[House Hearing, 114 Congress]
[From the U.S. Government Publishing Office]



 
    FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR 2017

_______________________________________________________________________
_______________________________________________________________________

                                 HEARINGS

                                 BEFORE A

                           SUBCOMMITTEE OF THE

                       COMMITTEE ON APPROPRIATIONS

                         HOUSE OF REPRESENTATIVES

                     ONE HUNDRED FOURTEENTH CONGRESS

                              SECOND SESSION
                             _______________

        SUBCOMMITTEE ON FINANCIAL SERVICES AND GENERAL GOVERNMENT

                    ANDER CRENSHAW, Florida, Chairman

  TOM GRAVES, Georgia                  JOSE E. SERRANO, New York
  KEVIN YODER, Kansas                  MIKE QUIGLEY, Illinois
  STEVE WOMACK, Arkansas               CHAKA FATTAH, Pennsylvania
  JAIME HERRERA BEUTLER, Washington    SANFORD D. BISHOP, Jr., Georgia
  MARK E. AMODEI, Nevada
  E. SCOTT RIGELL, Virginia

  
  NOTE: Under Committee Rules, Mr. Rogers, as Chairman of the Full Committee, and Mrs. Lowey, as Ranking
 Minority Member of the Full Committee, are authorized to sit as Members of all Subcommittees.


               Winnie Chang, Kelly Hitchcock, Ariana Sarar,
                    Marybeth Nassif, and Amy Cushing,
                            Subcommittee Staff
                               _________
 
                                  PART 6

                                                                   Page
  Internal Revenue Service..............
                                                                      1
  Office of Management and Budget.......
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  Securities and Exchange Commission....
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  Department of the Treasury............
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                               ____________

                    U.S. GOVERNMENT PUBLISHING OFFICE
 
 21-682                       WASHINGTON : 2016



                      COMMITTEE ON APPROPRIATIONS

                                ----------                              
                   HAROLD ROGERS, Kentucky, Chairman


  RODNEY P. FRELINGHUYSEN, New Jersey                NITA M. LOWEY, New York
  ROBERT B. ADERHOLT, Alabama                        MARCY KAPTUR, Ohio
  KAY GRANGER, Texas                                 PETER J. VISCLOSKY, Indiana
  MICHAEL K. SIMPSON, Idaho                          JOSE E. SERRANO, New York
  JOHN ABNEY CULBERSON, Texas                        ROSA L. DeLAURO, Connecticut
  ANDER CRENSHAW, Florida                            DAVID E. PRICE, North Carolina
  JOHN R. CARTER, Texas                              LUCILLE ROYBAL-ALLARD, California
  KEN CALVERT, California                            SAM FARR, California
  TOM COLE, Oklahoma                                 CHAKA FATTAH, Pennsylvania
  MARIO DIAZ-BALART, Florida                         SANFORD D. BISHOP, Jr., Georgia
  CHARLES W. DENT, Pennsylvania                      BARBARA LEE, California
  TOM GRAVES, Georgia                                MICHAEL M. HONDA, California
  KEVIN YODER, Kansas                                BETTY McCOLLUM, Minnesota
  STEVE WOMACK, Arkansas                             STEVE ISRAEL, New York
  JEFF FORTENBERRY, Nebraska                         TIM RYAN, Ohio
  THOMAS J. ROONEY, Florida                          C. A. DUTCH RUPPERSBERGER, Maryland
  CHARLES J. FLEISCHMANN, Tennessee                  DEBBIE WASSERMAN SCHULTZ, Florida
  JAIME HERRERA BEUTLER, Washington                  HENRY CUELLAR, Texas
  DAVID P. JOYCE, Ohio                               CHELLIE PINGREE, Maine
  DAVID G. VALADAO, California                       MIKE QUIGLEY, Illinois
  ANDY HARRIS, Maryland                              DEREK KILMER, Washington
  MARTHA ROBY, Alabama
  MARK E. AMODEI, Nevada
  CHRIS STEWART, Utah
  E. SCOTT RIGELL, Virginia
  DAVID W. JOLLY, Florida
  DAVID YOUNG, Iowa
  EVAN H. JENKINS, West Virginia
  STEVEN M. PALAZZO, Mississippi

 
                William E. Smith, Clerk and Staff Director

                                   (ii)
                                   
                                   
                                   
                                   


   FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR 2017

                              ______________                              --


                                       Thursday, February 11, 2016.

                        INTERNAL REVENUE SERVICE

                                WITNESS

HON. JOHN KOSKINEN, COMMISSIONER, INTERNAL REVENUE 
    SERVICE
    Mr. Crenshaw. Well, good morning, everyone. The hearing 
will come to order.
    This is the subcommittee's first hearing of the year. So 
welcome to all our returning members. Glad to have you back. 
And always appreciate your attention to these important issues 
that we face here in the subcommittee.
    Today we are going to hear from the Internal Revenue 
Service Commissioner, John Koskinen.
    Welcome, Commissioner. We appreciate you taking the time to 
be with us today, and especially since the budget was released 
so recently. Thank you for being here.
    As a matter of housekeeping, we are going to follow the 5-
minute rule that we did last year. Members are going to be 
recognized in order of seniority, those that were here when the 
meeting started, and the latecomers will be recognized in order 
of their arrival, and we will go back and forth from side to 
side. And if everyone will try to keep their questions and 
comments to 5 minutes, then everybody will have a chance to be 
heard.
    Now, over the past 5 years, the IRS budget request, in my 
view, has been a little bit unrealistic, a little bit 
excessive, because it has averaged $1.6 billion, or 14 percent, 
above the last year's enacted level. And the IRS hasn't 
received either a dollar or a percentage increase of that 
magnitude over the past 20 years, so history would not seem to 
be in your favor.
    Now, this year's request is not quite as excessive. For 
2017, the IRS is requesting $12.3 billion. That is $1 billion, 
or a 9.3 percent increase, over last year. However, less than 
20 percent of the budget increase is for taxpayer services, 
strengthening cybersecurity, and eliminating identity theft. 
This committee believes that these three activities should be a 
top priority of the IRS and they should be funded accordingly.
    In addition, the budget before us today removes some of the 
good government provisions that cure what we believe ails the 
IRS, such as reviewing the appropriateness of the videos that 
are made, complying with the Federal Records Act, guarding 
against excessive conference spending, upholding the 
confidentiality of taxpayer information, and prohibiting the 
targeting of taxpayers based on their ideological beliefs.
    Now, Commissioner, last year, we asked you to show Congress 
and all Americans that it is no longer going to be business as 
usual at the IRS. So sometimes it is hard for us to take 
seriously this budget request when the IRS again asks for an 
unrealistically high amount that doesn't make customer service 
a priority and fails to adopt some of the good government 
reforms that we added on this committee last year.
    Moreover, the IRS has fallen short of its mission to 
provide top-quality tax services and fairness to all. For far 
too long, too many calls into the IRS are either abandoned, 
they are dropped, or they are met with a busy signal. 
Inexcusably, the last tax season, only 37 percent of all the 
calls were answered by IRS. Telephone wait times just about 
tripled since 2010, and the inventory of tax-related identity 
theft cases rose nearly 150 percent since 2014.
    So for the past 2 years, I have asked this agency to make 
customer service a priority. And each year we learn that 
customer service diminishes. Now, you may argue it is because 
the IRS budget has been cut, and I might argue that it is 
because the IRS chooses to spend its funds on other areas, like 
the Affordable Care Act, bonuses, and conferences. But 
nevertheless, Congress included $290 million in the omnibus for 
the IRS to answer the phone, to improve fraud detection, and 
cybersecurity, and we expect to see results.
    Recent cyber attacks on the Federal Government and private 
businesses have all of us worried about identity theft, 
especially when it comes to filing taxes. Later today the 
Oversight and Government Reform Committee is going to hold a 
hearing with your chief technology officer on last week's IRS 
hardware failure and the destruction of an IRS hard drive 
despite a court preservation order to preserve its contents.
    Now, I look forward to hearing from you today on how the 
agency is providing taxpayers with both privacy and assistance.
    Along the lines of fairness, public confidence in the IRS 
was deeply betrayed when it came to light that the IRS was 
using inappropriate criteria for selecting tax-exempt 
applications for extra scrutiny. And so the omnibus took a 
major step toward restoring public confidence in the IRS by 
including a new provision that prohibits the IRS from using its 
funds to revise regulations for the 501(c)(4) organizations.
    This committee would also caution the IRS against wading 
into further controversy, such as when you proposed draft 
regulations that would put charities or 501(c)(3) organizations 
in the position of collecting and reporting Social Security 
numbers of their donors to the IRS. Members of this committee, 
other members, including myself, questioned the need for this, 
and we are glad to see the IRS formally withdraw the proposed 
rule. We don't want to see the IRS take any steps backwards.
    Now, with the budget release this past Tuesday, I look 
forward to hearing from you how the 2017 plan is going to 
modernize and transform your organization into one that is more 
customer service oriented, which stresses integrity and 
fairness to all. From what I have been able to observe, past 
funding cuts have clearly motivated the IRS to deliver more 
service online and increase automation, and every organization 
ought to constantly strive for greater efficiency. But these 
changes are meaningless without objective measures to evaluate 
their effectiveness.
    So I would encourage you to report back quantifiable 
results to the committee and to members to accommodate 
taxpayers. We want to make sure that you also deal with folks 
that maybe aren't as technologically advanced as others.
    But let me close on a positive note, Commissioner. Let me 
thank you for your personal dedication to the success of the 
ABLE Act. Some of you all know that was the major reform to 
individuals with disabilities, first time in 25 years, allows 
individuals with disabilities, autism, Down syndrome, to set up 
a tax-free savings account as long as they use those proceeds 
for qualified expenses. And that is going to give peace of mind 
to a lot of families. It is going to allow individuals with 
disabilities to achieve their full potential.
    And right now, 37 States have enacted some sort of ABLE Act 
legislation. I am happy to report that my home State, Florida, 
has a State mandate to have it up and running by July 1 of this 
year, and it wouldn't have happened without your commitment and 
the commitment of the IRS to get those regulations out, make 
them understandable, simple. So we thank you for that, on 
behalf of millions of individuals with disabilities around the 
country. Thank you for that.
    So now, I want to turn to Mr. Serrano for any opening 
statement he might make.
    Mr. Serrano. Thank you, Mr. Chairman. And I thank you for 
your cooperation and your support of all members of the 
committee. I am one who believes that, notwithstanding the 
omnibus situation that we always have at the end of the year, 
it is not this committee that causes that. Although, it is this 
committee where some members--not on this committee--would like 
to put so many riders on the bill that make it difficult then 
for the bill on the floor and otherwise. But maybe this year we 
can convince them that they want to go home earlier and it is 
better not to have riders on it.
    This is our first subcommittee hearing of the year, and I 
look forward to working with you once again. We have a number 
of important hearings planned, including with some folks who 
our friends on the Budget Committee don't feel like meeting 
with. So I look forward to moving forward with our process.
    Today, I would like also to welcome our Commissioner back 
before the subcommittee. He took over the helm of the Internal 
Revenue Service during a very difficult time in the agency's 
history, and I believe he has done a strong job of righting the 
ship and making sure that the employees there are focused on 
their mission.
    That said, there is only so much the Commissioner can do 
without sufficient resources, and that is where this 
subcommittee comes in. While we were able to increase funding 
for the IRS by $290 million above the fiscal year 2015 level, 
compared to the deep cuts suffered by the agency in previous 
years, this increase is insufficient.
    Last year, numerous nonpartisan reports--from the Taxpayer 
Advocate to the Treasury Inspector General for Tax 
Administration to the Center on Budget and Policy Priorities--
noted the negative impact that budget cuts have had on taxpayer 
services and dollars collected.
    The omnibus funding increase was a downpayment on the 
necessary investments needed for the IRS to succeed, and I 
believe that more investment is needed to help reverse these 
declines.
    That is why I support the fiscal year 2017 budget request 
proposed by the President. It includes a significant increase 
over last year's level and is spread across several 
initiatives, from improving taxpayer service to the continued 
implementation of the Affordable Care Act.
    Much of this increase is devoted to the core mission of the 
agency: helping ensure that Americans can file their taxes in a 
timely and accurate manner and ensuring that those who attempt 
to cheat the Federal Government are caught and punished. In my 
view, much of this increase should be acceptable to both sides 
of the aisle.
    Last year, we reached consensus that the IRS needed further 
investment in order to collect the revenue owed to our country 
and to ensure that everyone plays by the same rules. I hope we 
follow the same bipartisanship spirit this year.
    Before I conclude, I do want to express my concern over 
language that was added to the surface transportation bill, the 
FAST Act, last year requiring the IRS to use private debt 
collection agencies. We have seen in the past that this is a 
waste of taxpayer money and that requiring private entities to 
take on essential government function leads to confusion and 
abuse.
    I strongly opposed these efforts in the past, and it is my 
expectation that no private debt collection program should take 
place without sufficient safeguards in place. And if those 
safeguards cannot be found, then I expect the program will not 
move forward.
    I hope you will be able to discuss this issue and we will 
all be able to discuss this issue in more detail today.
    And I must say, Mr. Chairman, in closing that we have had 
this discussion before in this committee, both under your 
chairmanship, my chairmanship, and at other times, Mrs. 
Emerson, and the consensus throughout the years has been that 
these debt collectors in many cases abuse and mistreat people 
rather than collect the debt they are supposed to collect. So 
it is something we should be very careful about when we deal 
with it.
    Commissioner, welcome back, and I look forward to your 
testimony.
    Thank you, Mr. Chairman.
    Mr. Crenshaw. Thank you, Mr. Serrano.
    I would like to now recognize Mr. Rogers, who is chairman 
of the full committee, for any opening statement he might like 
to make.
    Chairman Rogers. Mr. Chairman, thank you for recognizing 
me.
    Mr. Commissioner, welcome back to the committee.
    Since fiscal year 2011, this committee has pared back IRS' 
astronomically high budget requests on a bipartisan basis. This 
is largely a result of this committee's concerted effort to 
reduce discretionary spending government-wide, justifiable 
concern over the implementation of ObamaCare and the Foreign 
Account Tax Compliance Act, and multiple objectionable 
management decisions at the agency; for example, targeting 
certain groups based on their ideological beliefs and 
destroying documents. It is therefore surprising to see that 
the fiscal year 2017 budget request is $12.3 billion, a 9.3 
percent increase over the enacted level of 2016.
    There are a number of issues with this request that you 
have made of us. Three in particular stand out.
    First, the bipartisan budget agreement does not allow for a 
discretionary cap adjustment for the IRS. As you know, this 
would require a statutory change outside the jurisdiction of 
this committee, a legislative change that has been rejected by 
both the House and Senate Budget Committees for the previous 5 
years.
    If the activities funded by the discretionary cap 
adjustment are important to the administration, then you ought 
to operate within the amount allowed under the Bipartisan 
Budget Agreement. The IRS needs to prioritize spending like 
every other Federal agency.
    Second, this Congress has repeatedly rejected additional 
funding for the implementation of ObamaCare. I am concerned, as 
are my colleagues, that the IRS, through CMS, made billions in 
payments to insurance companies without the approval of 
Congress.
    The courts, of course, will be the final arbiter of that 
issue, but I can say without doubt at this time that this 
committee has never appropriated a single penny to permit the 
administration to make any Section 1402 offset program 
payments.
    Finally, I am disappointed that the IRS requests to 
eliminate the three administrative provisions that have been 
enacted on a bipartisan basis for several years. Since the IRS 
targeting and spending scandals, appropriation bills have 
included prohibitions against targeting U.S. citizens for 
exercising their First Amendment rights, targeting groups for 
regulatory scrutiny based on their ideological beliefs, and 
making videos without advance approval. We are dealing with the 
taxpayers' money, and these provisions lay out what most people 
would consider commonsense policies.
    Mr. Commissioner, we are glad to have you with us today. 
This committee takes seriously our role in overseeing the 
budget and policies of the IRS, and I appreciate your continued 
engagement with us.
    This is the first hearing of this subcommittee for the 
year. It is also the first hearing of the entire committee for 
the year. We will have over 100 of these types of hearings 
among the 12 subcommittees, trying to oversee the spending of 
the Federal Government and trying to cut waste, fraud, and 
abuse, as we go.
    So, Mr. Commissioner, thank you for being here.
    I yield back.
    Mr. Crenshaw. Thank you.
    Commissioner, I would like to now recognize you. If you 
could keep your oral presentation to about 5 minutes, that will 
give us more time for questions. And your entire statement will 
be included in the record. So the floor is yours.
    Mr. Koskinen. Thank you. I will do my best.
    Chairman Rogers, Chairman Crenshaw, Ranking Member Serrano, 
members of the subcommittee, thank you for the opportunity to 
discuss the IRS budget and current operations.
    I want to begin by thanking you for the $290 million in 
additional funding for fiscal year 2016. These funds were 
specifically designated for improving taxpayer service, 
strengthening cybersecurity, and expanding our efforts against 
identity theft. It is the first time in 6 years the IRS has 
received significant additional funding. It is a major step in 
the right direction, and I can assure the Congress and this 
committee we will use these resources wisely and efficiently.
    But the IRS is still under significant financial 
constraints. Even with the additional $290 million, our budget 
for 2016 is still about $900 million below where it was in 
2010. As a result, we have had no choice but to continue the 
exception-only hiring policy that began in fiscal year 2011, 
that leaves us unable to replace most employees we lose through 
the year through attrition. In fact, we expect the IRS 
workforce to continue to shrink by another 2,000 to 3,000 full-
time employees this year, for a total loss of more than 17,000 
employees since 2010.
    We recognize the importance of spending taxpayer dollars 
wisely, and we will continue working to find efficiencies in 
our operations. But a fact that often gets overlooked is the 
U.S. is much more efficient in its tax collection than most 
other countries. The average OECD member country spends $8.87 
to collect $1,000 of revenue, while the U.S. spends only $4.70, 
about half. And so, I believe, it is important to understand 
that we already are one of the most efficient tax 
administrations in the world.
    The IRS is also continuing to strengthen our operations as 
we move forward. In that regard, we have addressed a number of 
management problems that developed in the past, including all 
of the issues that Chairman Crenshaw mentioned. We have dealt 
with all of those. Those problems are not going to recur again.
    And in particular, in the tax-exempt area, of concern to 
all of us, we welcomed the Senate Finance Committee's 
bipartisan report issued in August. And in addition to having 
accepted all of the IG's recommendations made 3 years ago in 
its report, we accepted, and have virtually completed, the 
implementation of all of the recommendations of the Senate 
Finance Committee bipartisan report, including the 
recommendations in the majority report and the recommendations 
in the minority report.
    In developing our funding request for fiscal year 2017, we 
felt it was important to be as specific as possible in 
describing our priorities and the cost of each one. So while 
the President's 2017 budget for the IRS requests a total 
increase of about a billion dollars, we have broken that down 
into 15 separate initiatives. We believe this will give 
Congress a good sense of how we intend to spend any increase in 
funding we might receive.
    And, I think equally important, we are prepared to be held 
accountable for achieving the goals related to each initiative. 
Let me briefly highlight some of the major areas covered by 
these initiatives.
    First, taxpayer service. The additional funding will help 
us improve service delivered through traditional channels, and 
allow us to continue modernizing the services we offer, to help 
transform the taxpayer experience.
    Second, stolen identity refund fraud. The additional 
funding will allow us to keep investing in resources and tools 
to stay ahead of criminals who continue to become more 
sophisticated in stealing identities and filing false refunds.
    Third, our core enforcement programs. With this additional 
funding, we would, for example, be able to increase audits and 
collections. This increase is critical because the ongoing 
decline in enforcement activities we have seen in the last 
several years has translated into, literally, billions of 
dollars of lost revenue for the government.
    Fourth, the Affordable Care Act. We have no choice but to 
implement it. It is a statutory mandate, and we must continue 
to invest in IT infrastructure to support implementation of the 
ACA's most tax-related provisions. I would point out that for 
the past 4 years, the IRS has received almost no funding for 
this implementation, and we have had to use over $1 billion of 
resources needed for other critical IT functions in order to 
meet our statutory obligations under the ACA.
    And fifth, electronic records management. Although we have 
been making progress in preserving and protecting emails and 
other electronic records, we need to continue making 
improvements so we can respond faster and completely to legal 
and congressional inquiries, as well as FOIA requests.
    While providing adequate funding in these and other areas 
is critical, Congress can also help us by passing legislation 
to improve tax administration. In that regard, the President's 
2017 budget request contains a number of legislative proposals 
I would urge Congress to approve.
    They include renewing streamlined critical pay authority, 
allowing us to expand the matching program for taxpayer 
identification numbers, granting us authority to require 
minimum qualifications for paid tax preparers, and expanding 
the electronic filing requirements for businesses.
    This concludes my statement, Mr. Chairman. I would be happy 
to answer any questions you have.
    [The information follows:]
    
