under any theory of fiscal
    responsibility the Government supporting these.
        And what we tried to do very thoughtfully was say, okay, we
    can't support these anymore. Let's wind this down in a way that
    recognizes that some of the companies have loans, some of the
    companies have made decisions based on certain assumptions.
        We recognize that. Those are business realities, but we
    also have to recognize that these do have to change. We have
    said we have and we will continue to work with those companies
    to moderate the impact while we get as fast as possible
    broadband to the 18 million Americans who don't have it, the
    90,000 people in Kansas who don't have it.
        Senator Moran. I don't think you've said anything that I
    disagree with, but that's the point I'm trying to get to when
    you tell me that you will work with those companies to get the
    right result.
        My assumption is that you work with those companies through
    a waiver process, and I'm worried that the waiver process is at
    least worded in your order that nearly almost no company would
    qualify for a waiver because there will always be voice
    services.
        We can continue this discussion as you would like. But your
    point about fiscal responsibility, and I'm certainly not
    arguing for anything other than that. I particularly agree with
    your sentiments that you expressed about competition when
    there's already service provided and one receives USF support
    and one doesn't.
        There's many reasons in which the USF justifiably needed to
    be reformed, but I'm worried about the consequences. And,
    again, you tell me, no, I don't know what the words are. No
    flash.
        Chairman Genachowski. Flash cuts.
        Senator Moran. Flash cuts.
        But I'm worried about how a company who's trying to make
    investment decisions, borrow money, make decisions about
    whether to invest in additional plant and equipment, expand
    their business, is going to have the certainty that they're not
    going to have a flash cut.
        Because there's a waiver process that prohibits, that
    allows them relief. You have, as I understand it, some
    petitions for reconsideration pending. I think some of those
    petitions at least are a request for change in that threshold
    related to waivers.
        And, again, on fiscal responsibility, I want to go back to
    the USF, and its consequences, the alteration of the universal
    service funds, consequences on another Government agency, RUS,
    part of the Department of Agriculture.
        And what I experienced in our State and we had the
    administration in many instances following passage of the
    Stimulus Act encouraging companies to invest in broadband.
    Again, a noble cause.
        Many companies chose to finance that expansion of
    broadband, their investments, through grants and loan programs
    using the American Recovery and Reinvestment Act, as well as
    loans from the USDA's RUS.
        RUS telecom portfolio has more than $4 billion in loans. I
    don't know exactly what percentage of those loans are expected
    to be repaid by funds generated from the USF that may no longer
    be there because of your order.
        And can you assure me, and I've had this conversation in an
    Appropriations subcommittee with Secretary Vilsack, and he
    indicates that he is working with FCC and others within the
    administration to make certain that we don't have a major
    default because of a decision by the FCC affecting the ability
    of a private company to repay another Federal agency--RUS.
        Chairman Genachowski. And for that reason, from early in
    our process, we worked closely with RUS because we were aware
    that this would be an issue. And we both agree that both the
    FCC and RUS and potentially the Congress will have to show
    flexibility to solve this problem the right way.
        The easy solution would be no change. And even in areas
    where we look at it from the fiscal responsibility perspective
    and say how can we justify Government money going to that,
    well, it's too late to make any changes for many, many years.
        That result would be unfair to the people who are paying
    into the fund. Similarly, a result that says, as a result of
    these rules, you have to end service tomorrow. That also would
    be unfair.
        So flexibility from us, from RUS, there may be actions that
    will collectively need the Congress to take, will be important,
    so we can get the balance right between the legitimate concerns
    that businesses have, the legitimate concerns that consumers
    who live in those areas have, and the legitimate concerns that
    the consumers have who are putting money into the Fund that are
    funding things that are hard to justify.
        And so I look forward to working together on that path
    through.
        Senator Moran. That flexibility, and again, I would point
    out, you said it may take flexibility on the Congress maybe to
    do something that RUS may need to do something, flexibility is
    required of FCC, and I still would be interested in knowing how
    that flexibility is going to be granted except through a waiver
    process.
        And in regard to the waiver, if you are granted a waiver.
    If a company is granted a waiver, where does the money come
    from to compensate them to be able to, for example, repay the
    loan? Or the flexibility that you're saying will be there, or
    may be there, where does that flexibility come from as far as
    the revenue stream to allow them to repay the loan?
        Chairman Genachowski. It's the right question. It comes
    from other companies who would use that money to build out
    broadband to people who don't have it. Because we're committed
    to a budget.
        So getting this balance right, a company that really needs
    help, will get the help it needs, but that will slow down
    broadband to other parts of America, other parts of Kansas.
        So this is the hard job that we have to make sure that
    we're turning the dial to the place where we're doing right by
    consumers wherever they live, right by businesses, whether
    they're in areas, you know, in this part of the State or that
    part of the State.
        It's a hard challenge, and we'd be happy to take you
    through a deeper level of detail on it. And, you know, we'd
    made a suggestion in our national broadband plan that some of
    these hard issues could be softened by an appropriation for a
    one-time capital infusion into the USF that would allow us both
    to turn the dial down over here on spending that's hard to
    justify, while simultaneously turning the dial up faster over
    here to parts of Kansas and the rest of America that don't have
    service.
        I continue to think that would be a good idea. I understand
    the various issues. In the absence of that, we'll work within a
    budget and we'll do the best we can.
        Senator Moran. Chairman Durbin, I think Chairman
    Genachowski has once again said the Congress could solve this
    problem.
        Are there waiver requests pending?
        Chairman Genachowski. Yes.
        Senator Moran. And by the numbers?
        Chairman Genachowski. Single digits so far. We issued some
    clarifications in the last few weeks. It's certainly possible
    that we'll get more waiver requests in.
        We've set aside staff to take the waiver requests
    seriously, and we understand----
        Senator Moran. How long would the process take to be
    granted a waiver, if one is justified?
        Chairman Genachowski. We have a shot clock that we've
    imposed on ourselves. I don't remember the length so I don't
    want to get that wrong.
        We found that in order for us to make a decision in the
    shot clock, it requires getting certain information from the
    companies. And so there's a little bit of a cat and mouse where
    in some cases we stopped the shot clock until we get the
    information we need.
        Again, this is the blood and guts of trying to make this
    work, and meet these big objectives of broadband to unserved
    America, fiscal responsibility and recognizing business
    reality.
        Senator Moran. You're dealing with the macro and the micro.
        Chairman Genachowski. Every day.
        Senator Moran. Mr. Chairman, thank you.

