[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.''
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                     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.

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