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    Mr. Crenshaw. Well, thank you very much.
    And let me start with a couple of questions. You know, you 
mentioned your goals. We have talked about the fact that $290 
million of additional appropriations came to you for those 
three areas: customer service, fraud detection, and better 
dealing with cybersecurity. And you outlined how you plan to 
use that in the sense of having some broad goals.
    Let's begin by telling us specifically what do you plan to 
do. Because one of the things, it is great to have goals, but 
they need to be implemented. And tell us specifically how are 
you going to deal with customer service. Are people going to 
still wait on the telephone? How are you going to deal with 
that?
    How are you going to implement that goal of making sure 
that you are detecting fraud, taxpayer fraud? Because right 
now, customer service is at an all-time low and tax fraud is 
rising every year. Give us a couple of specific ways that you 
are going to try to implement those goals in those three areas.
    Mr. Koskinen. I am delighted to explain. We have given this 
Committee a detailed spending plan, but our goal is your goal, 
and that is not only to spend the money, but see the results. 
As I have said all along, you ought to be able to tell what you 
get for what you pay.
    In taxpayer service, we will spend, of the $290 million, 
about $178 million specifically to improve taxpayer service.
    Mr. Crenshaw. How are you going to do that?
    Mr. Koskinen. And we are going to do that, by hiring up to 
1,000 new temporary and seasonal people. We hire several 
thousand every year, 8,000 to 10,000, to staff the call 
centers, to staff our walk-in centers, to deal with all the 
correspondence. It takes us a little while to get them hired, 
but already the results are in. We have about 25 million 
returns already filed, and the level of taxpayer service has 
already gone up.
    Our goal for the filing season is to have taxpayer service 
move from the 37 percent, 40 percent area into the low 60 
percent area. It won't be where we think it needs to be, 
because the $290 million was out of a request, last year, for 
an additional $700 million in those three areas.
    Part of the reason we have more requests for additional 
funding for taxpayer service in the 2017 budget is that we 
think the level of service ought to be at 80 percent; 80 
percent of people ought to get through, inside 2 to 5 minutes, 
to somebody they need to talk to.
    Specifically, the thousand people, the additional 
adjustment of resources, will allow us this year, we think, to 
have a taxpayer level of service in the low 60 percent. Our 
goal would be to try to get to 70 percent. But if we have the 
additional funding in 2017, we could get to 80 percent.
    Mr. Crenshaw. Twenty percent of that new money was going to 
go for customer service, right?
    Mr. Koskinen. Virtually half of it now. Of the $290 
million, $178 million.
    Mr. Crenshaw. That is good. So that is a big priority, 
right?
    Mr. Koskinen. Yes. Well over half of the money will be on 
taxpayer service.
    Mr. Crenshaw. Tell us about----
    Mr. Koskinen. Cybersecurity.
    Mr. Crenshaw. And before that, just identity theft.
    Mr. Koskinen. Identity theft. As I have said in my 
testimony, we called together, almost a year ago, the CEOs of 
the major tax preparers, the software developers, the payroll 
providers, as well as the State tax administrators. And I told 
them when they came together--it was the first time we had ever 
had that kind of a summit--that the goal was not for me to tell 
them what to do, or the IRS to tell them what to do. The goal 
was to create a true partnership, because we cannot deal with 
identity theft, any one of those groups, by ourselves. We need 
to actually work in concert with the private sector, with the 
States.
    And we have had remarkable success. We have virtually the 
entire tax ecosystem, as it were, working with us to share 
information, to spot suspicious patterns of refund filing. We 
have also worked with them to establish minimum standards of 
authentication. When taxpayers use their services, as one of 
the CEOs said, ``You need--the IRS--to set a standard.'' And I 
said: I am happy to set that standard, as long as you define it 
so it works for you.
    The net result of that is that we have 20 different data 
elements that we now have, that we didn't have before. We are 
sharing information on a regular basis. We have been able to 
actually move forward in such a way that the private sector 
leaders move from requesting, to almost demanding, that we make 
the partnership permanent, because it has been so effective for 
them, for the States, and us.
    Mr. Crenshaw. How much did we lose--do you know the latest 
number--in terms of tax identity theft? One time there was like 
$9 billion. What is that number today?
    Mr. Koskinen. In 2013, the GAO number in review with us was 
about $5 billion. We think we have it down, but it is still a 
significant number. We think this year--we already see--we have 
been able, thanks to having found some money ourselves, to get 
our filters to work better. Part of the way we caught the 
attack that took place in the last couple weeks was improved 
detection capacity.
    And what we would do with the $95 million we are devoting 
to cybersecurity, out of the $290 million, and we have specific 
additional resources we are providing that we will share with 
you, is we hope we will be able to finally begin to catch up 
with, if not get ahead of, the criminals.
    One of the ways we measure that is the percentage of 
suspicious returns and refunds we are able to stop. We already 
have stopped 300,000 suspicious returns just in the front end 
of this filing season, many of which we would not have been 
able to stop before. So it is the IT monitoring. It is being 
able to segregate our systems to be able to determine what is 
going on.
    In the most recent attack, as we stopped one attack, we 
could watch it moving. As I said yesterday, one of the things 
people don't realize is we are all in this battle, and that is 
why I brought the private sector in. We get pinged or probed a 
million times a day, a number that is hard and mind-boggling to 
think of.
    We are dealing with increasingly sophisticated organized 
crime syndicates around the world, attacking not only us, but 
attacking private sector companies and banks. Banks in the 
financial sectors are part of the security summit that we have 
put together, and we are working with them regularly.
    Mr. Crenshaw. Great. Well, thank you for that.
    Let me go now to Mr. Serrano.
    Thank you, sir.
    Mr. Serrano. Thank you, Mr. Chairman.
    We know that we were able to agree on an increase last year 
for the IRS, and that was a good thing. I hope we can continue 
it. But there are many people who still feel that it is 19 
percent below the fiscal year 2010 funding level.
    So my question is, what do you believe the long-term 
impacts of these cuts the IRS has experienced since 2010 will 
be? And how does your request for this year begin to repair the 
damage done by these cuts?
    Mr. Koskinen. We have tried to explain that, ultimately, 
the government functions on voluntary tax compliance. We 
collect over $3 trillion a year, the vast majority of it 
voluntarily.
    People participate voluntarily, first, because they think 
the system is fair. So one of the advantages of the Foreign 
Account Tax Compliance Act isn't just the money we will 
collect, it is that the person in Des Moines or Ashland, 
Kentucky, when they write their check, will feel rich people 
aren't getting away with something, hiding their money in 
Switzerland. That is no longer possible.
    People also do it because they know we have information. 
And while we try to work very hard with taxpayers trying to be 
compliant, if you are trying to cut corners or cheat, they know 
if we have got the information, we are not going to be pleased 
with that, and we will track you down.
    Taxpayer service is an element of compliance. In other 
words, I have always thought enforcement and taxpayer services 
are two sides of the compliance coin. So we need to provide 
appropriate taxpayer service. We need to make it as easy as 
possible for people to figure out what to do if they owe, and 
how to pay it. We need to be able to do that, for those who 
wish, online. Most people don't want to call us. They would 
like to get the information and just file.
    On the other hand, enforcement is important. It is not so 
much the $50 billion to $60 billion we collect with the 
enforcement funding, although that is significant money, 
obviously; it is that, again, people feel that, if I didn't 
pay, somebody would come and collect. And therefore, if the 
enforcement activities begin to decline, and people over the 
water cooler at their country clubs are saying, ``Well, you 
know, I did this and nobody called me'' or I got away with 
that, it is corrosive to compliance.
    Simply leading into this year, we have 5,000 fewer revenue 
agents, officers, and criminal investigators. At the end of 
this year, we will have 6,500 fewer. The fewer people we have, 
the fewer audits we do. The audit coverage rate has gone from 
1.1 percent to 0.6 percent.
    So we estimate on the numbers--and again, we are happy to 
share those performance measures--that, it is costing the 
government $4 billion to $5 billion lost every year. And I 
guess it is the audits and the cases that we cannot pursue 
because we do not have enough people to do that.
    We lose money on the one hand, but we also undercut--at 
some point risk undercutting--the voluntary compliance system 
if people think that the enforcement mechanism in the IRS is 
being constrained, underfunded, and no longer effective.
    Mr. Serrano. Let me ask you something. I have been here a 
bunch of years, and so have these other gentlemen, except for 
those two guys over there, the young ones. On one hand, you 
present a picture that I believe in, an agency that does its 
work and gets respect from most of the American people. And yet 
you have some Members of Congress, a large number, who have 
always seen the IRS as a problem. If they could get rid of it, 
I don't know who would collect the taxes, but they would be 
very happy.
    Briefly, because I know my time is running out, why do you 
think the difference of opinion? Obviously, it would be easy to 
say it is a political statement. But there is no real political 
gain in saying let's not collect taxes, although nobody wants 
to pay taxes. So why the difference?
    Mr. Koskinen. I think, around the world, tax collectors are 
not the world's most popular group. Many people ask me: Why did 
you take this job?
    It is important, I think, ultimately for people to 
understand tax collection is a critical function of government. 
Not only do we collect 93 percent of the money that funds the 
programs everyone else supports, but we deal with virtually 
every American. We, in the last year, had 150 million 
individuals file tax returns.
    And that is why I agree with the Chairman: taxpayer service 
is a critical issue. It is why I was as concerned, more 
concerned probably, than most people about the relatively 
abysmal level of service last year. Taxpayers deserve, and need 
to be able to get, service properly. When you call us, you 
should be able to get through, you should be able to get 
somebody knowledgeable, well-trained, able to answer your 
question.
    As Justice Holmes said a long time ago, taxes are the price 
we pay for democracy. Basically, without the funding, the 
government can't function, whether it is defense, whether it is 
Social Security, whatever it is.
    We have an obligation. I take Chairman Rogers' point and 
Chairman Crenshaw's point, that we have an obligation, not only 
to provide effective service and appropriate service and 
appropriate collection activities, but we have an obligation 
for taxpayers to feel they are going to get treated fairly. 
That it doesn't matter who they voted for, what party they 
belong to, what organization they support.
    And as I have said, people need to understand--because even 
with the low coverage rate we will still do a million audits 
this year--they need to understand when they hear from us, it 
is because of something in their return. And if somebody else 
had that same issue, subject to resource constraints, they 
would hear from us as well.
    One of the things I have taken on, and I think the concerns 
have been appropriate, it is critical for us to ensure that we 
restore whatever trust has been lost in the ability of this 
agency to function as a tax administration agency, without any 
agendas beyond that, treating everyone fairly.
    Most importantly, one of the things I have been trying to 
stress is, we spend a phenomenal amount of time trying to help 
taxpayers. I know we have an image of, well, you know, we knock 
on the door, we are chasing you for money. We spend a 
phenomenal amount of time on assistance.
    And as I have said, if you are trying to be compliant, you 
don't have to call somebody on late night TV to deal with us. 
You can call us. We will try to figure out. If you are having 
trouble making a payment, we have online installment 
agreements, we have offers in compromise. Our goal is to have 
people be compliant when they are trying to be compliant.
    Mr. Crenshaw. Thank you.
    Mr. Serrano. Thank you.
    Mr. Crenshaw. Mr. Rogers.
    Chairman Rogers. Thank you, Mr. Chairman.
    A recently released GAO study on the 2015 tax filing season 
highlights just how bad customer service has become at the IRS. 
That report found that roughly only one-third of taxpayers who 
called the IRS for assistance had their calls answered. One-
third. Two-thirds did not get an answer. The report also showed 
that call wait times have more than tripled in just the last 5 
years.
    Because of multiple poor management decisions at IRS, the 
budget has been either cut or held flat since 2010. Blame for 
long phone wait times and the decline in customer service is 
often placed on these budget cuts. However, nothing in the 
Financial Services appropriations bill explicitly reduces 
funding for customer service. To the contrary, funding for 
customer services was increased in fiscal year 2014 and fiscal 
year 2016.
    Under your leadership at IRS, funding has been prioritized 
for implementation of ObamaCare and the Foreign Account Tax 
Compliance Act, and your customers, the U.S. taxpayers, have 
paid the price.
    Since our committee has increased funding specifically for 
taxpayer services in recent years, how do you explain the 
continuing decline in customer service, which you, yourself, 
have admitted as abysmal?
    Mr. Koskinen. I testified 2 years ago, shortly after I 
became the IRS Commissioner, and noted, in fact, at my 
confirmation hearing 2\1/2\ years ago, this agency does 
statutory mandates. The chairman has talked about our efforts. 
With no funding, we have a number of statutory mandates. 
Unfunded or not, we do them. We have taken the ABLE Act 
seriously. We take all of the statutory mandates seriously, 
including private debt collection. When the Congress gives us a 
requirement, we do it. It is the highest priority.
    So Congress, as I noted in my testimony, has underfunded us 
for the Affordable Care Act. That does not remove the statutory 
mandate we have to implement the act. We have to implement the 
Foreign Account Tax Compliance Act. We have no choice.
    So when no funding is provided for those, we have to find 
the funding somewhere else. And as I said 2 years ago, at the 
continued level of underfunding, the things that were going to 
suffer were going to be enforcement, taxpayer service, and, 
ultimately, information technology.
    The $900 million that we did not get for information 
technology, for funding the unfunded mandates, had to come from 
other IT projects. We do not replace and install every patch 
that we get. We get thousands of security patches and upgrades. 
They all take time and money and effort. We have to prioritize, 
which we can do----
    Chairman Rogers. But have you taken money from customer 
services to do these other?
    Mr. Koskinen. No. We have actually, if you look at it, the 
only thing we have taken from customer service from last year 
is we have spent fewer user fees there. We have never been 
fully funded in the last 3 or 4 years for customer service. We 
have been using our user fees, which normally would help us 
with unfunded mandates, to support taxpayer service. Last year 
we provided user fees to taxpayer service, but we did not have 
enough user fees, as in prior years. We had to spend them 
elsewhere.
    Chairman Rogers. Stay on track here with me a minute.
    Mr. Koskinen. Pardon?
    Chairman Rogers. Stay on track here a minute.
    Mr. Koskinen. I am saying, we spent----
    Chairman Rogers. No, no, no. Let me ask you a question.
    Mr. Koskinen. Good.
    Chairman Rogers. We increased customer services funding in 
fiscal year 2014 and for 2016. Nothing in this bill, these 
bills, reduced funding for customer service. If service is so 
bad, as GAO says it is, and we have funded customer service, 
you say that you have had to use moneys from all over to fund 
these other mandates, our question is, the mandate we want you 
to have is to serve the public, and you are not doing that, 
according to GAO.
    Mr. Koskinen. We share that goal. The budget process, when 
you look only at the appropriation, ignores--and we have drawn 
this to the attention to your staff as well as the Committee--
that we have $250 million to $300 million of user fees we 
collect every year historically. I am sorry, we have $250 
million to $300 million----
    Chairman Rogers. Go ahead.
    Mr. Koskinen. We have $250 million to $300 million of user 
fees that historically have been used for unfunded mandates, 
other expenditures. Because the appropriation for taxpayer 
service has not been fulsome, we have historically devoted a 
lot of those user fees to taxpayer service.
    The appropriated amount, you are exactly right, went up by 
several million dollars. But what we were not able to do last 
year was put the same amount of user fees into taxpayer 
services. We ended up spending $100 million less of user fees--
and we made that very clear, your staff understands that--on 
taxpayer service, because those user fees had to be spent to 
fill the other holes in our budget.
    We have the same problem this year. At the end of this 
year, our balance of user fees will be at the lowest level in 
the last 15 or 20 years.
    Chairman Rogers. But how can you defend yourself against 
GAO's determination that only one-third of taxpayers who called 
the IRS even got their call answered? Only a third of them. 
Two-thirds never got an answer.
    Mr. Koskinen. That is right, and one of the reasons we 
appreciate the Congress' additional funding this year. And we 
are spending the vast majority of it, over half of it, on 
taxpayer services. We couldn't agree more.
    Two years ago, when our level of service was at a higher 
level, I noted that if the budget continued to be cut, we were 
going to see lower enforcement, lower taxpayer service, and 
threats to IT.
    So the Committee's actions, and the Congress' action, by 
giving us the $290 million, I think, is a significant step 
forward. As I say, we expect taxpayer service to be 
significantly better this year. It won't be at the level we 
want it to be because the funding of $290 million doesn't fill 
all of the gaps that the $700 million in additional requests 
last year, for those three areas, would have done. But it will 
be noticeably different.
    I think Chairman Crenshaw is right. If you give us the 
money, we should be able to show you the results. And my hope 
is, as taxpayer service gets better this year, the Committee 
will understand, if more money is provided there, and we don't 
take it out of someplace else, the service level will 
ultimately get to a point that 80 percent of people will get 
through in less than 5 minutes.
    It is the goal. We used to be able to do that. Before the 
budget cuts there were days in the mid-2000s when that was the 
level.
    But I couldn't agree with you more, and we agree with the 
GAO. We have, ourselves, been noting, as you note, and 
describing it as unacceptable to continue to run at that level 
of taxpayer service.
    Chairman Rogers. Well, the report also showed that call 
wait times have more than tripled----
    Mr. Koskinen. Exactly.
    Chairman Rogers [continuing]. In the last 5 years. Tripled.
    Mr. Koskinen. And in the last 5 years, the budget has gone 
down every year.
    Chairman Rogers. And we have increased your funding for 
customer services.
    Mr. Koskinen. I have told you. We have spent, the year 
before that, $150 million to $200 million in user fees on 
taxpayer service, because it is a priority. Last year, with the 
additional significant budget cuts, we could not do that. We 
could only put $50 million of user fees in. So taxpayer service 
last year, the funding went down by $100 million because of the 
budget cuts.
    But I would stress, we totally agree with you. It is unfair 
to taxpayers. It is not the way the government ought to 
operate.
    And the wait times are as bad as the so-called courtesy 
disconnects. You should be able, when you call us, to get 
through in less than 5 minutes. We won't quite meet the 5-
minute deadline this year because, again, we don't have the 
resources. The increase is significant, but not sufficient. But 
you will see a noticeable improvement. The Practitioner 
Priority Line will be better for the first time in several 
years.
    It is a high priority for us. I couldn't agree with you 
more.
    Chairman Rogers. Well, we want to see the statistics to see 
whether it is coming or going, better or worse.
    Mr. Koskinen. If it doesn't go, you have a legitimate 
point, we should be held accountable. If we are going to spend 
$178 million of taxpayer dollars on taxpayer services, the 
services should significantly improve, and we are happy to 
track that with you.
    Chairman Rogers. Would you be able to give this 
subcommittee a status report on how you are doing with that in, 
say, a couple of months?
    Mr. Koskinen. I could give you a status report right now. 
As I say, we have had----
    Chairman Rogers. I am interested in how you are going to 
change things.
    Mr. Koskinen. No, no, the status report. The number I have 
is 25 million returns have been filed, all but a million of 
them electronically. And while we are still at the front end, 
the level of service has gone up to 71 percent. So 71 percent 
of people, as a result of our ability, thanks to your funding, 
have moved in.
    Now, we won't be able to sustain that because we are about 
to get far more calls the rest of the filing season. But our 
goal, and we said that in our plan to you, we should be held, 
measured to, during the filing season this year, going from 
that 37, 40 percent to the low 60s. Our level of service for 
the filing season should be 62 percent.
    For the year--because we had 3 months before we got the 
bill and were running at a really crummy level--our expectation 
is that we will be in the 47 to 50 percent rate, which is 
significantly better than the 37 percent.
    Chairman Rogers. Well, what I want to know, and I want you 
to report to us on April 15----
    Mr. Koskinen. I will be here.
    Chairman Rogers [continuing] I want you to report to us on 
the percentage of people whose calls get through.
    Mr. Koskinen. Yes.
    Chairman Rogers. And how much you have reduced the wait 
times for those who call.
    Mr. Koskinen. Those are exactly the right measures, and I 
will be happy to report those.
    [The information follows:]
    