                                    CRAMMING

        Senator Durbin. I'd like to talk to you about cramming. In
    the 1990s, this became a more serious problem on consumer phone
    bills.
        When telephone companies open their billing up to third-
    party vendors who were selling satellite services and long
    distance services, many vendors took advantage of it to put
    fees on our phone bills that we'd never seen before.
        And some people didn't question, just automatically paid it
    and found out later on that some of these things were not
    warranted at all.
        The Senate Commerce Committee found third-party billing on
    wire line bills generated $2 billion a year. Much of that was
    from cramming. The industry voluntarily worked to curb
    cramming, and FCC adopted Truth in Billing rules to improve
    disclosure.
        Yet, third-party billing was not outlawed and continues to
    be a problem. Now the crammers are targeting wireless phones
    for obvious reasons. Cramming complaints on wireless bills as a
    percentage of total cramming complaints has increased from 16
    percent in 2008 to 2010 and now up to 30 percent in 2011.
        However, wireless billing is more complicated due to
    legitimate downloads for videos and apps. FCC approved a
    rulemaking requiring wire line phone companies to provide
    consumers a clear opt out of third-party billing.
        And both Verizon and AT&T announced in March they would no
    longer permit unwanted billing by third-party vendors on wire
    line accounts, not wireless, wire line accounts.
        So why did you choose the weaker opt-out provision rather
    than protecting the consumer with an opt in provision?
        Chairman Genachowski. Well, there were some other things
    that we did as part of that order too. Cramming clearly is a
    serious issue, particularly on wire line based on the record
    that we had.
        In addition to the clear opt out, we also required that
    phone companies separate out third-party billing charges so
    that it's easy for a consumer to determine whether a third-
    party charge on their bill was something they ordered or
    something that they didn't.
        The record that we had before us, our conclusion was that
    if we did that, that would empower consumers, deter crammers.
    The other thing we'd been doing is increasing our enforcement
    efforts for crammers.
        We issued fines totaling I believe $11 million for
    crammers. And we continue to monitor this very closely because
    you're right. It's a very serious issue.
        On wireless, the record that we had suggested that there
    may be a problem, but it wasn't clear. And so when we adopted
    the new rules for wire line, we launched a proceeding on
    wireless. We are gathering data. We made it very clear that if
    there's a problem, we will act in wireless as we did in wire
    line.
        On the wire line side, we made it very clear that if the
    separate disclosures don't work in eliminating cramming, the
    next option is opt in.
        Senator Durbin. So what are you waiting for? The percentage
    of total cramming complaints has almost doubled in 3 years on
    wireless.
        Chairman Genachowski. I'd have to, if I could, Sir, I'd
    have to get back to you on the data that we had before us when
    we did our proceeding. I don't recall what was in the record.
        But it was clear to our staff that there is potentially an
    issue on wireless. We didn't have enough of a record nor to
    proceed with rules just then.
        We didn't close the proceeding. We issued what in our
    parlance is a further notice of proposed rulemaking so that we
    can gather more information and put us in a position to act.
        It's important for us to have the evidence we need. There's
    no point in us adopting rules that we'll lose in court. And
    again, I trust our staff on making sure that if the record is
    there and we can justify this kind of consumer protection
    action, we'll do it.
        We've done it in many other areas.
        Senator Durbin. Well, and let me go back to the earlier
    point. Please make this intelligible to ordinary consumers so
    they know what they're getting into here. And that's why the
    opt out thing really leaves me cold.
        I really think, an opt in, most people will say, why in the
    world would I do that? And they won't. And that's why the
    companies beg for the opt out because they think they can just
    kind of slide in there.

              POSTING BROADCASTERS' PUBLIC INSPECTION FILES ONLINE

        Let me, if I can, ask a question here. After Citizens
    United, we virtually have no rules when it comes to money being
    spent on campaigns. I lived through the McCain-Feingold era
    where we applauded ourselves for restricting soft money, taking
    it out of the process.
        We're down to hard money, baby, and you report every buck
    of it, and we're going to have accountability. Then came
    Citizens United and said, none of this counts anymore.
        And a Las Vegas casino magnate can dump $15, $20 million
    into a Presidential campaign for his favorite and nothing can
    stop him. I mean Citizens United has opened the gate wide.
        I wish a couple Supreme Court justices had stood for office
    at some point in their life, maybe they would understand this
    issue a little more.
        One of the last sources of information about what's
    happening is end user, and that relates to the broadcasters
    file, that they keep the records that they keep.
        And, historically, I know because I used to walk into radio
    and TV stations, and they'd push a questionnaire in front of
    me, a consumer survey, community survey, which was being
    collected in the old, old days.
        But I know that at most of these stations there is a
    written record that is kept that includes a lot of basic
    information. In part of that record that is available in
    written form is information on political advertising, the
    amount that's being spent on that.
        It's physically available at the station, public comment,
    political files and so forth. Now, you recently approved a rule
    that takes this into the 21st century and says the entire file
    for all broadcasters has to be posted on the FCC's Web site in
    searchable format.
        So no longer does it require a physical visit. You can pick
    up this information online. And it's searchable for the first
    time. It increases transparency on political ad buys. It
    educates the public on which candidates and groups are using
    the public's airtime.
        And it is the public's airtime. This is important because
    of the rise in anonymous, large political donations through
    Super PACs and things like that. We have tried to pass a
    DISCLOSE Act here in the Congress so that the Super PAC folks
    would have to say, actually say on the ad, I paid for this, or
    I'm not a foreign national.
        Things like that. But we can't get that through. That's
    considered radical thinking. So how do citizens access the
    political file now? Is there any information that will be newly
    available to the public under this rulemaking? And is the FCC
    considering the same requirement for cable and satellite
    providers?
        Chairman Genachowski. So until we adopted this rule as you
    said, the information that the Congress required broadcasters
    to put in public files, was only available at a station. You
    had to physically go and you could get it that way.
        As part of our general effort to move all of our filing
    requirements, disclosure requirements into the 21st century, we
    proposed and now we have in fact required that those political
    files and everything else in broadcasters' public files be
    placed on line.
        That will go into effect in the first tranche over the next
    6 months. In full, over the next 2 years. And then that
    information will be available to anyone who has access to the
    Internet.
        Senator Durbin. So has there been a complaint that you've
    got another Federal mandate here, imposing another expense on a
    private company, and it's a hardship that some stations won't
    be able to meet? Have you heard that?
        Chairman Genachowski. We heard those complaints. We took
    them seriously. We went and did some investigation ourselves.
    We learned some interesting things.
        Our staff went to one station, asked for the public file
    and it was said, okay, you know, if you wait and sit here for a
    while, we'll bring it out to you. You can look at it here, but
    it's going to take some time.
        And, eventually, the person came back and said to our
    staffer, you know what, here it is in a thumb drive, why don't
    you just take this.
        And we concluded that the arguments about burden really
    weren't realistic. We're in an era where all of our licensees
    are increasingly doing everything with the FCC on an electronic
    basis.
        They're submitting their applications, their modifications
    for engineering. Everything is online. The question for us is
    should this be the one thing that doesn't go online?
        And we concluded that it just didn't make any sense.
        Senator Durbin. So what about the argument that somehow you
    are forcing disclosure of sensitive pricing data that otherwise
    would not be disclosed?
        Chairman Genachowski. The data that will be disclosed is
    data that's already disclosed. It's available already to anyone
    in the market with an economic interest.
        We found in our work that either other ad buyers are
    interested and they can get the information locally. It's very
    easy. In some cases, we learned that they did. Or they've
    concluded that it really doesn't affect the market. They don't
    need the information because of how ad deals ultimately get
    negotiated.
        The Congress made the decision that this information, and
    it was explicit, that this information should be made public,
    including the rate. It was upheld by the Supreme Court
    explicitly over similar arguments about burden and about the
    negative effects of disclosure.
        But in this case, the Supreme Court said, no, we reject the
    arguments. This is okay. And our action was completely
    consistent with the Congress' directive and with the Supreme
    Court upholding those provisions of the 2002 law.
        Senator Durbin. May I ask one last question if I can, and
    then I'll turn it over to Senator Moran for whatever he would
    like to ask.

      BUDGET REQUEST FOR THE FEDERAL COMMUNICATIONS COMMISSION INSPECTOR
                                    GENERAL

        Let's discuss your inspector general's appropriation, the
    amount that's being requested. You're asking for an overall 2-
    percent plus increase for the FCC. But you've cut the inspector
    general's budget by about 10 percent.
        Inspectors general around here are a little more popular
    since the General Services Administration mess, and why would
    you want to cut back on your inspector general's capacity?
        Chairman Genachowski. I believe that those aren't the
    correct facts. Our practice has been, is and will be to pass
    through the inspector general's request for a budget and to
    support their budget.
        The work of the inspector general is incredibly important.
    The independence of the inspector general is important. There
    may have been a mistake somewhere in the process.
        Senator Durbin. The fiscal year 2013 request is $8.75
    million for the inspector general. The fiscal year 2012 enacted
    level is $9.75 million.
        Chairman Genachowski. We will work on that with you, but I
    want to be very clear on this. Our policy is to pass through
    the inspector general's request and to support him.
        Senator Durbin. Thank you.
        Senator Moran. Mr. Chairman, thank you.
        I think this should be able to conclude my questions of the
    Chairman. Thank you for your patience.