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    Chairman Rogers. Gotcha. Thank you.
    Mr. Crenshaw. Thank you, Mr. Chairman.
    And, Commissioner, you hear this over and over again from 
this committee, you get $11 billion, and you have got a lot of 
things to do, just like we all have got a lot of things to do, 
and it is all about priority. And what the message is, it seems 
like the most important priority ought to be customer service. 
And I think the criticism is, from time to time, money goes to 
other places that don't seem to be as important as customer 
service.
    So I think you are getting the message that we would say--
sometimes people say: Well, the way the Federal Government 
works is when they cut their budgets, they find the place that 
creates more pain to the average citizen and then everybody 
thinks they need more money.
    So I think you got the message that we just want you to 
make sure that you make this a priority. That is all we have 
got to say.
    Mr. Bishop.
    Mr. Serrano. Mr. Chairman, I noticed that you said he gets 
$11 billion. That is what he is asking for.
    Mr. Crenshaw. No, he is asking for $12 billion.
    Mr. Serrano. Oh, okay. Just checking to see if you were 
committing yourself to the $11 billion.
    Mr. Crenshaw. No, that is last year.
    Mr. Koskinen. You are very careful.
    Mr. Crenshaw. Mr. Bishop, please.
    Mr. Bishop. Thank you very much, Mr. Chairman.
    And thank you, Mr. Koskinen, for being here.
    I have been listening to this discussion, but I know that 
your fiscal year 2017 budget request proposes to restore more 
than $807 million in cuts to the IRS that have occurred over 
the past few years. The cuts, once counting for inflation, 
currently fund your agency at levels comparable to 1998, I am 
told.
    You have indicated that personnel accounts for nearly 75 
percent of your budget and that these cuts have contributed to 
the loss of 13,000 people due to normal attrition, reduction in 
forces, and agency hiring freezes. This loss has translated 
into fewer personnel conducting audits, which you have said, 
and tax enforcement, fewer employees answering the phones to 
respond to taxpayer inquiries, longer wait times.
    As a result, you have indicated that we have suffered a 
degradation of taxpayer services and a loss of billions of 
dollars in enforcement revenue. I am told that for the 2006 tax 
year, that there was a $450 billion gross tax gap. That is the 
difference between taxes owed and taxes voluntarily paid on 
time. That would be a substantial contribution toward reduction 
of the deficit and also providing the additional resources that 
the Internal Revenue Service needs to collect the money that is 
needed to fund the government.
    It seems to me that the cuts over the past 5 years have 
really worked to sort of cut off your nose to spite your face, 
in terms of being able to fund our government.
    And so while customer service is vitally important--and I 
hear it from my constituents day in and day out when they have 
to deal with the IRS and can't get through--if you get this 
restoration, are you going to be able to collect that money, to 
decrease that $450 billion gross tax gap, so that the 
government gets what it is entitled to get under existing law 
without raising tax rates, what is actually owed?
    Mr. Koskinen. Perhaps a way to put this in context for 
everyone is the President's request for 2017 would get us to 
the level--forget about inflation--where we were 7 years ago, 
2010. I don't think there is any other major agency of the 
government that presently is asking, in 2017, simply to be 
restored to 2010's level.
    Since 2010, we have 10 million more taxpayers. We have the 
aforementioned Affordable Care Act, Foreign Account Tax 
Compliance Act, the Health Coverage Tax Credit, private debt 
collection act, and other unfunded mandates we are dealing 
with, with a budget that is not anywhere near where we were 6 
years ago, in 2010. The 2017 billion extra would take us back 
to where we were in 2010.
    So over 7 years, we would have been held flat. And yet, in 
the meantime, if we can get that program integrity cap money, 
the enforcement revenues, net of the expenses over a 10-year 
period in the budget, are projected to generate, to the 
government, a net of $46 billion more revenue, far exceeding 
the billion dollars that is in that budget, and would be every 
year.
    So, again, I would stress when we talk about this budget, 
it is another billion dollars, that would take us back to where 
we were in 2010.
    I would also stress, again, we need to be efficient. We 
need to consolidate our space, we need to make sure that we are 
not printing anything more than we have to, that we are using 
our people efficiently.
    But you have to understand, France, Germany, England, 
Canada, and Australia all spend twice as much as we do to 
collect their revenues. We are already far more efficient as a 
tax collection agency than anyone else.
    I agree we should be as efficient as we can be. But the 
image that somehow $11 billion, or even $12 billion, is a lot 
of money and we must be able to do everything with it doesn't 
correspond with the reality. It is clear to us taxpayer service 
is a priority, but statutory mandates are also a priority. 
Running the filing season every year is a priority.
    Mr. Bishop. Mr. Koskinen, I have got 24 seconds left.
    Mr. Koskinen. Sorry.
    Mr. Bishop. Bottom line is that Congress has required and 
the population increases has required that you do more with 
less. And that has contributed and is a contributing factor, I 
would take it, to the fact that customer service is poor and we 
have got that tax deficit, that tax gap.
    Mr. Koskinen. That is correct. And we are doing, as I said, 
much more with much less. There is a limit to what you can do 
with less, and we are well beyond that limit.
    Mr. Bishop. Thank you, sir. My time has expired.
    Mr. Koskinen. Thank you. Sorry to use so much of your time.
    Mr. Crenshaw. Thank you very much.
    Let's go now to Mr. Graves.
    Mr. Graves. Commissioner, good morning. I hear your 
arguments, and I want to applaud you for doing more with less. 
I remind the committee that we are nearly $20 trillion in debt. 
Over the last 6 years, we have been able to cut nearly $200 
billion from discretionary spending, but there is more to do. 
But I understand your request. I do.
    And so just to go back to last year, we had a conversation 
about fraud, and my memory, if it is correct, is that around 
$5.8 billion was reported in fraudulent tax refunds being sent 
to criminals and not to the taxpayers that were owed them. That 
is about half of your budget request.
    And so the easiest way to get to your budget request would 
probably be to continue your efforts to eliminate that fraud. I 
think that would help all of us.
    And so I want to thank you for the summit that you had and 
bringing all the stakeholders in. It sounds like it was very 
productive. I would like to learn more about that, and 
hopefully we will hear a little bit more about that today.
    But it sounded like it was more about the individual 
preparers that had been defrauded through identity theft or 
some other mechanism--that seemed to be the focus. Was there 
any type of focus on fraud related to the electronic 
identification numbers, the filing identification numbers the 
industry uses for authentication purposes, to check and make 
sure that there is not fraud occurring from the non-individual 
filing perspective?
    Mr. Koskinen. No. We are dealing with very sophisticated 
criminals. One of our concerns is, as we get better at dealing 
with individual fraud, and particularly with the Congress' 
approval for us to get W-2s earlier so we can match data, we 
now have criminals forming false corporations and creating 
false W-2s that look like they are real W-2s. So there is a 
business fraud issue.
    One of the issues we talked about, again, with our partners 
is, as we get better at detecting fraud, the next place 
criminals go is to the tax preparers. So there will be more and 
more private sector companies in the tax system who are being 
attacked, because if you can get into a preparer's system, you 
then have all of that information and you can file false 
refunds.
    The goal of all of this activity, as far as we are 
concerned, as opposed to whatever they are doing with 
everything else they have got, is to file false returns and get 
false refunds. We think that by being able to share this 
information in real time, because of investments we made we 
have improved. It used to be our filters could be adjusted once 
a year. We have a very antiquated system. We can now adjust 
those filters in real time. We can adjust them as a result of 
the information we get from preparers, from States.
    The issues we have had with the recent bot attack, we have 
immediately been able to share, thanks to the partnership, all 
of those Social Security numbers with State revenue agencies 
around the country. We have been able to share all of those 
with all of our private sector partners.
    So we think it is going to be a more formidable battle----
    Mr. Graves. So you have ability to verify and authenticate 
the EFIN of these preparers?
    Mr. Koskinen. One of the issues we have is, again, looking 
at authentication for every way people get into our system. We 
are satisfied on the installment agreements, for instance, if 
you are trying to pay us, it is unlikely you are a criminal. 
The criminals don't pay us, they try to get the money.
    On the other hand, we are looking at everybody who has 
access to our system--preparers, mortgage companies, others--
because they are all vehicles and venues that if we can stop 
people here, they will simply come in other ways.
    I would stress the bottom line is, we are making progress. 
We will never end this battle. The criminal syndicates we are 
dealing well are too well funded, too creative, and too 
desperate. Somebody asked me: When will you be done? And I 
said: The minute you think you are done is when you are going 
to be done. You can never think that you are finished.
    So we have spent a lot of time--and the funding you have 
given us will improve that--trying to make sure that, to the 
extent we can, we are getting ahead of it.
    What we would do with the additional funding in the 2017 
budget is be proactive. Thus far, even with our partners, up 
until recently, we have been reactive. There is a probe here, 
and we push back. We find a problem here, and we solve it.
    We have a potential, and, again, with this partnership, 
with all of their security people, to come together and 
actually start to get ahead of the game. Instead of responding 
to where the attacks are coming from, beginning to protect 
ourselves against where we think the next attacks will come 
from.
    Mr. Graves. All right. And as I close, Mr. Chairman, let me 
just point out that the industry is lawfully doing what they 
are expected to do, and that is filing returns to the best of 
their ability.
    Mr. Koskinen. Right.
    Mr. Graves. And so, as we said last year, and I believe the 
Commissioner supports this, we don't need to put undue 
regulations on an industry that is clearly trying to assist the 
Commissioner and the agency, and are doing as much as they can 
do with the information that is being provided to them. It is 
up to the agency to determine and verify the validity of the 
data being received.
    And then lastly, let me point out, it is nice to hear for 
the record that we have one agency that is just trying to get 
back to a 2010 funding level, and that demonstrates the good 
work of this committee and what we have been doing over the 
last couple years and how tough it has been.
    But thanks for doing more with less.
    Mr. Koskinen. Happy to hear that.
    And I would just stress, your point, in our work with the 
private sector, as I have told them, it is a partnership. So we 
are not telling them to do anything. What we are doing is 
jointly figuring out, OK, what can we do together.
    So when they said, well, they need a standard, obviously, 
because they don't want to have a competitive disadvantage if 
it is a little harder to get into one than the other, and as I 
have said, it has been our approach, OK, we will work with you 
on developing it. But it will be their standard. And I think 
that is why it has been such a productive relationship.
    Mr. Crenshaw. Thank you.
    Mr. Quigley.
    Mr. Quigley. Thank you, Mr. Chairman.
    Thank you, Commissioner.
    The phone scammers, I have heard the tapes actually played 
of people posing as IRS agents and scaring the hell out of 
people when they call them and tell them: If you don't do this 
right now or wire money to us to pay these back taxes, someone 
will be knocking at your door, you will be arrested. A real 
horror story in my district, in my State, and I know you know 
across the country.
    I would love to hear what you are doing about that, but 
particularly because as we go forward with private sector 
collectors, the possibilities that people believe that these 
people are real become more evident and I think it actually 
complicates that problem.
    Mr. Koskinen. I have been dismayed by the persistence of 
the scam. For the last 2 years, every press conference I have 
done, I have mentioned we put out a Dirty Dozen every year. The 
highest priority has been to warn people against phone scams. 
Basically, 2 years ago when I started I said: If you are 
surprised to be hearing from us, you are probably not hearing 
from us, because we don't call you first. We actually send you 
letters. You will get several communications from us before you 
get a call. We work with the IG. We have been working on 
criminal prosecutions of people we catch.
    What is concerning to me is I get news clips every day, and 
virtually every day there are very good news reports warning 
people, whether it is on television or print news media, across 
the country. And it is amazing the number of people who still 
get that call and they just say: Well, I am going to have to 
deal with it. A lot of times they are older people. A lot of 
times they are immigrants.
    One of the things we are trying to get people to understand 
is, if you hear from the IRS, we will never threaten you. We 
will never tell you that you are going to go to jail the next 
day, you are going to lose your house. We will never tell you 
to make a payment to a debit card or to a bank account.
    We are committed, and I am personally committed, that on 
the private debt collection, we are going to do everything we 
can to make it work. I don't want anybody to think we are slow-
rolling it.
    Mr. Quigley. Excuse me, how will they differentiate 
themselves, besides the precorrespondence?
    Mr. Koskinen. The big challenge we have is that--we are 
designing the program and the training--we will send a letter 
to the taxpayer saying: We have turned your account over to a 
specific company. Part of the contractual relationship is the 
company will then send a letter to the taxpayer saying: We have 
been given your account by the IRS and you will be hearing from 
us.
    That, we think, will help. It won't solve the problem. We 
are then trying to get ahead of the world. We know the 
criminals will now try to figure out how do they send letters 
that look a lot like our letters, use the same letterheads, say 
the same thing. So we are going to work.
    We have a bidders conference coming up at the end of this 
month, again, with the private sector, to say: ``Okay, we have 
got this problem. We didn't have it the last two times we tried 
private debt collectors. How can we jointly figure out how to 
deal with that problem?'' Because it won't do them any good if 
they call and get hung up on because people say these are more 
scammers.
    Again, I don't think we are going to have the only answer, 
and we are going to work with the potential contractors. One of 
the big issues will be how can we buffer their work from all of 
the efforts we are all making to try to get people not to 
respond to the phone scams.
    Mr. Quigley. You state the obvious. Hopefully, the letters 
will differentiate themselves: We are not going to call you and 
threaten you, we are not going to call you and demand you debit 
right away, we are not going to call. It has got to go into 
those specifics.
    Mr. Koskinen. Yes. And we are trying in our public 
relations campaign to tell people just that.
    The bottom line is, if we can just get the public to 
understand, ``If you are going to pay your taxes, you write the 
check to the U.S. Treasury and you mail it,'' and get people 
not to go down to the bank and make a debit card deposit today, 
not to make it to somebody's bank account. And nobody is under 
the threat of, if they don't do it, in 24 hours something 
terrible is going to happen.
    Mr. Quigley. Thank you.
    I yield back.
    Mr. Crenshaw. Thank you.
    Mr. Yoder.
    Mr. Yoder. Thank you, Mr. Chairman.
    Commissioner, good to have you this morning. Thanks for 
your testimony.
    I noted the very interesting dialogue that you have had 
this morning with members about how to collect the taxes that 
are due and owed, and how complex that is, and how challenging 
that is. Certainly Chairman Rogers made very clear his 
frustration that we all have with customer service and 
challenges that I think you recognize are a problem well and 
you have stated you are working on.
    You made a statement that really resonated with me, which 
was you said we will never win this battle, that it is sort of 
a never-ending problem, and you just have to do as good as you 
can.
    And I think the reason we are having this problem and why 
we will never win this battle is because we are looking at it 
the wrong way. You are looking at it, and this committee looks 
at it, from a revenue solution answer, and I think the problem 
is within the Tax Code itself and the tax system we have set up 
in America.
    With 70,000 pages, the complexities that exist, Americans 
are frustrated with the Tax Code. There are people that don't 
pay their taxes, that find loopholes. And most Americans want 
to see a Tax Code that is flatter and fairer, in both political 
parties.
    Maybe one of the things that unifies the country is that 
they want to see what happens if the IRS changes. And I think 
that makes your job very difficult. And I don't think there is 
enough money we can throw at the problem. The problem is 
changing the way we do business at the IRS, changing our Tax 
Code.
    And I note that you spend $11 billion. You would like a 
billion dollars more. I am sure you would be willing to spend 
even more than that, if we would give it to you, because you 
would try to use it to collect more taxes.
    Americans spend more than that. I mean, by some estimates 
they spend $37 billion annually complying with the Tax Code. So 
you are spending $11 billion and Americans are spending 3.24 
billion hours complying, and that adds up to 369,000 years 
annually. And just think about a country when we are trying to 
create jobs, we are trying to create opportunity, that would 
not be the country that our Founders designed that they would 
expect that this is where we would be.
    And if you look at the changes we have made to the Tax Code 
with ObamaCare additions and the various laws that get passed 
in this country every year, that has added up to a point where 
you have got a J curve in terms of just dramatic increase in 
responsibilities we have placed on you to the point where your 
point is we will never win this battle. And I think it is 
precisely because we are going about the battle the wrong way.
    If we had a simpler and fairer Tax Code, you would get 
higher compliance rates, people would know where their tax 
revenue is going, and they ultimately would be more willing to 
comply themselves, and your collection efforts would be less 
costly.
    So that brings me to some of the things we can do 
immediately that might help bring about some of those changes. 
One of the things my constituents hate more than anything is 
fraud, waste, and abuse in government. Nobody likes that.
    And I bring our attention back to the earned income tax 
credit issue that we have discussed before. And I would 
highlight again for the committee the roughly 25 percent error 
rate, which is astounding. I don't know that there are very 
many government programs that have that high of a fraud or 
error rate, to the tune of maybe $15 billion to $20 billion 
annually. We spend $30 billion researching cures at the NIH, 
every disease known to man, we are spending $30 billion, and we 
are wasting $15 billion to $20 billion on paying earned income 
tax credits to people that don't deserve them.
    So it is particularly concerning. And I would just like to 
ask, I guess, where we are on that issue, what progress we are 
making, and in particular, what solutions Congress can bring or 
you can bring towards resolving this? Can you highlight any 
disparities, in particular, of improper payments made by self-
preparers versus third-party providers? And do you believe that 
you need additional authority granted by Congress to impose due 
diligence penalties on self-preparers in addition to 
enforcement and audit powers that you have now?
    Mr. Koskinen. I am going to try to get all that done in a 1 
minute and 20 seconds.
    Mr. Yoder. Fair enough.
    Mr. Koskinen. But let me start by saying, as I have 
testified from the start, this is one of the major challenges 
we have. It is a program a lot of people support. Most people 
seem to support it. It is for the working poor. And the error 
rates, and the amount of money going improperly just need to be 
fixed.
    We appreciated your responding to our request to get W-2s 
earlier. Next year, we will get them in January. As a result of 
our partnership, we have volunteers who have provided us with 
20 million W-2s already this year, and that allows us to 
double-check, when somebody files, their income, to the extent 
W-2 income is reported. Next year, also the Congress has said 
that refunds will be held until February 15 to give us more 
time to check, and that will be helpful.
    [Clerk's Note. In the above paragraph, the IRS is referring 
to section 201 of the PATH Act, which was enacted as part of 
the Consolidated Appropriations Act for 2016 (P.L. 114-113). 
More specifically, 201(a) (earlier W-2s) and 201(b) (delayed 
EITC refunds).]
    The corollary to that, what we need, is to have what we are 
now calling, because we are trying to keep it narrow, 
``correction procedures for specific errors.'' For instance, we 
are going to work with Social Security to get their 
identification when people report that they have reported to us 
the wrong Social Security earnings for the EITC.
    When we see an error like that, that is from a reliable 
database, we can't make the change. We actually have to audit 
that person. We have to send them letters. We already do over 
400,000 EITC audits. So it is clear we can't just audit our way 
out of the problem.
    If we have the ability, as we have in some instances to 
correct math errors, when we have a reliable database, to make 
the change, taxpayer can still say, ``Hey, you know, I have got 
a concern.'' They have the right to come in and disagree. But 
if we can make those changes without having to audit, we think 
we could cut down improper payments significantly.
    One of the reasons we are talking about, and requesting, 
the ability to require minimum standards for preparers is not 
to create a regulatory regime. We had the program before. 
People know what it would look like, since we did it 4 or 5 
years ago. It simply requires some minimum testing of preparers 
so that they know something about the Tax Code.
    A significant number of errors are made in good faith. The 
statute is very complicated. So if somebody wanted to simplify 
the statute, that might be OK too. But it is basically 
preparers, if they have had no training or education, having a 
difficult time tracking their way through it. So that is what 
we have in mind for the minimum standards.
    We won't drive crooks out of business. There are 
criminals--a small, very small percent of preparers--who are, 
in fact, advertising: Come with us, we will get you a big 
refund. Those people we prosecute as we go.
    But if we could get the W-2s earlier, the correction 
procedure for specific errors would go away. We think the W-2s 
by themselves will help us make a dent in this problem as we go 
forward.
    To address the question of the due diligence, we have been 
running pilots, we have been looking at it. Preparers have due 
diligence questions. The questions are helpful. We have built 