              POSTING BROADCASTERS' PUBLIC INSPECTION FILES ONLINE

        In regard to the political broadcasting issue that the
    chairman raised, I just want to ask one question. Does FCC
    envision going beyond what is currently included in the
    political file to require the collection of any additional
    information?
        And what I heard you saying is that this is what the
    Congress authorized to be collected and retained. It's what the
    Supreme Court said was fine.
        So, I assume the answer to that is, ``No'', but I wanted to
    make certain that I gave you the opportunity to say that.
        Chairman Genachowski. I think you're right. The steps that
    we put in place simply said, we've already worked out what
    should be the disclosures. Let's move them from paper to
    online.
        They're many people with many different views who think
    that disclosure should be done differently. That's a discussion
    that could be had including broadcasters who have proposed some
    ideas on how to modify the disclosures.
        We'll be open to those suggestions, but the default is,
    what has been disclosed is what will continue to be disclosed.
        Senator Moran. Do you have the statutory authority? Are you
    able to do what you did because of the law you indicated the
    Congress has passed? Do you have the authority to collect more
    information?
        Chairman Genachowski. I would presume that we do. There's a
    long history as part of----
        Senator Moran. I guess collect and disclose.
        Chairman Genachowski. Collect and disclose. As part of
    broadcasters' public trustee obligations, which go back many,
    many decades, I would presume we have that authority.
        There have been a few instances where the Congress said to
    FCC, whatever you do, make sure you do this, and this is one of
    those cases. But I think most people would agree that our
    authority with respect to information from spectrum licensees
    is pretty broad.

                            UNIVERSAL SERVICE REFORM

        Senator Moran. I want to just as a final, a couple of
    questions related to the regression model that the order
    outlined.
        The order incorporated a regression model to evaluate when
    companies are perhaps not being as efficient with resources as
    possible. The regression model has raised concerns, I assume to
    you and certainly to me.
        It was brought to my attention that FCC may have entered
    incorrect data into the regression analysis used to set the
    upper limits of high cost loop paid to incumbent rate of
    return, local exchange carriers.
        This is an important aspect for future broadband
    investment. The other criticism that I've heard is that the
    outcomes will change, the regression model's outcomes will
    change from year to year as companies choose whether or not to
    make investments.
        And the concern here is that companies may be fearful to
    invest because if they choose to but other companies don't, the
    regression model may return results that indicate the company
    is an outlier in the model and therefore not eligible for
    recovery of their investment.
        Are either one of those concerns legitimate and something
    that you're attempting to address?
        Chairman Genachowski. I'm not certain about the status of
    that back and forth with our staff. But, again, any issues like
    that that get raised, we have a professional staff that's been
    directed to take them very seriously.
        The kinds of things we're trying to do, and the direction
    they've received from FCC, if I could be at a macro level for a
    minute, we want to distinguish instances like the following.
        A company is receiving Federal funds who set up multiple
    subsidiaries with the same CEO at each subsidiary, paying
    themselves multiple times, using what in effect is taxpayer
    money. Well, we want to stop that.
        We don't want to stop the perfectly honorable company in
    small town America that's doing the best it can under difficult
    circumstances to provide communications infrastructure in areas
    that have low population density.
        And our charge, and not just mine, but FCC on a bipartisan
    basis to the staff, has been let's get this right. Let's
    distinguish those cases where we can't defend the outflow of
    money from the ones where they're legitimate businesses doing
    the right things.
        Let's take these cases like what I mentioned before, where
    there's an overlap and phase them out in a reasonable way.
    Let's work with RUS to make sure that there's flexibility there
    on the loans as that's appropriate.
        So these are all legitimate issues that you're raising, and
    I want you to know that we care about any negative effects that
    we have in places where we don't want to have negative effects.
        And it's a hard job, and I'm just so proud of our staff for
    taking this seriously. The easier thing for us to do would have
    been to leave the program just the way it was, and not try to
    reform it, and not try to get broadband to people in rural
    America who don't have it, and not deal with these problems.
        But we took on the challenge. I'm proud of FCC for having
    done it on a bipartisan, unanimous basis. I look forward to
    working with you on this, but I'd ask that if we can receive
    bipartisan support to keep on doing the hard work of reform and
    fiscal responsibility in meeting these goals, I think we can do
    great things for the country in moving this program forward.
        Senator Moran. Chairman Durbin, thank you very much for
    this hearing today and thank you for the opportunity I've had
    to visit, to question, to have a conversation with Chairman
    Genachowski.
        Mr. Chairman, Chairman Genachowski, I don't think you
    volunteered to come to Kansas. But, Chairman, in the
    conversation that you and I had, you indicated a willingness to
    accept an invitation. I would like to extend that again.
        We'd love to have you come spend some time with folks in
    rural America, and in the interim, I would ask your commitment
    that your staff work with me and my staff, the subcommittee
    staff, as we try to sort out the questions that I've raised and
    some others, to give some additional information to those who
    are trying to make decisions about what to do next.
        Chairman Genachowski. I would be happy to do that.
        Senator Moran. Thank you very much. Thank you.
        Senator Durbin. I would consider it an honor to come to
    Kansas and----
        Senator Moran. Chairman Durbin, I would invite you to come
    to Kansas, but----
        Senator Durbin. As long as it's Norfolk, Kansas.
        Mr. Chairman, thank you for being here today. Thanks for
    your testimony. Senator Moran, thank you too.
        Senator Moran. Thank you.