them into the software. We are working again with the software 
providers and the preparers to try to figure out what is the 
reasonable level of due diligence they should have.
    Their point is, in the preparers that are preparing--back 
to the minimum standards--EITC returns, they have a very high 
error rate. What is also happening, though, is as we get more 
focused on preparers, then marginal preparers prepare the 
return and don't sign it. So it looks like it is self-prepared, 
but it has actually been prepared by a preparer. So we are 
trying to warn people don't do that, because you may lose your 
refund if it is a crook.
    One of the things we are doing, as actually the Omnibus 
bill suggested--maybe even required, but I thought it was a 
good suggestion. I pulled together everybody in the IRS that 
knows anything about this. They suggested a kind of a summit on 
EITC.
    And we are going to do that. We are going to bring 
preparers, we are going to bring recipients, we will bring 
people from outside the government, as well as inside the 
government, to try to sit down, and, again, not tell people 
what to do, but to try to say: ``Okay, what is the common view 
here as to what needs to be done?'' If there are statutory 
changes in the program that would help, we would get back to 
you.
    We know on the enforcement side, if we have the things I 
have just talked about, particularly the correction procedure, 
that would help.
    We have this duality. We have to make sure everybody 
eligible knows about EITC, like the ABLE Act. We say, ``here is 
your program,'' and at the same time we are trying to make sure 
people get the right amount.
    So we will hold that summit, which may turn out to be a 
series of meetings, and get back to you on that as well. I had 
four or five things that I was worried about when I started. 
This was one of the five.
    Mr. Yoder. Thanks, Commissioner.
    Mr. Crenshaw. Thank you.
    Just a quick question. You mentioned that identity theft 
costs $5 billion or $6 billion a year. What are the latest 
numbers on how much the earned income tax credit error rate 
costs?
    Mr. Koskinen. The earned income tax credit fluctuates. The 
error rate has always been in the 22 to 25 percent error. It 
goes up and down each year.
    Mr. Crenshaw. What is that in real numbers? At one time it 
was $19 billion. Do you know what is the latest?
    Mr. Koskinen. I don't remember it being high, but the 
number has floated again, depending on which year it is, 
between $14 billion and $17 billion. Whatever it is, it is a 
number--well, again it is like everything. We will never get it 
to zero, because it is complicated and people will file----
    Mr. Crenshaw. That is a lot of money.
    Mr. Koskinen. We ought to be able to get it under $10 
billion. I mean, you could say $5 billion to $7 billion. If we 
could just get it under $10 billion.
    Mr. Crenshaw. It would be nice.
    Mr. Rigell.
    Mr. Rigell. Thank you, Mr. Chairman.
    And, Commissioner, thank you for being here today and for 
your testimony.
    It has been my experience here in 5 years of service in the 
House that so often in these hearings it is not too surprising 
that Republicans, we really focus on really reducing spending, 
and often times my Democratic colleagues are making the case 
for the other side of things.
    Just for the business background, when I try to assess and 
work through that, because I am a fiscal conservative and I am 
deeply, deeply troubled by us being $19 trillion in debt, I 
think really it is a fundamental threat to our country. And we 
are all in this together, Republicans, Democrats, those who are 
fed up with both parties. From coast to coast, we are all in 
this together.
    So as it relates to the IRS, an evaluation of the request 
that you have made and just some of the comments that have 
already been made today, I try to look at this, as best I can, 
from an objective standpoint and trying to assess performance, 
and indeed your performance. That is part of what we do here.
    So performance over time is something that I always look 
for in evaluating a business unit or something like that. It is 
difficult for me to at least easily--I know you would be very 
good to come by and explain this to me. I have met with you 
privately before and you have always been responsive.
    That said, if you could incorporate into your summaries, at 
least I would ask for performance over time, that is the 
efficiency numbers that you are using, the cost per thousand 
collected. And also, because I know that it is not just cost 
per thousand that we are looking for and that you should be 
evaluated on, but also, and importantly, the quality on a range 
of different metrics there.
    So with all that said, is your cost per thousand, according 
to your own data, is it increasing, decreasing, or staying the 
same?
    Mr. Koskinen. At this point, we have become more efficient. 
Not to overstate it, but we really are, by far, the most 
efficient tax administration in the world.
    We do think, and we measure it, and we are happy to share 
those measures, on taxpayer service, for instance, as we have 
had more taxpayers and less funding, we have had a decline in 
performance. And it is of concern to all of us, and it is an 
appropriate measure.
    Over time we just look at it in gross. We are spending a 
billion dollars less than we did 6 years ago, even with the 
increase, and we are processing 10 million more taxpayers. So, 
obviously, we are processing significantly more taxpayers with 
less funding. There is a problem, at some point, in terms of at 
what point do you lose effectiveness.
    Mr. Rigell. Well, let's talk about that just for a moment. 
I remember from my econ class a long, long time ago, when 
marginal costs and marginal revenue are equal, you have 
maximized profit.
    Now, let me say right up front, I know this is not a 
business, we are not in the profit business. But this idea of 
optimizing the right amount of tax collection, not more than is 
owed, but not less than is owed, that is the optimum.
    So does your budget reflect, are you saying, could you make 
the argument that if you got the budget request that you had 
asked for, that that is the optimum? I mean, that is, if you 
start to spend more than that, you are going to actually maybe 
collect less than it cost you to collect it?
    Mr. Koskinen. I don't know where that curve will go. I can 
guarantee you, as I said earlier, just with the funding in the 
program integrity cap--and I understand that is always an issue 
as to where it fits in this budget--but just for the increased 
enforcement arm over time, our estimate is the net gain to the 
government would be $46 billion.
    So you are right. We are not a business, but we have a 
businesslike aspect to us because we are the accounts 
receivable, the collection arm of the business. If you are in a 
business, we are the revenue generator, and then you have the 
expenditures and all of the programs, wherever you are going to 
spend them.
    So part of my concern is that, as I said, I spent 20 years 
in the private sector running large, troubled businesses. I 
never met anybody who said: I think I will starve my revenue 
arm to see how they do.
    But on the other hand, your point is, everybody looks at 
them and says: But I want that revenue arm to be efficient. I 
am not just going to throw money at it.
    Mr. Rigell. There you go.
    Now, I have got about 30 seconds, and let me just close 
with this. I just wanted to share with my Democratic 
colleagues, the ranking member and others, every line of our 
budget needs to be given scrutiny, and including the IRS. And 
this is just part of being prudent and doing right by the 
taxpayer, all of us.
    But what is driving our fiscal situation overwhelmingly is 
our failure collectively to responsibly reform mandatory 
spending. And I just want to close with that, because that is 
really what has got to be done. I know it is outside the scope 
of this hearing, but we have got as an institution to address 
that thoughtfully, because that essentially is what is driving 
us in our fiscal situation.
    Thank you for your service, and thank you for your 
testimony today.
    I thank the chairman, as well, and I yield back.
    Mr. Crenshaw. Thank you, sir.
    Mr. Amodei.
    Mr. Amodei. Thanks, Mr. Chairman.
    Good morning, Commissioner.
    Mr. Koskinen. Good morning.
    Mr. Amodei. To the extent that Mr. Crenshaw is going to 
endeavor to manage my 5 minutes, please don't be offended if I 
endeavor to manage the time you take in your answers.
    I want to talk to you about a specific instance, and the 
issue is process related. And we have heard a lot about 
taxpayer service, and I am gratified by that.
    Taxpayer gets a designation for alternative energy purposes 
that says he is an alternative fuel refiner. It turns out he 
files under that, it is wrong, for whatever reason, you don't 
qualify for that. Receives advice from the IRS that you are an 
alternative fuel blender.
    OK. Goes forward under that. New IRS agent: Oops, you are 
not one of those either. Refund, blah, blah, blah, blah, blah.
    Goes into your appeals process, fast track mediation, 
mediates, IRS folks on the other side, come to an agreement, 
don't know what the agreement was. And your folks on the other 
side of the mediation say: Hey, we are not in power to sign off 
on this.
    So the mediator calls the person who is and gets an 
affirmative: We will do that deal. OK, whatever it was. Then 
they get a call back the next week saying, from somebody else 
above, whoever he talked to on the phone: We are not doing that 
deal.
    And so I am sitting here in the face of things like it is a 
critical function of the government, taxpayer service is a 
critical function. Now, these aren't folks who are trying to 
run away from you. They are embracing your system and your 
dispute resolution system. They are entitled to knowledgeable, 
well-trained, able to provide effective and appropriate 
service. You can call us, not some late night talk show person, 
have people compliant when they are trying to be compliant, 
treat them fairly.
    It is no news to anybody in here you are a Yale-trained 
lawyer, and I respect that. I know that is probably the only 
school you could get into with your minimal educational 
requirements. But don't worry, I couldn't even get in there, so 
you are doing better than me.
    But I look at all this stuff and I say: Hey, I am not 
expecting your folks to be perfect, they make mistakes. And 
maybe if it was just one of these things in a single case it 
would be like, well--and I don't know if you have been briefed 
on it, because your folks have been into my office at one point 
in time a while back.
    But I am sitting here in terms of basic fairness, in the 
context of all this stuff where we are talking about we want 
people to reach out to us, we want to provide the best possible 
service. And I am not saying, therefore, they shouldn't have to 
pay the tax or they shouldn't have to do this or that.
    But the process of a system where people have embraced your 
system at every point they could, thought that they went 
through your fast track mediation program, not yours, but the 
Service's, and they come away with not the first disappointment 
in terms of, oh, you are really not that, but the second one 
says: Oh, by the way, that deal we did, we have decided we are 
not doing that, even though you had somebody who ostensibly was 
in the course and scope of their employment in the appeals 
process that said we will do that.
    It is something that deeply troubles me in terms of those 
folks who are coming to you for resolution as opposed to those 
who we have been talking about that are trying to scam you, run 
away from you, cheat you, lie, and steal.
    So I say all that to say this: I would really appreciate, 
and my request is, since we are not going to accomplish it 
during our little 5-minute speed dating session here, I would 
like the appropriate folks from your office--I don't know if it 
is still under litigation or not, although I can tell you the 
company was 28 employees when this all started and now I think 
there are 4, because it is a business thing and those decisions 
had consequences--I need somebody to come in and say: Listen, 
Taxpayer Bill of Rights, Code of Federal Regulations, 
Administrative Procedure Act, are we exempt from something 
where if we say we are going to saw off on something in 
mediation, that it is really like, well, don't take that to the 
bank yet, because it came as a complete shock not only to these 
folks, but to the mediator who had never seen it before.
    And so I want to hear what the other side of the story is a 
little bit. But in terms of general process moving forward 
beyond this case, it is like, hey, if I am coming to you and 
trying to be compliant and you guys have made mistakes, then we 
still need to go forward, tax law still needs to be enforced.
    But there ought to be a lane for, OK, let's figure out how 
he get to where we need to get here short of, hey, sorry we 
made a mistake, but that doesn't change it, you have got fines, 
penalties, and blah, blah, because you weren't really entitled 
to be treated that way. Oh, and by the way, the appeals process 
really isn't going to help you, even though you thought you had 
a deal.
    Will you please come by and see me? I am not a high 
maintenance guy. You have only been by twice in 5 years. I 
don't abuse you. If I say please?
    Mr. Koskinen. As you can imagine, our golden rule is: ``The 
Commissioner does not get involved in any individual case.'' We 
can't talk about cases publicly. We are delighted to talk about 
it with you. But the Commissioners basically, historically, 
have not gotten involved in individual cases. But I take the 
point. I think the point you raise----
    Mr. Amodei. The point is a process point. I am not asking 
you to come talk about this case. I want to know the process 
that says that is OK.
    Mr. Koskinen. The process, I am happy to come talk to you 
about. I am happy to because the process is designed to be 
fair, it is designed to work with people who are trying to be 
compliant. We do, literally, millions of installment agreements 
and other agreements.
    When the system doesn't function appropriately there are 
lanes for appeals. We have a Taxpayer Advocate, who I strongly 
support, who can do that. There are ways.
    But, again, people ought not to have to go through the maze 
to the extent we can avoid it. We ought to be able to come to 
closure.
    Mr. Amodei. So is that a yes, your folks will be by?
    Mr. Koskinen. Yes, I will come, I will be happy to come by.
    Mr. Amodei. Thank you very much.
    Thank you, Mr. Chairman.
    Mr. Koskinen. But just for the record, I would note, we 
will be talking about process, not a particular case, because I 
can't talk about a case.
    Mr. Amodei. Absolutely.
    Mr. Koskinen. Fine.
    Mr. Crenshaw. And, Mr. Amodei, if you would like another 5-
minute speed date, if you just sit quietly for a couple of 
minutes you will have that opportunity. So we will have another 
round.
    Just what I would like to know is, I mentioned in my 
opening statement that you had this hardware failure, and I 
think that there is a hearing today on that. Tell us a little 
about how that happened. I think there was a destruction of one 
of the hard drives. Plus the problem, I guess, the breakdown. 
How did that happen? And how does that affect folks that are 
filing their tax returns?
    Mr. Koskinen. This is when we went down for 24 hours.
    Mr. Crenshaw. And then the destruction of that hard drive.
    Mr. Koskinen. Two separate issues.
    Mr. Crenshaw. OK.
    Mr. Koskinen. So the first is the systems failure. We do 
our processing in Martinsburg, West Virginia, and then we have 
a backup site, alternate site that we go back and forth to, in 
Memphis. We have redundancies within those systems.
    This was a hardware failure and we are still working with 
the vendors to figure out exactly why, but a simple voltage 
regulator failed. There is a backup voltage regulator. When 
they were fixing the first voltage regulator, the outside 
contractor, the backup failed again.
    We normally would have, if the system were going to be down 
for any period of time, moved to Memphis, which we do about 
every 6 months or so just so we have a disaster recovery. But 
that doesn't automatically take up. It takes us 24 to 36 hours 
to get that system up.
    We decided, and it turned out to be right, that we could 
get the system back up inside of the 24 hours, so it would go 
faster and we would be more secure in terms of not losing data 
going back up in Martinsburg.
    So the hardware has fixed, the system is up. It happened, 
again, about 3 years ago in a different mechanical failure. It 
reminds all of us filing season is simple if you are just 
filing and it all goes well, and last year we didn't have any 
of these issues. But we are running a complicated system to 
process and collect the data on 150 million taxpayers, and we 
are always at risk that some part of the system, just like your 
computer, is going to one day decide, ``Okay, I am just not 
going to function again.'' That is why we have the backups in 
Martinsburg.
    Part of the reason, when people say, ``Well, gee, you have 
a big system,'' is because we have to have the backup. If we 
had a lightning strike, a fire, whatever it was in Martinsburg, 
we have to be able to continue processing. So we have a 
redundant system with people sitting in Memphis and it moves 
back and forth for that reason.
    But we were delighted that we were able to be down less 
than 24 hours and that we were able to get back up and that 
there was no corruption of the data. It was a hardware failure. 
The system just stopped. So you are worried about----
    Mr. Crenshaw. There was no corruption of the data and it 
just kind of slows things down for----
    Mr. Koskinen. So we basically were down for a little less 
than 24 hours.
    Mr. Crenshaw. Just put you behind that.
    Mr. Koskinen. And so it turns out for taxpayers, the 
submitters are able to just simply hold--we have 17 
transmitters that collect all of this--and they just hold the 
returns until we are open again. So most taxpayers, of the 25 
million filing, never saw anything. They just filed. For all 
they knew, the system had gone through in that 24 hours.
    Mr. Crenshaw. How about the destruction of that hard drive? 
Evidently there was an order to preserve the contents.
    Mr. Koskinen. I would first note it wasn't a court order. 
It was part of a FOIA issue in a major case we have that got a 
lot of visibility. We had a FOIA case filed. So we, on our own, 
put out what is called a litigation hold. We said, OK, 
everything related to this FOIA request we need to preserve. It 
is part of major litigation. So, the FOIA was a kind of an end 
run. Can we get stuff in discovery out of FOIA that we won't 
get directly through the court?
    The hard drive in question belonged to an employee who had 
left in the summer of 2014, the end of July. The FOIA request 
was filed and the litigation hold was put in place in the end 
of the year.
    What happened was that we have 3,000, 3,500 people leaving 
every year. When they leave we clean their computers. They have 
to turn everything in, and then to protect taxpayer data as a 
general matter, if there is nothing else going on, we clean 
those hard drives and computers and then recycle them, or 
destroy them if they are old. And we collect those.
    In this case, the computer and the hard drive were 
separated. The hard drive was designated, along with a lot of 
others, to, in fact, be recycled and destroyed.
    As luck would have it, in October, it went to the holding 
area where they are all collected. When the litigation hold 
went on, it went on to all existing employees. It didn't go to 
this hard drive, which was on the way to being recycled.
    Fortunately, we had, in another FOIA case, taken the data 
off that hard drive. So we have the data, but we didn't 
discover that. We advised the court in the major litigation 
that in the FOIA case, it appeared we had lost that data 
because the Justice Department, whoever handled it, felt, and 
we agreed, that we ought to let them know.
    But we kept investigating and pursuing it and then 
discovered that we had, in another case, pulled the data off 
the hard drive. So as has been said, as a guy said, I would 
rather be lucky than good.
    What we decided to do is have me simply issue an order we 
are not going to sanitize, as it is called, or wipe any hard 
drive. We have been saving all of our disaster recovery backup 
tapes for the last 3 years. So they are there. And if need be, 
we could go into those to get data, if we hadn't found the data 
otherwise.
    But we decided that, while we are trying to fix the system 
so we don't rely on getting data off hard drives, we are going 
to save every hard drive. And beyond that, what we are going to 
do as people leave, is we will copy the data off that hard 
drive into an electronic area. And if there is a litigation 
hold, we will actually now, instead of just sending 
notification to the employees, send it to their managers. And 
the managers, when an employee leaves, will have to check: 
``Have you checked to see if there is a litigation hold?'' So, 
we will have a belts and spenders approach, I hope, going 
forward.
    By the end of this year, we hope that we will be able to be 
in a situation where all of the data off every hard drive as 
people leave will be collected into, in effect, an electronic 
area.
    One of the requests in the 2017 budget is for $17 million 
to $19 million to allow us to have a modernized e-discovery 
system. When you ask for data, instead of this clunky system we 
use now which takes forever, we would be able to go into that 
database, pull all of the relevant documents, and give them to 
you virtually overnight as we go.
    But in the meantime, nobody is wiping anything, or 
collecting the data off of it and saving it, and we have made 
even more complicated responses to a litigation hold. So while 
we didn't lose this data, it did seem to me that we just can't 
afford that question while we are moving to kind of a modern 
document recovery and retention system. I just don't want to 
hear anymore of these: It got stuck in----
    Mr. Crenshaw. In a minute, I would like you to talk more 
about this whole modernization. You just hear over and over 
again that somehow IRS needs to kind of transform itself, 
modernize itself. A lot of that has to do with technology. We 
will save that for a minute.
    But Mr. Serrano, and then Mr. Amodei after that.
    Mr. Serrano. Thank you.
    Well, that is the first thing I wanted to talk about, the 
IRS ``future state'' plan. The concern that some people have is 
that you may be making or your agency may be making these 
decisions based on false assumptions--one, for instance, that 
the budgets will remain in place, and that is a battle we have 
every day.
    And secondly, that you will be, and I am not trying to be 
sarcastic, you will be the first agency in the history of the 
U.S. Government to be up to date on technology. It seems that 
we have never had that. Ever since I got on Appropriations we 
have been--had dealt with fiscal year 2000, where the world was 
going to come to an end; didn't come to an end. But still every 
month it seems an agency is falling behind on its IT.
    So what are you doing to prepare for the fact that what you 
are dealing with now in terms of your plan may be obsolete by 
tomorrow?
    Mr. Koskinen. Well, IT presents that challenge. That as you 
go forward, if you just stand still you are falling farther 
behind because the IT is getting more modernized. We now talk 
about cloud storage and a lot of things nobody thought of 5 or 
7 years ago.
    We are, as I say, not at that level of risk in the sense 
that we are not trying to go to the moon. We are just trying to 
catch up where financial institutions are now, and then evolve 
with them in terms of the taxpayer experience.
    So the budget issue is always appropriate. People need to 
make sure we are spending the money appropriately. We need to 
make sure we are spending the money appropriately. But, again, 
as shown, if we can move, in response to taxpayers' requests, 
to more and more information online, make it more available to 
them, it will free up our call centers and our Taxpayer 
Assistance Centers to people who want to be there.
    The ``Where is My Refund?'' application is a good example. 
Last year, 235 million hits were made on that app online. It 
allows you to figure out the status of your refund. We don't 
have 235 million taxpayers. As I keep saying, some people just 