                         ADDITIONAL COMMITTEE QUESTIONS

        Senator Durbin. We are going to keep the file open for a
    week, if there are any questions or comments to be added. You
    may get a question in the mail, please take it seriously.
        [The following questions were not asked at the hearing, but
    were submitted to the Commission for response subsequent to the
    hearing:]

                   Questions Submitted by Senator Jerry Moran

                                     WAIVER

        Question. In our previous discussions about Universal Service Fund
    (USF) reform, you have cited the ``waiver process'' as a remedy for
    companies who may experience severe financial challenges as a result of
    lost USF support. The order published on November 18 clearly states,
    ``We permit any carrier negatively affected by the universal service
    reforms we take today to file a petition for waiver that clearly
    demonstrates that good cause exists for exempting the carrier from some
    or all of those refunds, and that waiver is necessary and in the public
    interest to ensure that consumers in the area continue to receive voice
    service.'' The threshold you have established for the waiver is related
    to a consumer's loss of access to voice service. This is an extremely
    low threshold of service to consumers particularly in the transition to
    a broadband world.
        At the March 19 event here in Washington, Federal Communications
    Commission (FCC) Commissioner Robert McDowell stated, ``If your company
    looks like it won't survive, there is a clear waiver process.'' Later
    the day, when questioned at an appropriations hearing, Commissioner
    McDowell said ``We also looked at a waiver process that is very frugal
    . . . if indeed there is a carrier experiencing undue hardship because
    of the reform they can file a waiver with the FCC where they will have
    to open their books in a very detailed fashion so we know exactly what
    is going on with the money but they can get a waiver.''
        Can you explain to me how can we make certain waivers will be
    granted to those companies who might have to walk away from their
    current networks?
        Answer. In reforming the USF, FCC unanimously agreed that, as a
    matter of fiscal responsibility and accountability, and to protect
    consumers and small businesses paying into the USF, a thorough, but
    fair waiver process was necessary for any company seeking a waiver. Any
    carrier facing reduced support as a result of FCC's universal service
    reforms may file a petition for waiver clearly demonstrating that good
    cause exists for exempting the carrier from some or all of those
    reforms, and that the waiver is necessary and in the public interest to
    ensure that consumers in the area continue to receive service.
        Waivers will be granted where an eligible telecommunications
    carrier can demonstrate that, without additional universal service
    funding, its support would not be ``sufficient to achieve the purposes
    of section 254 of the Act.'' In particular, a carrier seeking such a
    waiver must demonstrate that it needs additional support in order for
    its customers to continue receiving service in areas where there is no
    terrestrial alternative. Several weeks ago, I circulated a draft order
    to my colleagues to clarify that waivers can be granted to prevent loss
    of broadband service, not just loss of voice service.
        A full discussion of FCC's waiver process is available in the
    Connect America Fund order beginning at page 177 (available at http://
    hraunfoss.fcc.gov/edocspublic/attachmatch/FCC-11-161Al.pdf).
        Question. Additionally, assume a waiver is granted. What rules will
    companies who are granted a waiver fall under?
        Answer. The waiver process is structured to address the specific
    relief needed by the company and to grant tailored relief to address
    its needs. Otherwise, the generally applicable rules for the USF will
    apply. Careful, tailored relief is consistent with fiscal
    responsibility and accountability and to protect consumers and small
    businesses paying into the fund.
        Question. Will there be increased reporting requirements?
        Answer. That is a possible condition for granting a waiver. As FCC
    stated in the order, we intend to subject such requests to a fair and
    thorough review and will take appropriate measures to both ensure
    consumers do not lose service and protect public funds from waste,
    fraud, or abuse. This is consistent with our commitment to fiscal
    responsibility to consumers and businesses paying into the USF.
        Question. Will companies receive more support to help fund their
    networks? If so, what money will be used to pay for companies who are
    granted waivers?
        Answer. Any money used to grant a waiver will necessarily come from
    funds that could otherwise be used to support deployment of broadband
    to unserved areas. In the order, to address concerns about growth in
    the USF and to protect consumers and small businesses paying into the
    fund, we adopted an overall budget for the USF.
        Question. Is it possible rural Americans could lose broadband
    service which is currently available to them today?
        Answer. FCC's framework will ensure that consumers who have access
    to broadband will continue to have access to broadband.
        Question. What is the timeframe within which the FCC will respond
    to waiver requests from companies?
        Answer. The Bureau is reviewing each petition individually and will
    make final decisions as expeditiously as possible. To expedite review
    of waivers, FCC delegated to the Wireline Competition and Wireless
    Telecommunications Bureaus the authority to approve or deny all or part
    of requests for waivers of phase-downs in support. We required that the
    Bureaus initiate the process for public comment within 45 days of
    receipt of a waiver petition.

                                REGRESSION MODEL

        Question. That regression model outline in the USF/Intercarrier
    Compensation (ICC) reform order has raised concerns. It was brought to
    my attention that the FCC may have entered incorrect data into the
    quantile regression analysis used to set the upper limit of the high-
    cost loop paid to incumbent rate-of-return local exchange carriers.
    This is important for future broadband investment. Another criticism of
    the regression model is that the outcomes will change from year to year
    as companies choose whether or not to make investments. I have been
    told companies are fearful to invest because if they choose to and
    other companies do not, the regression model may return results that
    indicate the company is an outlier in the model and therefore will not
    eligible for recovery of the investment.
        Can you comment on the regression model and potential incorrect
    inputs and what the FCC is doing to address this issue?
        Answer. FCC created a streamlined, expedited process to correct any
    problems. So far, the Wireline Competition Bureau has received two
    petitions to correct data, and both of the petitioners received
    responses within 2 weeks. FCC also launched a process to collect a full
    set of updated data from companies before benchmarks take full effect.
        Question. How is FCC determining what caps for support should be in
    various areas?
        Answer. The caps are based on comparing carriers to other similarly
    situated providers based on a range of criteria. For instance, the
    benchmarks take account of local conditions like population density,
    soil type, climate, as well as any recent investment by the company. In
    some cases, carriers spend almost three times as much per customer as
    smaller carriers right next door.
        Question. How is FCC able to tell companies they should invest in
    serving their areas if the regression caps are changing year to year?
        Answer. The reforms adopted by FCC will make support more
    predictable for carriers spending efficiently. In response to concerns
    about the timing of changes to the benchmarks, the Wireline Competition
    Bureau's order determined that the benchmarks should initially remain
    in effect until 2014. In the interim, FCC will consider whether
    benchmarks should subsequently be set for multiple years.
        Question. How are you responding to companies who have asked about
    the regression model?
        Answer. FCC has an open-door policy--Commission staff takes all
    meeting or call requests from companies to address any questions that
    come up, and has made all aspects of the regressions available for
    public inspection.
                                     ______

                    Questions Submitted by Senator Mark Kirk

        Question. I strongly support the deployment of fixed and mobile
    broadband to increase economic development, productivity and America's
    global competitiveness. One analysis estimates the productivity gains
    from the deployment and use of wireless broadband will generate almost
    $860 billion in additional GDP by 2016. Spectrum auctions and rural
    broadband development are key tools to accomplishing our ambitious
    goals and ensuring economic success. However, I am concerned about the
    administration's execution of these programs and have the following
    questions.
        The administration recently announced its support for spectrum
    sharing in order to accelerate broadband development throughout the
    Nation.
        Given that the National Telecommunications and Information
    Administration (NTIA) recently reported that moving Federal users off
    the Federal Exclusive Band airwaves will take more than a decade and
    cost $18 billion, how does the Federal Communications Commission (FCC)
    intend to work with NTIA to ensure that the mutually beneficial short-
    term goal of spectrum sharing occurs, while at the same time balancing
    longer-term spectrum reallocation and incentive auction plans?
        Answer. FCC's Mobile Action Plan employs an ``all-of-the-above''
    approach to the spectrum crunch which includes more spectrum, but also
    more efficient use of spectrum and new ways to manage spectrum, both in
    the near-term and in the long-term. FCC is working now with NTIA and
    other stakeholders on near-term sharing and small cell opportunities in
    the 1755 MHz and 3.5 GHz bands. We are moving expeditiously forward
    with incentive auctions in a parallel process. We will continue to work
    with all stakeholders to meet the Nation's spectrum needs.
        Question. How long will it take to complete the testing process
    with NTIA before spectrum sharing can be implemented?
        Answer. I am hopeful that testing of sharing in the 1755 MHz band
    can be completed in a timeframe that would allow it to be paired with
    the 2155 MHz band for auction, as required by statute. FCC intends to
    initiate a 3.5 GHz rulemaking this year.
        Question. How does FCC intend to handle the costs of Federal
    spectrum relocation?
        Answer. FCC will follow the direction of the Congress, as set forth
    in the statute with respect to reimbursing relocation costs.
        Question. What assurances does the FCC have from Government
    spectrum users that they will participate in spectrum sharing and that
    such sharing can be implemented in a timely manner?
        Answer. FCC will continue to engage in discussions with NTIA and
    other Federal agencies, particularly the Department of Defense, to find
    solutions that meet commercial spectrum needs, while also enabling
    vital Government operations to continue.
        Question. I have introduced legislation to establish a process
    nearly identical to the successful Base Realignment and Closure (BRAC)
    process to determine which Federal spectrum should be auctioned for
    sole or shared use by the private sector. I believe this is a key model
    for spectrum relocation because it forces the relocation process to
    move forward unless the Congress passes legislation to block it. What
    is the FCC's position on using a BRAC-like approach to addressing our
    spectrum crunch and providing the telecommunications industry with a
    certain path forward to reliably clear spectrum for wireless
    advancements?
        Answer. This is an intriguing approach and I am interested in
    discussing all potential methods for identifying and deploying Federal
    spectrum. We should consider a broad range of solutions to the spectrum
    crunch and ensure that we have not left any concept off the table.
        In the meantime, FCC has moved ahead to work with its counterparts
    to deploy Federal spectrum as soon as possible. The National Broadband
    Plan recommended a number of approaches to increase the availability of
    spectrum for commercial mobile and fixed wireless use, including
    working with NTIA to develop a roadmap to identify opportunities to
    make Federal spectrum available for exclusive, shared, licensed and/or
    unlicensed use. FCC continues to collaborate with NTIA on this approach
    and we will work with our Federal partners to develop plans for
    identifying and freeing up this valuable resource.
        Question. I am concerned about the overlap in programmatic goals
    and implementation of the Universal Service Fund (USF) and the
    Department of Agriculture's (USDA) Rural Utility Service (RUS).
    Additionally, carriers use USF funds, that would otherwise have been
    used to build out broadband, to repay their RUS loans. What are the
    default criteria mechanisms in place that the FCC will use to enforce
    repayment of RUS loans?
        Answer. RUS administers its loan program and has a better
    understanding of its default criteria. That said, as I mentioned at the
    hearing, we have worked closely with RUS throughout the USF reform
    process and our waiver criteria specifically consider debt, including
    RUS loans.
        Question. How is the FCC working with USDA's RUS to ensure that
    taxpayer dollars are not diluted through duplicative projects that are
    also funded under USF?
        Answer. RUS loans and USF support serve complementary purposes. USF
    provides ongoing support, while RUS provides low-cost loans. More
    generally, our USF reform was designed to ensure that USF support only
    goes where it's needed, and includes new accountability and safeguards
    for all USF spending.
        Question. A recent study conducted by a Georgetown University
    researchers found that, based on the analysis of previous FCC auctions,
    the success of spectrum auctions depends greatly on whether or not
    conditions are placed on the auction. The study found that the full
    auction potential of broadcast spectrum with no conditions imposed
    could generate as much as $91 billion in revenue, whereas the same
    auction which carries heavy conditions, such as net neutrality
    requirements. A free auction could raise 250 percent more funds than an
    unconditioned one.
        What, if any, kinds of conditions will FCC place on the spectrum
    auctions authorized by Public Law 112-96? Will any restrictions be
    placed on participants?
        Answer. FCC's incentive auctions team currently is preparing
    rulemaking notices for the incentive auction process. FCC will comply
    with all statutory requirements, and our process will be open,
    inclusive, fact-based, and guided by economics and engineering.
        Question. How will FCC ensure that the value of the spectrum will
    be upheld throughout the auction process?
        Answer. FCC has a long history of raising revenue through the
    auctions process, generating $50 billion to the United States Treasury
    since 1993. Spectrum value goes beyond direct payments to the Treasury
    for spectrum licenses--spectrum deployment supports technological
    development, job creation and economic growth. FCC will consider these
    factors as well as all relevant statutory mandates as it initiates the
    incentive auctions process.