love to push the button. But this year already we have had 95 
million hits.
    Now, even if that is only 10 million or 20 million 
taxpayers, in the old days they used to call to find out, 
``Where is my refund? I filed my return. What has happened?'' 
So we moved all of those calls online.
    Now, if we don't get funding going forward the app--except 
for our concern about operation and maintenance--the app will 
be there. And so the more people we can move online, the more 
efficient we will become, the better the taxpayer service will 
become.
    What is at risk in terms of future budgeting--and we hope 
to present this committee with more details about what the line 
of sight over the next 3 to 5 years will look like with 
particular building blocks and how much they cost--is simply 
that we will go slower than we would like. So, for instance, 
the apps that are up about online installment agreements, 
online payment agreements, online payments, all are building 
toward taxpayers being able to have an online, secure account 
with us. If we stopped today, we would have apps that work for 
limited applications, but people would still have to call us 
for other issues.
    It is important to recognize two things about this. One is 
there will always be taxpayers who aren't comfortable with the 
digital economy, or basically don't want to use it. I always 
use my mother-in-law, until she hears me. For years we didn't 
try to get her to do email. She refuses. She wants to talk to 
somebody. She picks up the phone.
    Last year, 86 percent of people filed electronically, which 
meant 14 percent, over 20 million taxpayers, gave us paper 
returns. And as far as we are concerned, if that is what they 
want to do, that is fine.
    So in the future, there will be people who could use the 
app who will call us, and that is fine. What we are trying to 
do is get people off the phone who didn't want to be there in 
the first place.
    But your point about it in terms of upkeep is we have two 
challenges, and the committee knows this. The committee has 
been very good about our modernization program, and we have 
made significant progress as a result of the funding provided 
by Congress. And we give you reports about that, and I am 
trying to make the reports more readable, so as you see what 
you are buying.
    Once we get a system up and running, we have to sustain it. 
Our operations and maintenance budget has not necessarily grown 
with that. Our budget for 2017 asks for $95 million for 
maintenance of all of these systems. So when we get a hardware 
failure like the 24-hour shutdown, we have the systems to fix 
it, and hopefully we modernize enough that we have fewer of 
those breakdowns as we go forward.
    It is a package. It is complicated. The system is 
complicated. IT is complicated. What we are trying to do with 
this ``future state'' is not look at it from the standpoint of 
the IRS, look at it from the standpoint of taxpayers, again, 
taxpayer service. How do we make the taxpayer experience as 
improved and as efficient as we can for them, recognizing we 
don't want to leave anybody behind, so if they don't want to 
participate in the online digital stuff, that is fine? But I 
think that helps.
    And then, if we can, for the Committee, be clear about 
exactly--and that is where we started in this budget, trying to 
be very specific about the initiative so you could see what you 
are getting for what you pay for. My goal is that then we could 
have performance measures, you could look at it every year and 
say: How are we doing? You put in that system.
    One of the systems we put in this year, for instance, 
allows us to monitor our system better, which is how we caught 
the bot attack, which in previous years we never would have 
caught.
    So we need to be in an ongoing dialogue with you about 
specifically what are we buying, and why, and what is going to 
make a difference.
    Mr. Crenshaw. Thank you.
    Now for another speed date from Mr. Amodei. Take your time.
    Mr. Koskinen. I would like the record to note I didn't use 
any of his last 5 minutes.
    Mr. Crenshaw. That is right. And he can have some of my 
next 5 minutes if he wants them.
    Mr. Amodei. Thanks for the generosity on both gentlemen's 
parts. And I am sure that if I don't already, I will soon 
regret referring to the phrase as speed dating in 5 minutes. 
Nonetheless, I will stand by it.
    Commissioner, in the highway trust fund provision that was 
passed last year, there were some things in there which 
strengthened your ability to collect tax debt. And I believe 
one of the provisions was, hey, we want you to do some stuff 
within 90 days, and we want you to look at using private 
collection folks, they are already approved by the Treasury. 
And I am looking at something here that says last month you 
said you didn't think you would meet the deadline for 
implementing that program, and I guess that deadline refers to 
the 90 days.
    Mr. Koskinen. Right.
    Mr. Amodei. So I am looking through your statement talking 
about all the initiatives in terms of Treasury-approved folks, 
that sort of thing, although it is not clear to me that that 
was part of it, but I think some people assumed it was. And you 
are talking about additional funding to strengthen enforcement 
programs and the ability to handle 30,000 more addition debt 
collection cases.
    I guess my first question is, I am assuming you are not 
going to meet the 90 days, when do you expect to meet that if 
that assumption is correct? And what do you attribute the delay 
to?
    Mr. Koskinen. Let's work backward. The delay is that, even 
just in a standard procurement, 90 days would be the shortest 
time in which we could do it, if we had a program up and 
running and it was simply a question of buying off the 
schedule.
    So my commitment is within that 90 days, to give Congress a 
timeline as to when we are going to implement the private debt 
collection. As I said earlier, my goal is to make sure we do 
everything we can to make it work well, including dealing with 
the phone scams issue.
    We have a bidders conference scheduled this month which 
will be within the 90 days, again to get their participation 
with us in designing this program. We have to set up an IT 
system from scratch, again an unfunded mandate. We just keep 
collecting these. We have to design an IT system to take the 
cases that, under the statute, go to debt collectors, send 
those to the debt collectors, make sure they have a secure 
system to protect the taxpayer data.
    They then have to process those cases, have a secure way of 
giving us back the information case by case as to what happened 
to it so we can monitor and collect that, monitor their 
performance, and be able to report on how it runs.
    So our goal, although the timeline is still being 
finalized, and I do want to get it back to the Congress in the 
90 days, is we will have a bidders conference now. Our goal is 
to have the procurement done and the program designed, with all 
of the training that goes into it for the debt collectors, so 
that they know exactly how this is going to work, the 
development of the protections for taxpayers, the letters. Our 
goal would be to have that procurement done before the year is 
out. But we will have that timeline, we will get it to you.
    My concern is, I don't want to put it together quickly and 
then have it be a problem, and then people say: ``Well, you 
really knew that was going to be a problem and that is your way 
of killing the program.'' I have no intention of killing the 
program. If we can make it work, my view is that would be fine. 
But it is complicated because you are taking people and having 
them perform quasi-government functions. You have got to make 
sure the data is protected. You have got to make sure that they 
are trained appropriately, and that we have an agreement with 
them this is, in fact, what they are going to go do.
    Mr. Amodei. So use of the language already used by the 
Department of Treasury, which I assume would have some of those 
same concerns since you are collecting on behalf of the 
government, really wasn't helpful to you.
    Mr. Koskinen. No, no. It is very helpful to us. We are 
going to use that. The bidders coming to that conference are 
the people on that list. It is very helpful to us. It would 
take us much longer if we had to go to the broader GSA list. 
That list has four companies, the GSA list has 63.
    So it was very helpful. The focus is there. The reason we 
can have this bidders conference and get going is because you 
made it easier.
    Mr. Amodei. In the remaining minute of our speed date, how 
would you describe this in terms of your priorities for how you 
are transitioning the Service? And I will tell you the context, 
to be fair. It is like when I look at this thing that says, 
hey, we get more money, we can process 30,000 more collection 
cases, I am assuming that that is an in-house thing, not a 
private debt collection thing.
    Mr. Koskinen. Exactly.
    Mr. Amodei. So the question comes, how would you describe 
this as one of your priorities in terms of compliance?
    Mr. Koskinen. Like all statutory mandates, it is a high 
priority. The highest priorities we have, we have got to run 
filing season, because that is $3 trillion we collect. The next 
highest priority is to implement statutory mandates. And we do 
those as quickly as we can.
    Again, since I have been here we have accumulated a number 
of statutory mandates; none of them have come with any funding. 
That doesn't give us an excuse for not doing it. It may slow us 
down in some places. But we have an obligation to do them. We 
have an obligation to make them work, and we have an obligation 
to keep you advised as to what the timeline is and how the 
program is going.
    Mr. Amodei. Thank you.
    Thank you, Mr. Chairman. Since it is a school night, I 
yield back. I will be dating no further.
    Mr. Crenshaw. You are on a roll. You want to keep going?
    Mr. Koskinen. And I am not taking that as a sign of 
rejection that he gave up on the relationship here.
    Mr. Amodei. Since I have never had anybody say, ``I wish 
you would have talked longer,'' I think I will stick with that.
    Mr. Crenshaw. Thank you very much.
    Just real quick, how much money, how much revenue did we 
collect last year?
    Mr. Koskinen. We collected a little over $3 trillion. $3.1 
trillion. I think is the number.
    Mr. Crenshaw. When is the last time we collected $3 
trillion?
    Mr. Koskinen. I think we probably collected, the year 
before, $3 trillion. Basically it grows incrementally.
    Mr. Crenshaw. So would you say this last year that you 
collected more than you had ever collected before?
    Mr. Koskinen. I think our collections from our enforcement 
activity, with the revenue agents, are starting to go down. But 
as a general matter, the compliance rate continues and our 
collection rate, overall compliance rate, goes steady.
    My concern is, a decline of 1 percent in that compliance 
rate is going to cost us $30 billion a year, so that we have to 
worry about taxpayer service, we have to worry about 
enforcement. Because the number that we collect on our 
enforcement activity, the $50 billion to $60 billion, is real 
money. But what it is doing is reinforcing voluntary 
compliance.
    The number I have tried to get everybody to focus on is, 
what is the compliance rate? And if it starts to decline, the 
numbers you are talking about dwarf everything else we have 
talked about here today.
    Mr. Crenshaw. The enforcement collections, do they go up 
and down?
    Mr. Koskinen. We do a lot of enforcement collections by 
just our automatic collection process. We automatically find 
mistakes in returns and we communicate with people by paper, as 
I said. We send out 200 million notices a year. So the vast 
amount of our collection is done that way, and that stays 
fairly steady.
    Our problem is, to the extent people write back and 
disagree, then we have an audit. And our limited ability to 
audit starts to run down, and that is where the decline in 
revenue agents and officers, which we are now tracking 
separately, goes down.
    Somebody asked about revenues. Say the average revenue 
agent generates between $1.5 million and $1.8 million a year. 
So on the incremental basis it is why we say, if we could 
restore the agents and officers, we can guarantee you we would 
give you more money back, by far, than you gave us for that 
purpose.
    But otherwise the voluntary compliance system has continued 
running appropriately and effectively. My concern is, I just 
don't want to do anything that jeopardizes that.
    Mr. Crenshaw. I would just encourage you, this is like 
priorities in terms of customer service. I mean, you know where 
the revenue comes from, and I would think those, you would want 
to make that a priority. If you only have so much money, you 
have to decide where you are going to spend it.
    Mr. Koskinen. We do that.
    Mr. Crenshaw. And I think you are doing that to a certain 
extent. But that really is the bottom line on any kind of 
agency.
    I am bothered sometimes when I hear you say: Well, if we 
just had a little more money we would have collected more 
revenue. If you listen to GAO, they will tell you: You give us 
an extra dollar and we will save you $69. And I always say: 
What if we gave you a trillion dollars, would you save $69 
trillion? And I know you are not saying that, but just keep 
that in mind.
    Mr. Koskinen. I agree.
    Mr. Crenshaw. We collect more revenue with less dollars, 
but make sure we are spending our money in the right places to 
keep that collection going.
    Mr. Koskinen. And the advantage of having this discussion 
in the face of 6 years of decline, until this year, is that we 
can track the number of cases, collection cases we are not 
pursuing where we know there is money owed. So it is not the 
theoretical. ``There is an unlimited amount of money out 
there.'' There is not an unlimited amount of money. The tax 
gap, actually, you couldn't collect all of that.
    But at this point you can talk to the heads of our Criminal 
Investigators or Wage and Investment, Small Business people, 
and they will tell you, without revenue agents and officers, 
the rate of examination is going down. But more importantly, as 
we have collection cases, we are just going after fewer of 
them.
    I have talked to over 20,000 IRS employees personally. And 
when you talk to them, their concern is that--the revenue 
agents particularly--is that they know the money is there and 
they just don't have the time and the people to get it. And as 
we shrink--and we will shrink more this year--there is going to 
be less of that.
    I am not saying we would have collected a billion billions, 
but we have committed that if you funded the enforcement, we 
would get you $46 billion net over the next 10 years.
    Mr. Crenshaw. I understand that. I would just encourage you 
to, if you know that is there, then you ought to find money in 
other places. That seems to be an important function, and if 
you do that more efficiently you will get the money.
    Mr. Koskinen. Well, yes, but you have to understand, on 
enforcement, the easiest thing to do we would just take rich 
people and big spenders, because that is where the biggest 
differentials are. The minute we don't provide audits across 
the entire income spectrum, preparers are very smart and they 
have large numbers of clients, they can see, because they know 
which clients they are hearing from, they will notice. And the 
minute we are not providing oversight, even though it is at a 
lower rate, in a particular area of the economic range, that is 
where you are going to see the next frauds. And the bulk of 
money is collected from the bulk of people in the middle of the 
bubble.
    Mr. Crenshaw. I just want to encourage you to make that a 
priority. You have a lot of money, you spend it in a lot of 
different places, and I know everything is important, but some 
are more important.
    Mr. Koskinen. I would say we don't have a lot of money. We 
have a lot of money from the standpoint of any individual. In 
terms of how the operation of the agency goes, we do not have a 
lot of money. We have $900 million less than we had 6 years 
ago.
    Mr. Crenshaw. And you are collecting more revenue.
    Mr. Koskinen. Right. Our customer service has not been good 
and we are losing $5 billion a year on the revenue we know is 
out there.
    Mr. Crenshaw. But it is more than you had 5 years ago.
    Mr. Koskinen. And the $900 million, as always, nobody has 
ever disagreed, costs you about four to five times as much in 
lost revenue.
    I think it is appropriate to look at performance, and we 
are a businesslike operation with the accounts receivable of 
the government. And so to underfund the accounts receivable, 
when you know there are accounts out there you should be 
collecting, doesn't seem to me to be the most sensible way to 
run the business.
    Mr. Crenshaw. No, but I guess you could argue, if you 
collect more revenue with less money, then maybe if you had 
even less money you would collect even more revenue. But I 
think there are other factors, we all agree, that go into that.
    Mr. Koskinen. And I guess my bottom line--because I only 
have another one of these years and then I am going to run out 
of my tenure--my bottom line concern is that when we have 
undercut the effectiveness of the Agency, you won't see it 
immediately, we won't see a 1 percent decline.
    Mr. Crenshaw. We don't want to see that happen. I am with 
you 100 percent.
    Mr. Koskinen. OK, but we are getting very close to the 
edge, if we are not over it.
    Mr. Crenshaw. OK. Mr. Serrano has a parting comment.
    Mr. Serrano. There is the temptation to say that if we are 
collecting more money, then the President Obama economy is 
strong. But I won't do that. You will tell me it is just that 
taxes are higher and we will get into that back and forth.
    Quick statement, and then you could comment on it if you 
wish. It is not in the form of a question. But I am still not 
convinced, I have never been convinced, about the private debt 
collectors. I don't like them. It makes me nervous. And I know 
it can be abused. These folks get a bounty. A bounty means that 
you go hard to make sure you collect and how you treat people.
    I am one of those Members of Congress, and there are more 
than we think, it is just that they don't say it out loud, who 
has great respect for government employees, government workers. 
I have great respect, for instance, for the people who sit 
behind us.
    If the American people knew the average age of the people 
who run Congress behind the scenes, behind the work that we do, 
they would be very grateful and know that the country--the last 
time I looked the country is still the greatest country on 
Earth, and there are a lot of young people involved in running 
it on a daily basis, at least running the Senate and the House.
    But I worry, and I hope that as time goes on and this 
begins to be developed that you keep us informed on whether or 
not I was wrong or I was right on the fact that there will be 
abuse, and that it is better to have people who are on the 
payroll now, people who have been around a while, collecting 
that debt, rather than having people who don't have the 
government as their sense or center point, but rather just 
collecting the dollars.
    And that is my statement. If it's a question and you want 
to comment on it, it is up to you.
    Mr. Koskinen. It is an important statement. It has been 
controversial. We have tried private debt collection a couple 
times in the past, and it hasn't turned out to be efficient or 
effective.
    It is not our role to second-guess that decision. And that 
is why I want to make it clear we are committed. It is a 
statutory mandate. We should take this program. We are 
committed to doing everything we can to make it work. We want 
to protect taxpayers. We want to make sure that we don't build 
in problems for them, which is one of the reasons I can't just 
go out and say, ``Go collect debt,'' because I have a lot of 
things we have to do around it.
    But we really do want to make sure that we do everything we 
can to make it work, because it needs a fair shake. And we are 
documenting with the IG, as well, all of the steps we are 
taking. We have tried to learn from what happened before, and 
if there were issues that we could have improved on the last 
couple times, I said we need to do that.
    Because if it works, that would be fine and we would have a 
fair choice at it. If it doesn't work, we will have done 
everything we can to make it work, and then everybody will be 
able to decide, OK, we had a fair test of it, we worked hard, 
and it didn't work.
    Our goal is to make it work. We recognize the issues around 
it. But the Congress has said you should do this, and our 
response to what the Congress tells us to do is we do 
everything we can to do it as quickly as we can.
    Mr. Crenshaw. Thank you.
    Mr. Amodei, do you have anything further?
    Mr. Amodei. Thank you, Mr. Chairman. I guess I am going to 
be staying out past my curfew today.
    I appreciate the comments of my colleague who is the 
ranking member in that. There are a couple of things going on 
here where you are, although some days I am sure you feel like 
it, are not held to a perfection standard. Government employees 
make mistakes from time to time.
    So to hold this thing, I am not sure that is what is being 
attempted, but to hold the concept of this statutory mandate, 
which was signed by the President, so for anybody with a C or 
above, in government it is like, well, that kind of makes it 
the law of the land at the moment. To hold that to a perfection 
standard, I can tell you right now, you are going to be 
disappointed, because there are human beings involved. That is 
like holding Members of Congress to a perfection standard, 
members of executive agencies to a perfection standard, and all 
that.
    But in the context of the testimony that I believe is 
absolutely accurate from the Commissioner, that we have a very 
large amount of money that is due to the government, 
legitimately, that, quite frankly, isn't collected, to explore 
this as a possibility, and especially with your testimony, Mr. 
Commissioner, that we want to try to give it every fair chance 
and do it right, so we are going to report back within the 90 
days or whatever, it is like OK. And if it fails, then that is 
fine.
    But I think sweeping generalizations in terms of it can 
only be done by your employees or it should never be done in 
another context are things that, quite frankly, aren't open. If 
it falls on its face, then that will become evident. I 
appreciate the fact that you want to cover yourself, to say we 
put all the gas in the tank it could hold and it didn't get 
there, or if it does get there it is like, OK, this is part of 
it.
    But to take a tool that is in the box and not try to use it 
and leave it in the box, I think is one of the reasons that 
gets us all criticism in government, whether it is the 
executive branch or the legislative branch.
    So I look forward to hearing what you folks have done in 90 
days with those already-working-for-the-government folks and 
then how the program proceeds. And, hopefully, you will pick 
folks that don't make as many mistakes as those of us in 
government do, and that will be a rousing success. And if they 
do make as many mistakes as those of us in government, then we 
will deal with what comes.
    Thank you. I yield back.
    Mr. Serrano. Mr. Chairman, if I may?
    Mr. Crenshaw. Yes.
    Mr. Serrano. Because the gentleman made a very interesting 
point.
    Your comment would be perfect if we had never tried this 
before. We have tried it and it hasn't worked. The experience 
has not been a good experience.
    And that is my concern, that there are some people heck 
bent on making this part of how government collects money. And 
the experience we have had in the past was not good. We had 
complaints about people being harassed, we had complaints about 
people going to the door really as, I hate to say it, as bounty 
hunters.
    So I just have a certain respect for people who understand 
what the parameters of their behavior are in government. But I 
understand your point, and your point would be extremely well 
taken if we have never tried this before.
    Mr. Crenshaw. Maybe it will work this time.
    But we thank you for being here today, for your time, and 
are really encouraged to hear some of the efforts you are 
making in terms of customer service, in terms of modernization. 
It is a tough job. But we thank you for your service, and we 
thank you for your testimony today.
    This hearing is adjourned.
    
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                                        Tuesday, February 23, 2016.

                    OFFICE OF MANAGEMENT AND BUDGET

                                WITNESS

HON. SHAUN DONOVAN, DIRECTOR, OFFICE OF MANAGEMENT AND BUDGET
    Mr. Crenshaw. Well, good afternoon, everybody.
    This hearing will come to order.
    Today, we will hear from the OMB Director, Shaun Donovan, 
who has the dubious distinction of submitting for the first 
time in our Nation's history a $4 trillion budget.
    This record level of spending corresponds with a record 
level of revenue; however, it still isn't enough to balance the 
budget. So another $600 billion is added to the Federal debt, 
which, in gross terms, now exceeds $20 trillion for the first 
time. It took 233 years to incur the first $10 trillion in 
debt, and it took only 8 short years to incur the next $10 
trillion in debt.
    Now, the only way to retire the Federal debt is for 
spending as a percentage of GDP to be lower than its historical 
average and for revenue as a percentage of GDP to be higher 
than its historical revenue. The budget before us, however, 
projects that both spending and revenue as a percentage of GDP 
will remain above their historical average through 2026. In 
other words, this budget is a permanent source of debt.
    As a percentage of GDP, gross debt hovers around 105 
percent. Now, that is a level that has not been seen or 
tolerated since the end of World War II. And I think we would 
all be a little afraid if the country became acclimated to this 
level of debt.
    So make no mistake, it is an economic burden that threatens 
the living standards of future generations. As such, I am 
disappointed that the administration's final budget request to 
Congress did not propose any substantive entitlement reforms to 
prevent any further intergenerational inequity, let alone not 
one substantial entitlement reform in the last 8 years. Back in 
2000, there was talk about retiring the Federal debt by 2013, 
and now the Federal debt has eclipsed our GDP.
    Now, the Office of Management and Budget has the great 
responsibility of constructing a budget that reflects the 
President's vision for our country. And because of this 
responsibility, I believe OMB has an even greater 
responsibility to be judicious and deliberate with its own 
budget request. And so, today, I hope not only to have an 
informative discussion about OMB's appropriations request but 
also to dive into some of the important policies and 
assumptions included in the President's overall request.
    For fiscal year 2017, OMB is requesting a 6-percent 
increase over last year's level. That is just a little bit 
under $101 million. In addition, the budget requests a 
significant increase for OMB's IT account, at 17 percent over 
last year.
    Now, I appreciate the strides the administration has made 
to improve the use of IT resources all across the government to 
increase efficiency, to reduce waste, and identify savings. 
However, at a time where our Nation is incurring significant 
debt for generations to come, I think OMB should be exercising 
even greater fiscal restraint.
    And may I remind the Director that when the President first 
took office in 2008 OMB received $78 million. Therefore, I 
believe your agency, again, has a greater duty to lead by 
example and to live within the means of your own budget.
    I would also like to discuss the role OMB has in 
strengthening Federal cybersecurity and the steps the Federal 
Government is taking to prevent the kind of IT failure we saw 
with the breaches of OPM's background security and personnel 
database. More and more, we are seeing threats to our national 
security via cyber attacks on our networks and operating 
systems. OMB's role in guiding and coordinating cyber policy is 
very, very important.
    Today, I hope we can talk about the Department of Labor's 
proposed fiduciary standard rule. As you know, last month, the 
Department of Labor submitted its rule to redefine fiduciary 
standards to OMB for its mandatory review. I will have some 
questions about this because OMB has the critical task of 
reviewing all the Federal regulations to ensure all proposed 
regulations keep pace with modern technology, promote the 
changing needs of society, and avoid duplicative and 
inconsistent policies.
    I believe the Department of Labor's rule will significantly 
harm low- and middle-income investors seeking financial advice 
regarding their retirement and will cause unintended 
consequences to many Americans' IRA accounts by limiting their 
access to investment advice provided to many small account 
holders. At a time when many Americans lack adequate retirement 
savings, we should be empowering families to save more for 
retirement by preserving access to all forms of affordable 
investment advice.
    And, finally, I want to talk some today about the 
administration's inadequate proposal to fund the Army Corps of 
Engineers. I am very disappointed the administration chose to 
ignore the importance of our Nation's ports and waterways. As 
we move toward larger post-Panamax ships, ensuring that ports 
are dredged deep enough to handle these larger ships is 
essential to secure America's place in a global competitive 
market.
    For instance, in Jacksonville, Florida, my home district, 
JAXPORT, our local port, is a major economic driver in the 
community. JAXPORT supports more than 132,000 jobs and has an 
economic impact of about $27 billion in the northeast Florida 
region. And, unfortunately, the President's budget not only cut 
the Army Corps of Engineers' funding by 22 percent, but it 
doesn't fund a single new deep draft navigation project.
    In order to modernize our Federal navigation channels, we 
need a budget that reflects the needs of our Nation's ports. 
And so I am hoping to hear from you, Director, today on why the 
administration woefully underfunded the Army Corps of Engineers 
and about the decision to fund only one new start project in 
the 2017 budget request.
    But, again, I want to thank you, Director Donovan, for 
taking the time to be with us today, and I look forward to your 
testimony.
    And now I would like to turn to the ranking member, Mr. 
Serrano, for any opening remarks he might have.
    Mr. Serrano. Thank you, Mr. Chairman.
    I want you to know that you just cost me a dollar. I bet 
someone that you would say something positive about the budget, 
and I didn't hear it. Maybe I skipped it.
    Mr. Crenshaw. Yeah, I said something nice about the IT 
stuff.
    Mr. Serrano. Yes, you did. Yes, you did.
    Thank you, Chairman Crenshaw. I would like to join you in 
welcoming Shaun Donovan, Director of the Office of Management 
and Budget, to this hearing.
    Today's hearing serves a dual purpose: We will of course 
discuss OMB's specific budget request for this year and delve 
into the new initiatives that will help coordinate government-
wide responses to pressing issues. But we will also delve into 
the budget request as a whole and how OMB has helped to put 
together a coherent and cohesive product that reflects our 
Nation's values and addresses its needs.
    That secondary role is especially important for this year's 
context, because this year our majority colleagues on the 
Budget Committee have taken the unprecedented step of refusing 
to invite Director Donovan to testify on the administration's 
budget. I think that decision is unwise at best.
    With that in mind, I want to commend Chairman Crenshaw for 
his decision to hold a hearing today. I think it speaks well of 
the Appropriations Committee's more bipartisan nature. Although 
we may have differences of opinion about what our policy 
priorities should be, I am glad to know that the chairman 
believes that we should hear all sides of the debate.
    And I am very serious and sincere about that, Mr. Chairman.
    And I think it is especially necessary to hear what 
Director Donovan has to say about the fiscal year 2017 budget.
    So I believe that the President's request, prepared with 
your counsel, creates a strategic plan that strengthens our 
economy and invests in working families by improving access to 
early and higher education as well as affordable health care, 
investing in our infrastructure, and partnering with local 
communities and businesses to create good-paying jobs and 
affordable housing. I commend OMB for your role in these 
efforts.
    There is also much to discuss in OMB's request, as well, 
which totals $100.7 million in fiscal year 2017. This includes 
a relatively small increase of $5.7 million to help ensure you 
have the personnel and the tools necessary to meet these 
numerous responsibilities.
    It is important to note that, out of the requested 
increase, $2.4 million are for unavoidable costs, such as 
salary increases, higher rental costs, and IT contractor 
support. The other $3.3 million would help OMB restore a 
portion of previous staff cuts at a time when OMB has taken on 
numerous new responsibilities mandated by Congress. OMB's 
current staffing levels are 7 percent below 2010 levels and 
would still be 5 percent below 2010 levels even if OMB receives 
its full 2017 funding request. We need to make sure that OMB 
has the resources necessary to do its job.
    I am also interested in hearing about the implementation of 
the Cybersecurity National Action Plan and OMB's role in 
developing and coordinating Federal IT cybersecurity strategy 
and policy. I hope we will have a chance to discuss all these 
issues in further detail today.
    Thank you for your service and for appearing before this 
subcommittee. I look forward to hearing about your priorities 
for 2017.
    And I thank you, Mr. Chairman.
    Mr. Crenshaw. Thank you.
    I would like now to yield to Mr. Rogers, who is the 
chairman of the full committee, for any opening statement he 
might like to make.
    Chairman Rogers. Thank you, Mr. Chairman.
    Director Donovan, we are pleased to have you with us to 
discuss the President's fiscal year 2017 request for OMB as 
well as some recurring themes in the overall request.
    This marks the eighth and final budget request under the 
Obama administration, which you have been a part of from the 
very beginning. While we may not agree on everything, I have 
enjoyed working with you over the years and appreciate your 
service to the country.
    For fiscal year 2017, as has been said, you have requested 
$100.7 million, which is about $5.7 million over fiscal year 
2016. These additional funds are proposed to hire more staff, 
raise pay and benefits, and for increases in rental and IT 
costs.
    As you know, we are in very tight fiscal times, so any 
request for additional dollars is met with extra scrutiny in 
this committee. That is our job.
    Your relatively small agency plays a critical role in 
overseeing the administration of the entire executive branch, 
and it is important that this committee assess the strength of 
the President's budget request as a whole.
    As you are aware, in December, Congress and the President 
came to an agreement that set budget caps for fiscal year 2016 
and 2017. So I am disappointed, not surprised, that this year's 
budget request seeks at every turn to circumvent the terms and 
the spirit of that agreement.
    Year after year, this committee has rejected the 
administration's attempts to evade statutory discretionary 
spending caps by proposing new and unrealistic programs on the 
mandatory side of the ledger. And yet, here again, this budget, 
which you helped draft, shifts tens of billions of dollars from 
discretionary funding over to mandatory.
    If we were to blindly follow the President down this path, 
by 2020 our country would spend more money on interest payments 
on the national debt than we would on protecting and defending 
our Nation. Instead of proposing real solutions to help get our 
Nation's fiscal house in order, the President has chosen only 
to exacerbate the problem.
    And while I have sadly come to expect the budget request to 
be a political document, this year I am especially disappointed 
in two proposals in particular.
    First, despite bipartisan efforts in the past several years 
to increase funding for medical research, this budget opts 
instead to politicize the issue, proposing the $1 billion 
Cancer MoonShot through mandatory spending, outside the terms 
of the balanced budget agreement and outside the scope of this 
committee's jurisdiction.
    The same goes for the proposal related to our Nation's 
deadly opioid epidemic. Our country loses over 100 lives a day 
to heroin and prescription drug overdoses. That is over 100 
families every day that lose a son, a daughter, a father due to 
this tragic scourge.
    And don't mishear me. I have enjoyed working in a 
bipartisan fashion with the administration, with a number of 
dedicated individuals to curb the tide of abuse, to help save 
those lives and those families. I believe we have made some 
real progress, and I do not question their commitment.
    However, when we receive a $1 billion proposal in mandatory 
funding to address this pressing problem, I do have to question 
the sincerity and seriousness of the request. It is 
unquestionable that funding for NIH and for treatment and law 
enforcement to fight against drug abuse are important, 
admirable goals that we all share on a bipartisan basis. But 
here we have to make tough choices and prioritize, and this 
budget request is completely devoid of that leadership. Again, 
I am not surprised, but I am truly disappointed.
    And let's move on now to the global Zika virus emergency. 
The committee has received the President's supplemental 
appropriations request for Zika. We are reviewing it carefully. 
But I am disappointed you didn't take our committee's 
recommendation to use unobligated Ebola and other disease funds 
for the immediate response to Zika, which we offered to 
backfill as needed in the fiscal year 2017 bills.
    I think you will eventually regret that decision. The 
supplemental you have requested will take time, will probably 
get mired in controversy, and will likely attract many requests 
for additional emergency funding.
    We gave you a quick and easy path. You have chosen a much 
more difficult one that will only slow the response to Zika. 
And I am sorry you didn't take our advice and our permission to 
use those funds for Ebola and the other diseases for this 
immediate pending problem with Zika.
    I look forward to discussing these issues with you further 
during the question-and-answer part of the hearing, and I want 
to thank you for being here and for your work.
    I yield back.
    Mr. Crenshaw. Thank you.
    And now, Director Donovan, we will turn to you for your 
testimony. If you could keep it in the 5-minute range, that 
will allow more time for questions. And your full statement 
will be made part of the record. So the floor is yours.
    Mr. Donovan. Thank you.
    Chairman Rogers, thank you for joining us today.
    Chairman Crenshaw, Ranking Member Serrano, and all the 
members of the subcommittee, thank you for the opportunity to 
present the President's 2017 budget request for the Office of 
Management and Budget.
    I want to first thank this subcommittee and the full 
committee for its work on the 2016 omnibus and the Bipartisan 
Budget Act of 2015. Together, we came together to avoid harmful 
sequestration cuts and enacted a spending bill that provided 
critical funding for both our defense and nondefense 
priorities.
    The President's 2017 budget builds off the achievements we 
secured for 2016 and adheres to the funding levels authorized 
in the BBA. And we look forward to working with Congress to 
continue the progress we have made in moving the appropriations 
process back to regular order.
    I also want to thank you for your support of OMB. Over the 
last 3 years, you have provided OMB with resources to halt the 
furloughs and staffing losses that threatened our ability to 
maintain the high standard of quality that we hold ourselves to 
and that Congress rightly expects from OMB. Restoring capacity 
allows us to deliver more value for taxpayers through improved 
program management, smarter regulations, and more identified 
opportunities for savings.
    Under the President's leadership, we have turned around our 
economy and created 14 million jobs; the unemployment rate has 
fallen below 5 percent for the first time in almost 8 years; 
nearly 18 million people have gained health coverage as the ACA 
has taken effect; and we have dramatically cut our deficit by 
almost three-quarters.
    The President's 2017 budget will help continue this 
economic and fiscal progress. It shows that investments in 
growth and opportunity are compatible with putting the Nation's 
finances on a strong and sustainable path. And it lifts 
sequestration in future years so that we continue to invest in 
our economic future and our national security and replaces the 
savings by closing tax loopholes, reforming tax expenditures, 
and with smart spending reforms.
    The budget shows that the President and our administration 
remain focused on meeting our greatest challenges not only for 
the year ahead but for decades to come, making critical 
investments that will accelerate the pace of innovation, give 
everyone a fair shot at opportunity and economic security, and 
advance our national security and global leadership.
    The President's request for OMB is $100.7 million, which 
will be used to support the staff we brought on board in 2015 
to address our historically low staffing levels, as well as 
enable us to hire an additional 10 full-time equivalents. Our 
2017 request supports the staffing levels we need to more 
effectively oversee program management and funding, including 
identifying opportunities for budgetary savings across more 
than 100 agencies and departments throughout the Federal 
Government.
    OMB's request will also enable us to continue to play a 
central role in executing the President's management agenda. 
The additional resources will let OMB ramp up promising efforts 
and build on progress in a number of key areas. But I would 
like to specifically highlight our investments in supporting 
smarter IT delivery and stronger cybersecurity across 
government.
    OMB is requesting $35 million for Information Technology 
Oversight and Reform, or ITOR, to support the use of data, 
analytics, and digital services to improve the effectiveness 
and security of government services.
    The requested resources will help scale up particularly 
promising efforts like the U.S. Digital Service, which has 
already saved agencies millions of dollars and assisted with 
many of our toughest digital challenges. The 2017 request 
expands the central USDS team at OMB to work on additional 
projects and supports standing up Digital Service teams at 25 
agencies across the government.
    The ITOR fund also supports OMB's work on enhancing Federal 
cybersecurity. Strengthening the cybersecurity of Federal 
networks, systems, and data is one of the most important 
challenges we face as a Nation. To address these challenges, 
the President created a Cybersecurity National Action Plan that 
takes near-term actions and puts in place a long-term strategy 
to enhance cybersecurity awareness and protections. OMB will 
use ITOR resources to work with Federal agencies to implement 
these actions and to support timely and effective responses to 
cyber incidents.
    Our efforts to help deliver a smarter, more innovative, and 
more accountable government extend to our regulatory 
responsibilities as well. The administration is committed to an 
approach to regulation that promises economic growth, 
competitiveness, and innovation, while protecting the health, 
welfare, and safety of Americans.
    We continue to make significant progress on the 
retrospective review of existing regulations, eliminating and 
streamlining regulations to reduce burden and cost. Since 2010, 
agency retrospective reviews have detailed hundreds of 
initiatives that will reduce costs, saving more than $22 
billion in the near term.
    The responsibilities I have described here are in addition 
to our work with agencies to prepare and execute the Federal 
budget. And while some people think only about OMB's efforts on 
behalf of the President's budget, members of this subcommittee 
know that OMB works with Congress every day to provide 
information and analysis and to respond to contingencies and 
unforeseen circumstances.
    I want to close by thanking you again for the opportunity 
to testify today. It is a particular honor for me to serve at 
OMB, given the critical role it plays and the talented 
individuals who work there.
    Supporting OMB and the work we do to make government 
perform better for the American public will continue to be a 
smart and necessary investment, and I look forward to 
continuing to work closely with this subcommittee to that end.
    Thank you. I look forward to your questions.
    [The information follows:]
    