                             CONCLUSION OF HEARINGS

         Senator Durbin. This meeting stands in recess.
        [Whereupon, at 4:55 p.m., Wednesday, May 9, the
    subcommittee was recessed, to reconvene subject to the call of
    the Chair.]

           LIST OF WITNESSES, COMMUNICATIONS, AND PREPARED STATEMENTS

                                  ----------
                                                                       Page

    Congress of the United States, Letter From the...................    21

    Durbin, Senator Richard J., U.S. Senator From Illinois:
        Opening Statements of................................1, 33, 65, 115
        Prepared Statements of....................................... 2, 67
        Questions Submitted by..................................57, 90, 108

    Federal Trade Commission, Prepared Statement of the..............
      89.............................................................

    Geithner, Hon. Timothy F., Secretary, Office of the Secretary,
      Department of the Treasury.....................................
      33.............................................................
        Prepared Statement of........................................
          35.........................................................
        Summary Statement of.........................................
          35.........................................................
    Genachowski, Julius, Chairman, Federal Communications Commission.
      115............................................................
        Prepared Statement of........................................
          120........................................................
        Summary Statement of.........................................
          117........................................................
    Gensler, Hon. Gary, Chairman, Commodity Futures Trading
      Commission.....................................................     1
        Prepared Statement of........................................     7
        Summary Statement of.........................................     5

    Kirk, Senator Mark, U.S. Senator From Illinois:
        Questions Submitted by............................61, 105, 110, 142

    Lautenberg, Senator Frank R., U.S. Senator From New Jersey:
        Prepared Statements of....................................... 4, 41
        Questions Submitted by.......................................
          60.........................................................
        Statements of............................................4, 41, 116

    Miller, Brian D., Inspector General, General Services
      Administration.................................................
      75.............................................................
        Prepared Statement of........................................
          76.........................................................
        Questions Submitted to.......................................
          108........................................................
    Moran, Senator Jerry, U.S. Senator From Kansas:
        Prepared Statement of........................................     3
        Questions Submitted by.......................................
          140........................................................
        Statements of........................................3, 45, 69, 115

    Tangherlini, Daniel M., Acting Administrator, General Services
      Administration.................................................
      65.............................................................
        Prepared Statement of........................................
          72.........................................................
        Questions Submitted to.......................................
          90.........................................................
        Summary Statement of.........................................
          70.........................................................

                                 SUBJECT INDEX

                                  ----------

                      COMMODITY FUTURES TRADING COMMISSION

                                                                       Page

    Agricultural Swaps...............................................    20
    Business Conduct Rules...........................................    13
    Core Principles..................................................    15
    Emergency:
        Actions......................................................    24
        Authority....................................................    23
    Fear of Growth...................................................    29
    Funding Needed for New Responsibilities..........................    28
    Genesis of the Market............................................    27
    Implementation...................................................    15
    Legal Segregation With Operational Comingling....................    19
    Market Impact on Prices..........................................    17
    Position Limits..............................................14, 16, 26
    Registration and Product Reviews.................................     8
    Speculation......................................................    26
        and Pricing..................................................    21
    Surveillance:
        Meetings.....................................................    25
        To Detect Emergencies........................................    25
    User Fees........................................................    14