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    Mr. Crenshaw. Well, thank you.
    Let me ask you about your budget request of a little over 
$100 million. You got an increase last year. You are asking for 
a 6-percent increase this year.
    As I understand it, your role is to say to the agencies 
what you ought to be asking money for and not spending 
yourself. I mean, you oversee the overall budget, and that is 
why I said earlier I think you have a particular responsibility 
in terms of fiscal restraint.
    I know when I was chairman of the Legislative Branch 
Subcommittee of this full committee, I cut the Members' office 
accounts by 10 percent. It was a tough decision, but I thought 
we ought to lead by example. And if you look over the last 5 
years, the budget of the House of Representatives has gone down 
by 16 percent.
    And so when you ask for a 6-percent increase, I look at the 
request, and I think last year part of that increase was going 
to go for 25 new staffers and now, for 2017, another 10 new 
staff positions. Can you tell me how many of the 25 from last 
year's appropriation have been hired?
    Mr. Donovan. We have fully hired to the staffing levels 
that you have provided in prior years.
    And I think it is important to recognize, there is a 
significant piece of this--of the $5.7 million increase, $2.4 
million will go just to inflationary increases that we have, 
whether staff, benefits, rent, those types of things.
    I think it is critical for us to execute the additional 
responsibilities that we have been given, many of them by 
statute. I was very pleased that we reached a bipartisan 
agreement in the transportation bill last year, for example, to 
step up our efforts to streamline infrastructure permitting 
across the country. I think a very strong bipartisan effort 
there. We are bringing on some new staff to implement that 
effort. That is a good example.
    Mr. Crenshaw. So the 25 that we funded last year, they have 
all been hired?
    Mr. Donovan. That is correct.
    Mr. Crenshaw. Okay.
    Mr. Donovan. That is correct.
    Mr. Crenshaw. And then you need 10 more for next year, and 
you have roles for them to play.
    Mr. Donovan. Absolutely. And, again, the DATA Act is 
another good example, a bipartisan effort that we need to bring 
on staff for. And, obviously, cybersecurity is an area where I 
think we can all agree.
    I think one of the most important points I can make about 
this is that I think in all of these different areas we can 
demonstrate that the staff that we are bringing on are 
achieving substantial savings across the Federal Government, 
whether it is the Digital Service----
    Mr. Crenshaw. I gotcha.
    Mr. Donovan [continuing]. Which is saving hundreds of 
millions of dollars----
    Mr. Crenshaw. You hired that first 25 pretty quick. And, 
you know, if you have the money to do it, you did it, and that 
is good.
    Mr. Donovan. We have saved $3.5 billion in IT acquisition 
costs through the reforms that we have made. So the leverage on 
these staff, we think--and it is important that we show you the 
return on investment for those staff.
    Mr. Crenshaw. Gotcha.
    Let me ask you a quick question about some of the work you 
do when you oversee all the different regulations that come 
before you. And, in particular, I mentioned in my opening 
statement the Department of Labor and the fiduciary standard.
    As you know, we had this conversation last year, I believe 
the SEC, which we oversee and fund here, has the primary 
responsibility to look at our economy and make sure that things 
are safe and stable. And it seems like they would be the 
appropriate people to make a rule or regulation about fiduciary 
standards. In fact, when we asked Mary Jo White at the hearing, 
she said they are working on a rule to do that.
    It seems like the Department of Labor has kind of just 
ignored everybody's input to say, you know, let's not 
duplicate, let's not make things overlap, and yet they just 
keep going, and keep going. They have heard from the Department 
of Treasury, they have heard from the different appropriators, 
different subcommittees, full committees.
    And I guess the question is, if they are just going to kind 
of keep moving--then they come to you, and you have to 
ultimately review that. And my understanding is that you are 
going to expedite that review, and there might be a final rule 
sometime in April.
    And so the question becomes, do you sit down and do a 
comprehensive cost-benefit analysis to make sure that--we all 
want to help investors. We all understand that with the stock 
market there are certain risks involved. So we want to help, 
but we don't want to help in a way that cuts off people's 
access to investment advice.
    So before you kind of finalize that rule, do you do a cost-
benefit analysis?
    Mr. Donovan. Absolutely.
    And let me just say at the outset, we do have, as you just 
noted, this rule under review at this point. So I am limited in 
what I can say on the specifics of the rule. But, generally 
speaking, it is one of our most important duties to ensure that 
cost-benefit analysis is done correctly and effectively, and we 
take the time necessary to ensure that that is done.
    Also one of our most important duties is to ensure that 
there is interagency review of regulations. In this case, it is 
the Department of Labor's statutory authorities that they are 
putting into effect through the rule, but one of our jobs is to 
make sure that there is a strong interagency review of these 
rules before they are finalized.
    Mr. Crenshaw. So can you assure us that there is not going 
to be duplication or inconsistencies if you have a rule by the 
SEC and a rule by Department of Labor?
    Mr. Donovan. What I can assure you is that we are going to 
do everything we can to minimize those. SEC is obviously an 
independent agency, so, while we consult with them, we don't 
have direct oversight over their rulemaking. But I can assure 
you that we will do everything we can to ensure that 
coordination.
    Mr. Crenshaw. And how do you go about making sure this 
proposed rule isn't going to have unintended consequences, and 
actually limit people's access, not adversely affect 
particularly some of the low- and middle-income Americans? How 
do you go about the process to make that determination?
    Mr. Donovan. Well, one of the critical things that we do--
and this is through an open, transparent process of meetings 
and comments that come into rules. I believe there were 
thousands of comments that were received and evaluated, 
hundreds of meetings that took place in the review of the rule. 
And so that is, obviously, the best possible way to have an 
open, transparent process that makes sure that concerns about 
any particular rule are incorporated.
    Mr. Crenshaw. And I guess you know there have been a lot of 
concerns--anytime you have a comment period, some people like 
it, some people don't--but there have been a lot of concerns 
raised, and not on a partisan basis, kind of across the board, 
people are just concerned that you don't overdo the regulation 
to really harm the people you are trying to help. So I just 
hope that you will continue to keep that in mind.
    And, again, when we have the SEC Chairman before us, we 
will ask her how she's doing on her rule. Because, again, we 
don't want to see the inconsistencies, duplication that just 
create even more confusion.
    Mr. Donovan. Well, again, I am not going to comment 
directly on the rule. I will say that Secretary Perez has made 
clear they are doing everything they can to streamline and 
simplify the rule while still maintaining the bedrock principle 
of a fair standard of protection for investors.
    Mr. Crenshaw. Can you tell us whether or not you are 
expediting the rule and when the final rule might be available? 
Or is that something you are not supposed to comment on?
    Mr. Donovan. Even if I could tell you, I wouldn't know 
exactly when we would be finished here. What I can tell you is 
we are giving it a full interagency review, as I described.
    Mr. Crenshaw. Thank you very much.
    Mr. Serrano.
    Mr. Serrano. Thank you, Mr. Chairman.
    You have touched on it somewhat, but I want you to expand 
on it. You know, we have been in a certain kind of mood in the 
last few years--actually, more than a few years--of cutting, 
cutting, cutting the budget. And some Members feel that if we 
cut the budget, that is fine; that is what we were elected to 
do. But some of us feel that what made our country great was 
investing in our country also, investing in infrastructure, 
investing in education.
    So how does the President's budget deal with those issues? 
And is it possible, do you think, at all in this climate--and I 
know this is more a political question than anything else--for 
any President to make Congress happy in terms of investing and 
at the same time not making them totally angry on spending?
    Mr. Donovan. Well, I think you have hit on a core issue 
that we grappled with in the budget. But I will say that I 
think what we really did here was to build on a bipartisan 
precedent that we have seen now twice, with the Murray-Ryan 
agreement and then with the Bipartisan Budget Act last year. 
And that is basically to recognize that sequestration, which I 
would really describe, in many cases, as mindless austerity, 
cutting just simply straight across the budget without 
reflecting, really, which are the critical investments--that, 
on a bipartisan basis, we came together last year to invest 
more on the discretionary side of the budget, but we offset it 
with both revenue increases and smart spending cuts on the 
mandatory side of the budget.
    And that is exactly the model that we have been taking up 
in the President's budget. Not only are we living within the 
caps that were part of that budget deal, which provide 
substantial relief on the discretionary side for critical 
investments, many of which you described, but we also achieved 
$2.9 trillion in deficit reduction over the 10-year window 
through taking a look at where we can close loopholes on the 
tax side, where we can make smart spending reductions. We have 
$375 billion in healthcare savings over the 10-year window.
    So we really think that is the right model, and it is a 
model that has been bipartisan that we have followed.
    But what we can't do is continue to cut the very things 
that will help us make the investments that are going to grow 
our economy, whether it is the research and development that is 
so critical to keeping our innovation edge that we have over 
other countries, whether it is investing from the very youngest 
age in our kids, like we did with Head Start in the bipartisan 
agreement last year and we continue this year in our budget, in 
education and training and so many other areas that are 
critical to our short-term but also our long-term success.
    Mr. Serrano. I am glad that we are discussing that 
approach, Mr. Chairman, because one of my concerns and the way 
I always say it is, you know, somewhere right now in this 
country, in many places, there is a man and a woman somewhere 
in a lab, or a couple of men and women in a lab, in white coats 
working either on the next Velcro or perhaps finding a cure for 
cancer or the common cold. And we sometimes feel, it looks to 
me, like we are willing to even cut those areas, you know, that 
make us grow.
    Do you think we are reaching at all that dangerous point? 
Or do you think that the bipartisan agreements we have had or 
some of the changing in tone that we have seen at times in the 
last couple years, which some people forget about--it hasn't 
all been rancor and discord at times--that we can get to a 
point where we don't jeopardize the investments we have to make 
in the future of the country?
    Mr. Donovan. Well, I am hopeful, if we can not continue the 
model that we had of 3 or 4 years ago, between shutdown and the 
other manufactured crises that really hurt our economy, hurt 
confidence of individual families across the country and our 
businesses, but follow the model we had last fall, I think we 
really can make progress on these issues.
    Because I think there is broad recognition that 
discretionary spending is not where our fiscal challenges are, 
that, actually, we are investing too little on the 
discretionary side, even with the substantial increase that we 
got in this budget deal, which we lived by in our budget, and 
that, really, where our fiscal challenges are are more on the 
revenue and on the mandatory side of the budget, particularly 
around health care. And that is something that we have made a 
lot of progress on, bringing down our healthcare costs.
    Mr. Serrano. Mr. Chairman, one quick question. And this is 
a question that I run the risk that anybody under 30 in the 
audience will leave here shaking their head and saying, ``How 
dumb can he be?''
    But can we reach a point where the IT equipment we buy 
doesn't become obsolete 6 months later? Is that our ability to 
purchase improperly, or is it just that technology changes so 
quickly that we can't keep up?
    Mr. Donovan. Well, no----
    Mr. Serrano. Because it seems that all the years I have 
been on Appropriations--I mean, there was the fiscal year 2000 
where we thought we were going to all die and the country was 
going to go down the drain. But since then, one of the issues 
is how we pour money at times--pour money, honestly--you're 
hearing a Democrat say that--into IT and then, a year later, 
the department or that agency is saying it is obsolete.
    Mr. Donovan. Yeah.
    Mr. Serrano. Is there any way to deal with that?
    Mr. Donovan. Part of this is, clearly, the technology 
changes quickly. But the fact is, historically, the government 
has taken an approach that dramatically exacerbated that 
problem. A lot of this is in how we procure information 
technology, whether that is the individual devices that we use 
or how we procure software services.
    And so two critical things that we are doing that we are 
making a great deal of progress on: One is we are moving 
aggressively to what we call category management. Instead of 
having literally thousands of different contracts across the 
Federal Government for laptops, for desktops, for handheld 
devices, we are going to a very small number of government-wide 
contracts.
    As we started to implement that late last year in IT and 
particularly in devices, we saw a 50-percent decline in prices 
very quickly. How can that be, you say? Because, for example, 
right now, if you were going to bid on a contract, you have to 
look at potentially thousands of different contracts in 
different agencies with many, many different types of 
configurations. Instead, if we go to saying simply, let's 
choose three, four, five different configurations of a desktop 
or a laptop and make that the standard, we can actually 
dramatically improve the efficiency for the contractors 
themselves of doing business with us and bring the prices down. 
And we have started to see that.
    On software procurement, which is a little more 
complicated, we have moved to what we call an agile system. It 
basically used to be that we would buy giant IT systems all at 
once, kind of in a big bang, and, by the time you get 4 years 
down the road, realize you are above budget, behind schedule, 
it is too late to be able to make changes and adjustments. 
Instead, what we are doing is buying, just like the private 
sector does, much more incrementally. And that is also really 
starting to make a difference.
    I saw this, frankly, at HUD. When I came in, I had a giant 
financial services project that was above budget, behind 
schedule. And I came to OMB--this is the role that OMB can 
play. I came to OMB; they said, you know what, Treasury has 
actually got a system that is very similar. And so we moved to 
what we call shared services where HUD now does all its 
financial transactions through its system at Treasury. Much 
more cost-effective.
    And so those are the kind of techniques that, even if 
technology changes quickly, it allows us to be much more agile 
and responsive to keep up with those changes.
    Mr. Serrano. Thank you.
    Thank you, Mr. Chairman.
    Mr. Crenshaw. Just real quick, do you have a number, like, 
how much money the Federal Government spends every year across 
the board on IT?
    Mr. Donovan. Roughly $90 billion.
    Mr. Crenshaw. That is all?
    Mr. Rogers.
    Chairman Rogers. Mr. Director, let's talk about debt. We 
owe over $19 trillion, growing uncontrollably, several 
trillions of it during this administration.
    People out there are frightened, frustrated, mad, 
misunderstanding what is happening. And when I try to tell 
them, look, we have cut discretionary spending in the last 5 
years by over $175 billion, and yet the debt continues to zoom. 
Why? Because of mandatory spending, entitlement spending--out 
of control.
    When I first came here, we appropriated two-thirds of 
Federal spending. Today it is one-third. Two-thirds is now 
mandatory, automatic. If you qualify for a certain program, the 
money comes out of the Treasury. It doesn't go through this 
committee. We have no oversight.
    If we continue at this pace, as I said in my opening 
statement, soon the debt interest is going to exceed what we 
spend for national defense, among other things. So it is a real 
crisis, in my judgment.
    Of the $4 trillion in Federal spending that is going to 
take place next year, we are only appropriating $100 billion, 
and it is out of control. And yet this budget that the 
administration is proposing would increase mandatory funding by 
some $60 billion, either currently funded under discretionary 
or new money that should be funded as discretionary.
    [Clerk's note.--Chairman Rogers corrects the $100 billion 
as $1 trillion later in the record.]
    Knowing that we have a mandatory spending problem that is 
crowding everything else out, the President chooses to ignore 
that problem and, frankly, only make it worse. He plans to pay 
for much of this new funding through imaginary fees and taxes 
that obviously aren't going to happen.
    With the President having been in office now over 7 years, 
we still haven't seen a credible plan to tackle this out-of-
control entitlement spending and debt. He has almost 11 months 
left in office. Can we see any hope that he will make a good-
faith effort with the Congress to help strengthen and preserve 
critical entitlement programs and yet have some kind of a check 
on the rapid growth of the entitlement sector?
    Mr. Donovan. So, Chairman, let me begin by agreeing with 
your fundamental premise that discretionary spending is 
actually a place that we have cut and I think cut too far, and 
that was the basis of the bipartisan deal we reached last year. 
And I want to thank you for your leadership on getting to, I 
thought, a very effective compromise on the omnibus at the end 
of last year.
    Where I want to disagree with you is that, in fact, since 
the President has come into office, we have made substantial 
progress not just on our short-run deficits, which are down by 
roughly 75 percent--we have had the fastest sustained deficit 
reduction since the end of World War II--but we have also made 
substantial progress on our medium- and long-run deficit and 
debt as well.
    And the reason for that is because healthcare spending, as 
you know, is the single most important challenge that we have 
on the mandatory spending side. It outweighs all other 
programs. And, in fact, that is one of the reasons why the 
President immediately, on coming into office, focused on this 
issue. And since he came into office, we have actually seen the 
slowest healthcare cost growth in 50 years.
    And, in fact, if you just take 1 year, the year 2020, since 
the Affordable Care Act was passed, CBO--these are not our 
numbers--CBO projects that we are going to spend $185 billion 
less in 2020 on Medicare and Medicaid combined.
    So we have made real progress. And what we are proposing in 
our budget is to continue that progress. We have $375 billion 
of further healthcare savings that we are proposing. And as we 
saw with the doc fix legislation that got done about a year 
ago, we think there are many areas where we can make bipartisan 
progress to make further progress on those entitlements.
    But I would also say that the President believes that we 
need to take a balanced approach. And the fact is we have 
wasteful spending on the Tax Code side of our budget as well 
and that we need to aggressively look at those areas as well. 
And our budget does that.
    But even with the added $2.9 trillion of deficit reduction 
that we achieve in this budget, if you add that to the $4.5 
trillion of deficit reduction that we have achieved since 2011, 
even if his budget was enacted tomorrow, we would still have 
more than 50 percent of the deficit reduction of that $7.4 
trillion that comes from spending cuts.
    So we think we have a real record of looking hard not just 
at the discretionary side but the mandatory side. But we also 
need to look at the tax side.
    Mr. Rogers. What was the amount of debt when he took 
office?
    Mr. Donovan. As a share of the economy and the 
projections----
    Mr. Rogers. No, as a real number.
    Mr. Donovan. I don't have those numbers in front of me. 
But, again, the right way to look at this problem----
    Mr. Rogers. It was only about $14 trillion. Now it is over 
$19 trillion.
    Mr. Donovan. Well, what I----
    Mr. Rogers. How can you say that you have cut the debt?
    Mr. Donovan. What I can say is that, as a share of the 
economy, we have brought down the deficits dramatically. If you 
look at our budget proposal, it would take the critical step of 
stabilizing and then bringing down our debt as a share of our 
economy. That is the critical test that economists apply to it.
    And I will say, compared to the current status quo, we 
achieved that $2.9 trillion of deficit reduction in our budget, 
which achieves that key fiscal goal.
    Mr. Rogers. Let me make a correction. I think I said a 
moment ago something wrong, when I said that of the $4 trillion 
we are going to spend next year, I said $100 billion. It is $1 
trillion of that is what we appropriate.
    The rest is mandatory and growing out of control. And yet 
your budget proposes roughly $60 billion more mandatory 
spending from discretionary. It should be going the other way.
    Mr. Donovan. Expected mandatory spending has gone down 
substantially since the President came into office, primarily 
because of the healthcare savings that we have achieved. The 
projections of debt and deficits today----
    Mr. Rogers. How did we get from a debt of $14 trillion when 
he took office to over $19 trillion now? That is not a 
reduction; that is a huge increase.
    Mr. Donovan. Not compared to the expectations when he came 
into office. If you look at CBO's numbers when the President 
came into office, we have substantially reduced expected 
deficit and debt.
    Mr. Rogers. Can you take expectations to the bank?
    Mr. Donovan. All I can do and all the President can do is 
make changes, propose changes, working with Congress, that 
change our path, our fiscal path.
    Mr. Rogers. The bottom----
    Mr. Donovan. And we have done a substantial amount to 
improve the fiscal path of this country, particularly through 
reductions in healthcare spending, since the President came 
into office.
    Mr. Rogers. But in spite of all of that, the debt has gone 
up dramatically since the President came into office.
    Mr. Donovan. The President inherited deficits that were at 
almost 10 percent of our economy, and he has brought them down 
to well below 3 percent. That is the fastest deficit reduction 
we have seen since World War II.
    Mr. Rogers. Well, bottom line, bottom line, the public 
doesn't understand cutting expectations. The public sees that 
we owe $19 trillion and growing like a weed, all the while the 
administration adds more mandatory spending to the debt so that 
the appropriations process, the people's way of oversight, is 
thwarted. Because mandatories, as you well know, rely upon 
formulas and qualifications for programs that automatically 
come out of the Treasury without it being appropriated. And 
that is where I think we are on a real, real bad track.
    Mr. Donovan. Well, Mr. Chairman, where I think we can agree 
is exactly the leadership you and the committee provided last 
year, that finding ways to reduce mandatory spending in smart 
ways, which was part of the budget agreement that was reached 
last year, is the right way to go while we continue to make the 
critical investments on the discretionary side that we need.
    Mr. Rogers. Thank you.
    Mr. Crenshaw. Thank you.
    We have been joined by the ranking member of the full 
committee, Mrs. Lowey. And so I am going to recognize her to 
either make an opening statement and/or ask a question or a 
combination thereof.
    Mrs. Lowey. Well, my good friend the chairman is so very 
generous. I really appreciate your welcome here to this 
distinguished committee. And I appreciate you and my good 
friend Mr. Serrano holding this important hearing.
    And I would like to join you in welcoming Director Donovan. 
Thank you for being here today.
    And thank you for your gracious welcome, Mr. Chairman.
    Mr. Serrano. I can't take all this.
    Mrs. Lowey. Welcome.
    Mr. Donovan. Thank you.
    Mrs. Lowey. With the 2-year bipartisan agreement we reached 
at the end of last year and Speaker Ryan's focus on regular 
order, most of us were optimistic that this year's 
appropriations process would be smoother than the prior years'.
    Yet Speaker Ryan, I understand, is entertaining cutting 
entitlements through appropriation bills instead of through 
authorizing committees. And Budget Committee Republicans broke 
with decorum and did not invite you to testify on the 
President's budget request. This is very surprising to me.
    At this time, it is unclear whether House Republicans will 
even offer a budget of their own. At least the Appropriations 
Committee is doing its job, and I am very happy to work with 
the chairman in doing the job. And I am glad to have you here 
today.
    Mr. Donovan. Thank you.
    Mrs. Lowey. Director Donovan, do you know the last time a 
sitting OMB Director was not asked to testify before the Budget 
Committee?
    Mr. Donovan. To my knowledge, Ranking Member, that has 
never happened before since the Budget Committees were created.
    And I will say, despite any personal feelings, I think the 
most important issue is that I was disappointed because we did 
make--and I said this before you arrived, and I want to 
compliment you directly for the bipartisan work, both on the 
bipartisan budget agreement and on the omnibus in December. But 
it felt like we made a lot of progress toward reestablishing 
regular order in doing that and creating this 2-year framework 
and getting a good agreement, a good compromise last year. And 
I was disappointed that I wasn't able to testify. My hope is 
that we can continue the progress toward regular order as we go 
forward.
    Mrs. Lowey. And I know because Chairman Rogers and I would 
like to have regular order and move forward with regular order.
    So, Mr. Donovan, Mr. Director, had you been invited to 
testify before the Budget Committee, are there particular areas 
of Federal investment that would spur the economy, enhance our 
national security, provide groundbreaking biomedical 
breakthroughs that you would have discussed? If so, I am happy 
to let you speak to those investments now.
    Mr. Donovan. Thank you.
    I would really highlight three key areas, and these were 
areas that the President highlighted as major challenges for 
the country going forward.
    First, we have to invest to maintain our leadership as the 
most innovative economy on Earth. And one particular area that 
he highlighted was the investment in renewable energy. R&D for 
that is a critical place where we can put people to work, grow 
the jobs of the future. But an area that I know is near and 
dear to your heart, as well, is on biomedical research and a 
substantial increase in investment that we are proposing as 
part of the Cancer Moonshot, along with a range of other areas 
of investment as well.
    The second big area is where we need to invest to grow 
opportunity to give everybody a fair shot in the country. One 
of the most important advances I think we won in the omnibus 
was a major increase in Head Start to get kids started at the 
very earliest stages. Our budget proposes more than a $400 
million increase there, which would take us to more than half 
of Head Start children in full day, full year programs around 
the country, which has been shown to be a critical advance.
    But also a great bipartisan victory in replacing the No 
Child Left Behind Act. And I think there is a significant set 
of places that we could invest, and that the budget does, on 
the education side, on training and apprenticeships.
    One other area that I would point out to really try to 
modernize the safety net that we have for workers is our wage 
insurance proposal as part of a broader effort to modernize 
unemployment insurance around the country. We think that is a 
critical area where we could make bipartisan progress, 
encourage people to get back to work even more quickly.
    So those are two, and then the third is national security. 
The budget invests more than $2 billion in additional resources 
to take the fight to ISIL; substantial increases to make sure 
that our European partners are reassured that we are going to 
stand in the way of Russia's aggressive actions in Europe and 
beyond. Third, the cybersecurity proposal that we have already 
started to talk about is a major national security threat that 
we need to do more on, and the budget proposes a more-than-one-
third increase, $19 billion in total, for our fight to improve 
cybersecurity.
    Mrs. Lowey. In looking at President Obama's final budget 
proposal, I see that it would reduce the Federal deficit to 
$503 billion in fiscal year 2017, down from the current fiscal 
year.
    In fact, since 2009, under President Obama's leadership, 
Federal deficits have fallen by nearly three-quarters, the most 
rapid sustained deficit reduction just after World War II. The 
annual deficit in 2015 fell to 2.5 percent of the gross 
domestic product, the lowest level since 2007 and well below 
the average of the last 40 years.
    You have mentioned that the budget stays within last year's 
budget agreement and, as a result, has caused some tough 
choices. Can you describe the effect of some of these choices 
on the discretionary side of the budget?
    Mr. Donovan. Absolutely.
    So the structure of the bipartisan budget agreement 
relieved about 90 percent of sequester on the nondefense side 
of the budget but only about 60 percent in 2017. So 90 percent 
in 2016; about 60 percent in 2017. Essentially, discretionary 
funding is about flat in our budget from 2016.
    And what that means is, as you well know, if you look at 
areas like veterans health care where there are inflationary 
increases that happen each year, Section 8 vouchers I am very 
familiar with, and a range of other programs where simply 
serving the same number of people requires an inflationary 
increase, what that means is, when you have flat funding, you 
are going to have much more pressure on other discretionary 
accounts.
    And so there are a range of areas where we had to make 
tough decisions, whether it is in low-income heating 
assistance, the LIHEAP program; CDBG; State-paid leave 
assistance. There are a number of areas where we would have 
wanted to do more, but, through the compromise that was 
reached, we decided that we should honor the deal that was 
reached last year and stick to those caps despite those tough 
choices.
    Mrs. Lowey. Thank you, Mr. Chairman.
    Mr. Crenshaw. Thank you.
    Mrs. Lowey. I appreciate your time.
    Mr. Crenshaw. Now we will turn to Mr. Womack.
    Mr. Womack. Thank you.
    I want to pick up--before I go to a couple of my prepared 
questions, I want to go back and pick up on Chairman Rogers' 
discussion on the mandatory side.
    So, since we didn't have a presentation, Director Donovan, 
before the Budget Committee, on which I proudly serve, maybe we 
could go back and just revisit some numbers in response to his 
questions.
    One, what does the gross Federal debt of the U.S. 
Government balloon to in the 10-year window?
    Mr. Donovan. Actually, it declines from about 76 percent of 
GDP down to----
    Mr. Womack. So let me stop you. Just a minute.
    Mr. Donovan. It declines from----
    Mr. Womack. I have very limited time. I have very limited 
time, Director.
    So only in Washington and only from the Office of 
Management and Budget could we see the gross Federal debt go 
from $19 trillion today to--and let me help you with the 
number; it is fresh on my mind--even with $3 trillion worth of 
tax increases, $26 trillion in the 10-year window. Now, forget 
the percentage of the economy. In many respects, that is kind 
of a fairytale around here. But only here can we go from $19 
trillion in gross Federal debt to $26 trillion and somebody in 
this administration talk about how it is going down.
    So let me ask you this. What is the net interest on the 
debt based on the projections of interest rates, if there is 
such a thing, over the 10-year window? Today it is, in round 
numbers, $225 billion or $230 billion a year. So what does it 
go to in the 10-year window, Mr. Director?
    Mr. Donovan. I don't have those numbers in front of me.
    Mr. Womack. Well, let me help you with the number. Even 
with tax increases, it balloons to more than $700 billion a 
year.
    What do we spend on national defense? With OCO----
    Mr. Crenshaw. About $600 billion.
    Mr. Womack. $500-and-some-odd billion, plus some OCO money. 
So let's just round it to $600 billion.
    In the budget that was presented to this Congress by this 
President, we were going to take the net interest on the debt 
from an alarming rate of $225 billion or $230 billion today to 
nearly $800 billion in the 10-year window. And if you take out 
tax increases, it is nearly a trillion dollars of interest.
    How can you sit here with a straight face and tell this 
committee in response to questions about what we know to be the 
true drivers of the deficits and the debt in this country--
mandatory spending--that this President has done anything but 
lead on how we are going to get our arms around this 
phenomenon? How can you sit here and say that?
    Mr. Donovan. Congressman, you don't have to take my word 
for it. If you look at CBO's numbers, if you look at the 
broad----
    Mr. Womack. These are CBO's numbers I am looking at.
    Mr. Donovan. And CBO's numbers will show you that, relative 
to where we were 4 or 5 years ago, they will tell you we expect 
to spend $185 billion less on Medicare and Medicaid in 2020 
than we did just 4 or 5 years ago. Relative to current law, our 
budget shows $2.9 trillion of deficit reduction.
    And so we are making real progress on the most important 
driver of mandatory spending. We have the lowest healthcare 
cost growth than we have had in 50 years. And that is why, 
despite the politics around the Affordable Care Act, the 
President focused on health care as one of the most important 
drivers, if not the most important, of our mandatory 
challenges. And we have made real progress on that front.
    Mr. Womack. All right. I am glad you mentioned health care, 
because I agree with you that it is the principal driver of the 
deficits and the debt as we now know it.
    So at about what year--and I know you have looked at these 
numbers. At about what year, based on 18 percent of GDP in 
average revenues--that is about what we see, 18, plus or 
minus--at what year is there no money left for discretionary 
spending at all, no money at all for this committee to 
appropriate? At what year does that happen because mandatory 
programs consume all of it?
    Mr. Donovan. Congressman, one of the things that we all 
have to recognize----
    Mr. Womack. What year?
    Mr. Donovan [continuing]. Leave aside the politics----
    Mr. Womack. What year?
    Mr. Donovan [continuing]. Is that we have a demographic 
challenge in this country, with the retirement of the baby 
boomers, that is going to require us to pay attention to these 
mandatory challenges but also to look at the revenue side. If 
we want to keep our promises to seniors, we are going to have 
to look not just at mandatory spending but also to close tax 
loopholes, to look at wasteful spending on the tax side of the 
ledger as well.
    Mr. Womack. I know that the President wants to raise a lot 
of taxes. What I find incomprehensible as a Member of 
Congress--because I sat with my colleagues on the floor of that 
House when the President gave his State of the Union address 
and talked for 70 minutes, and not one time did he dedicate any 
leadership from that podium on what we are going to try to do 
to get our arms around the mandatory spending that is 
bankrupting this country.
    That is the kind of leadership that I think we should 
expect out of the President, and that is leadership that I 
think is lacking in the budget proposal.
    Mr. Donovan. What I can certainly tell you is he showed a 
lot of leadership in pushing healthcare reform that is 
accelerating the cost reductions that we have seen. It is 
universally recognized, as you have just agreed, that 
healthcare spending is the most important driver of the costs 
on those sides, and we have made remarkable progress in the 
last 4 to 5 years.
    So I think it is a completely unfair characterization that 
we have not focused on entitlements. And, in fact, we have made 
remarkable progress compared to any benchmark when the 
President came----
    Mr. Womack. We are probably not going to agree on that one.
    And I yield back my time.
    Mr. Crenshaw. Thank you.
    We will have time for another round of questions, but now 
let's turn to Mr. Quigley.
    Mr. Quigley. Thank you, Mr. Chairman.
    Mr. Chairman, I can't help it. I wasn't going to get into 
this, but let me put this on a different picture and put it in 
the proper perspective. Simpson-Bowles, I believe, really only 
had one major vote on the House side, and that was Cooper-
LaTourette, as I recall, and I was one of 38 Members of the 
House to vote for that. So the debt, the deficit, these are 
things that I am concerned about and put my vote on the line 
toward that end.
    But let me just put the perspective, I think, what you are 
trying to get to is, as you relate to the deficit as it relates 
to GDP, I think what you are saying is, if a household of 
$25,000 annual income has $5,000 in debt, that is a whole lot 
different, a debt of $5,000, than it is a $50,000 income a 
year, correct? Is this what you are alluding to?
    Mr. Donovan. This is the way we look at mortgages, we look 
at personal finances: What share of people's income do they 
dedicate toward their debt? And that is exactly the way we look 
at it for the economy.
    Mr. Quigley. And one last point on this. I am sure you 
don't have this--able to answer now, but since people are 
asking you for specific numbers--and if you don't have it, 
maybe you can get it to us. The total debt we have right now, 
could you tell us what percentage of that debt comes from the 
Iraq war and the tax cuts that came with it at the same time?
    Mr. Donovan. I don't have an exact number. What I can tell 
you is a sizable portion when the President came into office. I 
would also say----
    Mr. Quigley. I would like to know what percentage is----
    Mr. Donovan. Well, that we have reduced spending in OCO, in 
the war account, by over $100 billion a year since the 
President came into office because he was able to keep his 
promises to end the ground wars in Iraq and Afghanistan.
    Mr. Quigley. And I appreciate that. But at some point if 
you would get to us the raw numbers----
    Mr. Donovan. Absolutely.
    [The information follows:]

           Debt Impact of the Iraq War and 2001/2003 Tax Cuts

    OMB does not separately track the comulative impact of individual 
legislative action on debt. However, the cumulative effects of the 2001 
and 2003 tax cuts, along with spending for Iraq war and related 
activities, are clearly substantial. The Congressioal Budget Office 
maintained a cumulative tally of the changes in its January 2001 
projection of a surplus of $5.6 trillion surplus over the 10-year 
period 2002-2011 (see https://www.cbo.gov/sites/default/files/112th-
congress-2011-2012/reports/06-07-ChangesSince2001Baseline/pdf).