                           DEPARTMENT OF THE TREASURY

                            Office of the Secretary

    Accelerated Depreciation.........................................    48
    Additional Committee Questions...................................    56
    Derivative Market Reforms........................................    46
    Domestic Finance:
        Financial Institutions/Federal Insurance Office..............    59
        Housing..................................................57, 60, 61
    Early Effects of Home Affordable Modification Program Principal
      Reduction Alternative on Redefault Rates.......................    43
    Economic:
        Growth and Job Creation......................................    37
        Policy.......................................................    61
    Entrepreneurship Opportunities...................................    47
    Federal Housing Finance Agency's Lack of Principle Reduction
      Policy.........................................................38, 42
    Financial Crimes Enforcement Network Information Technology
      Modernization..................................................    53
    Improving Efficiency, Reducing Taxpayer Costs, and Reforming
      Government.....................................................    36
    International Affairs............................................    62
    Mortgage Principle Reduction.....................................    41
    Office of Foreign Assets Control Sanctions Against Iran, Sudan,
      Belarus, and Syria.............................................    53
    Protect Our National Security Interests and Prevent Illicit Use
      of the Financial System........................................    37
    Sale of Agricultural Goods to Cuba...............................    55
    Small Business Lending Fund......................................    53
    Student:
        Loan Crisis..................................................    48
        Loans........................................................    42
    Taxpayer Support of Freddie Mac and Fannie Mae...................    56
    Terrorism and Financial Intelligence:
        Financial Crimes Enforcement Network.........................    59
        Terrorist Financing and Financial Crimes/Office of Foreign
          Assets Control Sanctions...................................    63
    The Effect of the Principal Reduction Alternative on Redefault
      Rates in the Home Affordable Modification Program: Early
      Results........................................................    42
    Volcker Rule.....................................................    52

                            FEDERAL TRADE COMMISSION

    Additional Committee Questions...................................   140
    Budget Request for the Federal Communications Commission
      Inspector General..............................................   137
    Cramming.........................................................   134
    Funding for Research and Development.............................   126
    License Renewals...............................................125, 128
    Posting Broadcasters' Public Inspection Files Online...........135, 138
    Privacy..........................................................   128
    Public Safety Network............................................   127
    Regression Model.................................................   141
    Spectrum Crunch..................................................   123
    Universal Service Reform.............................123, 126, 131, 138
    Waiver...........................................................   140

                        GENERAL SERVICES ADMINISTRATION

    Addendum on Agency Improvements..................................   113
    Additional Committee Questions...................................    90
    Centralize:
        Agency Information Management................................   113
        Program and Budget Management................................   113
    Civilian Property Realignment Board.........................87, 88, 104
    Construction.....................................................    82
    Cost:
        Cutting Measures.............................................   103
        Savings at the General Services Administration...............    73
    Denver Federal Center Remediation................................    98
    Effect:..........................................................
        Of Reduced Spending on the General Services Administration's
          Ability To Pay Bills and the Effect on Federal Agencies....    94
        On:
            Building Projects........................................    95
            Federal Agencies.........................................    95
    Effects of:
        Little Construction and of No Major Repairs to Buildings.....    68
        Slowing Down the Department of Homeland Security Headquarters
          Construction Project (St. Elizabeths)......................    98
    Federal Trade Commission Building................................    83
    Fiscal Year 2013 Budget:
        For the Federal Buildings Fund...............................   102
        Request......................................................69, 73
    General Services:
        Administration:
            Inspector General Report on the Western Regions
              Conference.............................................    67
            Position on Pending Legislation on Civilian Property
              Realignment............................................    88
        Administration's Corrective Actions..........................    91
    Get:
        Back to Basics...............................................   113
        Out of the ``Matrix''........................................   114
    ``Hats Off'' Program--Employee Rewards Program...................   109
    Holding Officials Responsible....................................    72
    Improper Contracting............................................91, 108
    Intern Conference................................................    78
    Interns Conference...............................................    93
    Lost Conference Survey Forms.....................................    92
    Noncompliance With Fire Safety Act...............................   108
    Office of Inspector General Reports..............................    80
    Problems at Public Buildings Service--Systemic?.................94, 109
    Promoting Efficiency and Reducing Costs..........................    72
    Proposal To Move the Federal Trade Commission From Its
      Headquarters Building..........................................   101
    Reduced Federal Building:
        Construction and Effect on Agencies..........................    97
        Repairs......................................................    99
    Region 9 Commissioner--History of Excessive Expenditures?........    93
    Regional Oversight...............................................80, 81
    Require Procurement Accountability...............................   114
    Taking Action....................................................    72
    Targeted Investments in Critical Infrastructure..................    73
    The Federal Buildings Fund.......................................    68
    Transition at the General Services Administration................    87
    Was Training To Enhance Job Skills Conducted?...................90, 108
    We Must Pay the Obligatory Bills.................................    68
    Western Regional Conference..............................77, 79, 82, 85
        Per Diem................................................86

               Community Development Financial Institutions Fund

                       CONSUMER PRODUCT SAFETY COMMISSION

                         OFFICE OF PERSONNEL MANAGEMENT

                       SECURITIES AND EXCHANGE COMMISSION

                         SMALL BUSINESS ADMINISTRATION

                       UNITED STATES POSTAL SERVICE deg.

                                       -