    Mr. Quigley [continuing]. Of how much we owe now, how much 
of that--now and as time goes on, what percentage of that will 
be from the expenses of invading Iraq and completing that war 
and the tax cuts that went. Because what I recall, in World War 
II we went to war and we recognized that wars are expensive and 
we raised taxes.
    On a less pleasant note, let me talk about something 
locally in Illinois. Flooding is a regional issue. In the 
Chicagoland area, it is a bipartisan issue. I talk to my 
Republican colleagues and those that serve with me in the 
region.
    One of the big solutions to that was the McCook reservoirs, 
supported on a bipartisan basis. Got funded from the 
administration for 3 straight years. We are concerned about 
spending money; had a three-to-one benefit-cost ratio, not just 
Chicago but 36 suburbs. Would have had 1.5 million structures, 
5 million people. And the amount of damage we already had 
before these were completed is staggering.
    Unfortunately, Assistant Secretary of the Army (civil 
works) Ms. Darcy omitted this in the 2017 funding for stage 2 
under the extraordinary mistaken belief that stage 2 is related 
to water pollution control instead of the fact that it is for 
flood control, fully authorized and documented in the Corps' 
system as such. The project is being recommended by the Corps 
for flood protection.
    At some point, as Senator Durbin and I have been talking 
about, but, again, on a bipartisan basis, we need your help to 
try to include these resources in the fiscal year 2017 workplan 
for the Corps of Engineers in that area.
    Mr. Donovan. Well, I understand your concern about this. We 
did include----
    Mr. Quigley. Concern is you stubbed your toe. This is a 
broken foot.
    Mr. Donovan. I am sorry if I understated it.
    Mr. Quigley. Yeah.
    Mr. Donovan. But we did include $5 million in the 2016 
workplan, which is part of a substantial contribution we made 
to completing phase 1. I am glad that we are able to keep that 
commitment to the first phase, but I understand that you are 
focused on how we get phase 2 funded.
    Mr. Quigley. Right. So this will be one of many 
conversations, and more and more animated, because, with all 
due respect, we need your help to try to find a way to put 
these resources in the workplan for the Corps of Engineers. And 
I believe that Ms. Darcy will be around Friday, and we will 
have an animated conversation with her at that time, as well.
    But the fact is we need your help. Funding the first 3 
years and then leaving it hanging there isn't particularly 
helpful.
    Mr. Donovan. Understood.
    Mr. Quigley. Thank you.
    Mr. Crenshaw. Thank you.
    Mr. Graves.
    Mr. Graves. Mr. Donovan, good to see you.
    Mr. Donovan. And you.
    Mr. Graves. I am going to change topics briefly for a 
moment, but, first, I am excited to hear the enthusiastic 
support of the President's budget by Mr. Quigley and the 
ranking member. I hope to see them introduce that and put their 
name on it and cosponsor it and advocate for it and debate it 
on the floor so we can see where all Members of the House stand 
on that budget.
    But thinking about the President's budget, thinking about 
Mr. Womack's comments and the chairman's comments, the American 
people and particularly those in the 14th District of Georgia 
are just mad. They are frustrated. They do not trust this 
government. They do not trust in any kind of responsibility for 
financial management, for reducing the debt. They hear the 
comments, such as yours just now, of, ``oh, well, the debt's 
going to go down over time in relation to something else,'' 
when, actually, the number is going up over time. They see 
that. They know that.
    And it is that frustration you are seeing all throughout 
the country right now in the Presidential election. And, quite 
frankly, I am glad that they are expressing this frustration 
and this anger because I am hoping somebody will listen. And we 
are soon to find out who is going to be listening.
    But an area they know they can control and they know they 
can manage is their own personal finances. They don't think 
anybody can do anything with this place up here, and, for the 
most part, I think they are right. But someplace where they do 
have direct control and access is their own personal finances, 
their own debt reduction, their own savings for retirement.
    And that leads me to the fiduciary rule that you and I 
spoke of last year, and you mentioned it briefly today, about 
the economic analysis. And I know the terms you used earlier 
today were the same as last year, in that you cannot speak 
directly on the rule because the rule is being evaluated.
    But as to the economic analysis, has there been one 
completed, a cost-benefit analysis? And if so, what did it 
indicate?
    Mr. Donovan. So the cost-benefit analysis is obviously 
completed as part of finalization of a rule. So we do not have 
a final cost-benefit analysis that I can speak to.
    What I can say is that the Council of Economic Advisers 
looked at this issue more broadly and identified that consumers 
lose about $17 billion a year over bad advice on investment 
products. So there clearly is a major impact directly to 
families, the families that you are talking about, from bad 
advice.
    Mr. Graves. So the $17 billion, I believe that is the far 
end of the scale. It is a very wide range--it is an extremely 
wide range of numbers.
    Is that an analysis that you are basing your economic 
analysis off of? Or is yours an independent analysis taking 
into consideration potentially other analyses that may disagree 
with the $17 billion or the $8 billion number?
    Mr. Donovan. Again, I can't speak directly to OIRA's 
because we have not completed the rulemaking. But, generally 
speaking, we look at a broad range of sources of information, 
not just the Council of Economic Advisers.
    Mr. Graves. Speaking of the one you did reference, so I 
assume you have knowledge of it, that $17 billion of savings, 
how is it achieved? How does a consumer achieve a savings?
    Mr. Donovan. Actually, I think it was a cost. And so the 
savings would be achieved if a consumer is protected from 
getting bad advice or gets better advice.
    Mr. Graves. How, though? The mechanism of their--you say 
it's a cost. So if they don't incur that cost, I am going to 
suggest it is a savings. How are they saving $17 billion, 
specifically?
    Mr. Donovan. If I understand the question, it would be 
through getting advice that would allow them to make better 
investment decisions.
    Mr. Graves. Is the assumption that there would be the same 
number of investors post-fiduciary-rule versus pre-fiduciary-
rule in that analysis?
    Mr. Donovan. I guess I would want to look back at that 
analysis before I answer that question. I am not sure.
    Mr. Graves. I understand.
    Well, my concern--and I will close, Mr. Chairman--is that, 
while this rule may have some intention, we don't know whether 
it is good, or not, intention. It has some intention.
    The question truly should be how does this impact the 
overall consumer, who in my district is working hard every day 
just to try to slog through this economy that the President, in 
previous spending and irresponsibility, has created for them to 
struggle through, with their families.
    But they want to get ahead. They want a fair shot. They 
want to be able to save. They want to be able to invest. My 
concern is that this rule is a barrier to them, that instead of 
being able to save a little money and meet with somebody in 
their town that they know, that they go to church with, that 
they shop with, that they see locally that offers them advice, 
now they are going to be pushed more towards an interface that 
is impersonal, and maybe it is a computer interface, Internet 
interface, whatever it might be, but something that is less 
accessible, which creates a deterrent, which creates less 
savings and less preparation for retirement.
    So I would be very interested in the analysis and whether 
or not it makes the assumption that you will have the same, if 
not more, investors in the future after the rule, or will you 
have less investors. Because it is going to be one of those 
options there.
    So thank you, Mr. Chairman.
    Mr. Crenshaw. I think what he is asking is what areas of 
the market failure led the administration to propose this rule. 
I mean, if you think about that, it sounds like one of those 
solutions looking for a problem. But you think that through.
    Let's turn now to Mr. Yoder.
    Mr. Yoder. Thank you, Mr. Chairman.
    Director Donovan, welcome to the committee.
    Mr. Donovan. Thank you.
    Mr. Womack. Director, you are a good man, I like you, we 
have had conversations in the past. But your attempts to 
sugarcoat this budget and its projections for the future on 
behalf of the administration that I know you work for is just a 
sad abdication of responsibility for the challenges we are 
facing as a country.
    Chairman Rogers, my colleagues Mr. Womack, Mr. Graves, and 
others have really laid out some very specific concerns. And 
what we have gotten into is a debate, which we see all the time 
in Washington, D.C., about historical discussions about who is 
wrong and who is right, and we have really no optimism for 
where we are going for the future.
    So I want to take our conversation to what we can do to 
work together to solve some of these problems going forward, 
because where we are headed is not a rosy situation.
    Now, when you look at where we have come from, the $10 
trillion to $20 trillion, that is a huge deficit increase--or 
huge debt increase, and no one gets a pat on the back for that. 
We know that if we had adopted every one of the President's 
budgets, our government would be 20 percentage larger today.
    And so we know that we have reduced a bad situation to not 
as bad as it could have been. And maybe that may be the motto 
of what is going on in Washington these days, is things could 
be worse. But things need to get a whole lot better, and I know 
you know that. And I know that you know this budget doesn't 
really pass the smell test.
    When you look at what is driving the costs--and we have had 
this discussion, sort of a straw man from the ranking member 
about mindless austerity, manufactured crisis--you both had 
that conversation. I mean, what the House has tried to do is to 
really shed light on and be honest with the American people 
about where we are going. And when you look at automatic 
spending, you look at the pie charts, you know, in 1965 it was 
34 percent, in 2015 it is 68 percent, it is headed to 78 
percent. Mr. Womack asked when it would be 100 percent. We 
don't know the answer to that, but it is really bad, and it is 
crowding out investment.
    So I really pushed hard in the last budget to increase the 
President's budget request on NIH from $1 billion up to $2 
billion. I sent a letter with a bunch of my colleagues, many 
folks here, to try to get to $3 billion, and we can't get there 
because the White House has other priorities or because we are 
being crowded out by mandatory spending.
    I have a 3-year-old daughter--I am sorry--a 2-year-old 
daughter, a 3-month-old daughter. We all have children, we all 
have grandchildren, people that we are worried about. And I 
guess my questions for you are: As we go forward, what do we 
tell them? And when can we tell our children that the American 
budget will be balanced if we adopt the President's budget 
submission?
    Mr. Donovan. Well, I guess I would disagree with you that I 
haven't been talking about forward-looking proposals here. I 
talked specifically about a broad set of things the President's 
budget does on healthcare reform. Let me take another. In 
fact----
    Mr. Yoder. I understand. I understand, Director. I just 
have a little bit of time here, and so I have some specific 
questions that I just want to get to the heart of it. And we 
are going to get into a debate about semantics. And what I 
want----
    Mr. Donovan. What you can tell your daughter----
    Mr. Yoder. But I want to know, when can we tell our 
children that the American Government will run in the black 
based upon the President's budget submission? It is a pretty 
simple question, and you are a very smart man. I know you know 
the answer to this. What is that date?
    Mr. Donovan. I think what you should tell your daughter is 
that this country is facing a significant demographic challenge 
with the retirement of the baby boom, that we need to keep our 
promises to those retirees, and----
    Mr. Yoder. Well, let's get to that question.
    Mr. Donovan. If I could just----
    Mr. Yoder. Sure.
    Mr. Donovan. You asked a question.
    One of the most important things about that is that we are 
now facing a world where, instead of having over three workers 
for every retiree, we are going to have about two and a half--
--
    Mr. Yoder. I am probably going to agree with you on a lot 
of the root causes, Director.
    Mr. Donovan. Immigration reform--immigration reform is 
actually an area where I think we could reach a bipartisan 
agreement. It will help us not only grow our economy, it would 
reduce the deficit by a trillion dollars----
    Mr. Yoder. So my child asks me when is the budget going to 
balance and I say what?
    Mr. Donovan. What I would tell her is that we need to do 
exactly the kinds of things that we are proposing to do.
    Mr. Yoder. So I wouldn't tell her--I would not tell her--
what is the answer to the question, Director? When does the 
budget--when does America run a budget in the black?
    Mr. Donovan. I am trying to answer your----
    Mr. Yoder. I know, but when is your projection? Give me a 
date. When will the American budget be in the black again?
    Mr. Donovan. We----
    Mr. Yoder. Based upon the President's budget request, which 
lays out all of his requests--this is his vision for the 
future, it is your vision for the future. On what date certain 
can we tell the American people, if we adopt your policies 
wholeheartedly, the $3.5 trillion in tax increases, if we adopt 
all of that--because you have already asked for trillions in 
new taxes--if we adopt it as is----
    Mr. Donovan. I think----
    Mr. Yoder [continuing]. When do we go in the black?
    Mr. Donovan. Please don't mischaracterize our budget. We 
proposed a budget that has $2.9 trillion in deficit reduction, 
that in the 10-year window stabilizes debt and starts to bring 
it down, compared to a current path that we are on where debt 
would increase substantially as a share of the economy. Those 
are the critical tests that the President has laid out for 
fiscal stability, and we meet those tests.
    Mr. Yoder. Mr. Chairman, I will submit to the Director, who 
I have a lot of respect for, this is why people get frustrated 
with Washington, because we can't ever get straight answers to 
straight questions.
    I have other questions on here in terms of Medicare. You 
mentioned that. When are IPAB cuts going to start with 
Medicare?
    Mr. Donovan. That will be----
    Mr. Yoder. Because the CMS says next year. Is that still 
your position, that the way to fix retirement benefits through 
ObamaCare that you are talking about so much as the key to 
these healthcare situations, that--what is the date certain 
when I can tell my 104-year-old grandmother that her Medicare 
benefits would be cut under the IPAB?
    Mr. Donovan. Well, first of all, CMS will make a final 
decision this year. But you are also deeply mischaracterizing 
the way the IPAB works. All of those changes are presented to 
Congress and voted on by Congress. And so----
    Mr. Yoder. When will the government, when will CMS make 
recommendations? And how much will they be----
    Mr. Donovan. We expect----
    Mr. Yoder [continuing]. Regarding how much of Medicare----
    Mr. Donovan. We expect it to be later this year----
    Mr. Yoder. OK.
    Mr. Donovan [continuing]. In the next few months.
    Mr. Yoder. Mr. Chairman, I will just conclude by saying 
this is why I think Americans are frustrated that we can't get 
straight answers to these questions.
    We are not making the kind of progress we need to make. We 
are leaving a legacy of debt and despair for the next 
generation. Director Donovan knows it; the President knows it. 
And they are shutting down and going to be gone in a year, and 
we are going to be here left with fixing the situation. And our 
kids and grandkids, ultimately, after Director Donovan is gone 
and I am gone, we both know they are going to be left picking 
up this leftover expense.
    And it is embarrassing, and we ought to work at it to 
seriously fix it and not get into a semantical debate about 
shaving off, of increases, and we were going to build something 
and we didn't build it so we are going to count that as a cut. 
It is a lot of Washington talk, and we all know how this works.
    The reality is the debt is growing to an unsustainable 
level, and we are going to saddle our kids and grandkids with 
it. And I just hope and pray that this administration--the 
President has political capital left--that maybe he will come 
to the table and we can actually work together so we can answer 
that question: This is the date certain we will go in the 
black, and this is when we will actually solve this problem. 
And until then, we are going to have these conversations that 
ultimately get us nowhere.
    I yield back, Mr. Chairman.
    Mr. Crenshaw. Thank you.
    Now we will turn to Mr. Rigell.
    Mr. Rigell. Thank you, Mr. Chairman.
    And, Mr. Donovan, I thank you for being here today.
    Mr. Donovan. Thank you.
    Mr. Rigell. And I want to give you credit right from the 
start. I think you are trying to do the best you can. OK? That 
said, the differences between your assessment of our situation 
and, indeed, the President's assessment of our situation and my 
own and what I see in my colleagues, the differences are 
profound, and they are fundamental.
    I had the opportunity to meet with the President--it was a 
few years ago, and it was just for a few minutes. But in those 
few minutes that I had the opportunity to speak to him, I went 
right at this issue of our fiscal situation. Above all else, it 
is what concerns me.
    And I would just associate myself with the remarks of my 
colleagues. We didn't meet beforehand to understand where we 
were coming from on a line of questioning, but it resonates 
with me, the alarm that they are expressing.
    And in the Nation's capital, I think hyperbole is used 
oftentimes, and the word ``crisis'' is used on just about 
everything, but I am submitting to you that we do, indeed, have 
a fiscal crisis. I don't believe that your testimony here today 
reflects the crisis we are in. I don't think the President's 
words reflect the crisis that we are in.
    In fact, I associate myself with what Mr. Womack said. I 
walked out of the State of the Union, and I just thought, it is 
like he is just completely unaware of where we are headed 
financially. Interest rates can only go one way, right? Which 
way? Up. $130 billion for each 100 basis points, 1-point 
increase. That is hardly reflected in all of this. I look at 
the President's schedule, what he talks about when he is in 
public. It is like fiscal Orwellian speak.
    You know, I have been a businessperson all of my life and 
dealt with budgets. And I look at your own testimony, Mr. 
Donovan. Look, page 1, bottom paragraph--and I know you know 
the difference between the debt and the deficit, but listen to 
this sentence. ``The 2017 budget continues this progress. It 
shows''--OK. You talk about that we are proud of the 
President's budget, that it meets the test of fiscal 
sustainability--listen to this part--``and putting debt on a 
declining path through 2025.''
    Does the President's budget put debt on a declining path 
through 2025?
    Mr. Donovan. Yes, it does.
    Mr. Rigell. No, it does not. As a percent of the GDP, it 
doesn't.
    And, by the way, I agree with you on that point. Everything 
ought to be evaluated in terms of percent of GDP--revenue, 
expenditures, the debt as a percent of GDP.
    But words matter, Mr. Donovan. I would expect that you of 
all people would understand the difference here. You said you 
are putting the debt on a declining balance through 2025.
    Mr. Donovan. A declining path as a share of the economy.
    Mr. Rigell. No, it is--no. No. Debt is increasing.
    Mr. Donovan. As a share----
    Mr. Rigell. We need to be precise----
    Mr. Donovan. As a share of the economy----
    Mr. Rigell. Oh, is that what you--that is not what it says. 
Look, this isn't a matter of semantics. I get the difference. 
Listen, I am in favor of evaluating things of the percent of 
GDP.
    Mr. Donovan. Every serious economist who looks at this 
issue looks at debt----
    Mr. Rigell. You are misunderstanding the point I am making.
    Mr. Donovan [continuing]. Deficits as a share of the 
economy.
    Mr. Rigell. No. On that point, Mr. Donovan--please. You are 
a smart guy. I am not trying to talk down to you. I think we 
are trying--the thing is we only have 5 minutes. It goes just 
like that.
    On that point, I am in agreement with you. I really believe 
everything ought to be evaluated as a percent of GDP. That is 
how every lender does this. That is how I ran my business. It 
is your ability to repay. And that is a percent of--whatever it 
is, your business cash flow or whatever. On that point, we are 
in agreement.
    I am saying that, even in your written testimony, you said, 
we are putting debt on a declining path. Now, if I was putting 
my business on a path of declining debt, that means I am paying 
down my debt.
    The reason I bring this to your attention is because, when 
I hear the President speak--and, indeed, it is kind of embedded 
in your own testimony here--it is a bit Orwellian. And what I 
mean by that is that you are not dealing with reality, the 
stark and harsh and troubling reality of our fiscal situation.
    The President references in extremis point of deficits, and 
he says, ``I brought them down.'' He doesn't go on to say, 
``But they are still way too high.'' That is what leadership 
is.
    And, look----
    Mr. Donovan. Deficits today are below the 40-year average 
of deficits.
    Mr. Rigell. Well, no, see, the challenge that--see, this 
Orwellian speak here--and, look, I still associate myself--
there is a fundamental difference between this side and that 
side. And, frankly, we are right on this. We are calling 
attention to our fiscal situation. You are not expressing any 
real concern about where we are headed.
    Mr. Donovan. I don't----
    Mr. Rigell. I will tell you----
    Mr. Donovan. I don't think that is accurate. I have talked 
a lot about the progress that we have made but also more that 
we need to do on----
    Mr. Rigell. You know, the President is not fighting for 
this. He didn't say hardly a word about it in the State of 
Union speech, hardly a word. That is not leadership.
    Mr. Donovan. He talked about----
    Mr. Rigell. And the clock is ticking on his administration. 
The clock is ticking on our country.
    Mr. Serrano. Mr. Chairman, is this a contest of 
interruptions?
    Mr. Rigell. No, I am sorry. Listen, I don't mean to raise 
my voice. And I appreciate the ranking member----
    Mr. Serrano. Well, you are, sir, raising your voice. And we 
have given very little respect to the Director today.
    Mr. Rigell. No, he is----
    Mr. Serrano. I have been on this committee a long, long 
time, and I have never seen anyone come before us treated the 
way he has been treated today.
    And the last time I saw--I read the Constitution and the 
Appropriations Committee manuals. It says that the President 
proposes and we dispose. So how can it be that a President is 
drumming up the debt when we pass bills that pay for programs 
in this country? So we don't have a dictatorship, and I think 
it is time we realize we don't have a dictatorship. We are 
either all guilty or no one is guilty.
    Mr. Rigell. Mr. Chairman, may I just have 30 seconds?
    Mr. Crenshaw. Certainly. And that doesn't count against 
your time.
    Mr. Rigell. OK.
    Mr. Crenshaw. And if you feel like talking loud, that is--I 
don't think the Director----
    Mr. Rigell. And I just--I thank the----
    Mr. Crenshaw. And I can talk loud too.
    Mr. Rigell. And I respect the ranking member.
    And, look, it is an honor to be on this committee. And I 
simply want to say, look, we are fellow Americans trying to get 
this right. And I have problems with my own party. The 
Americans for Tax Reform pledge is mathematically indefensible.
    I am simply submitting to you, Mr. Donovan, that part of 
leadership, and I think the fundamental part of it, is the 
proper assessment of the current situation and the trajectory, 
the direction we are going.
    My concern here today is not something I have contrived. I 
know these hearings are so often thought of as theater. I am 
not saying I care any more than you about our fiscal situation. 
But it keeps me up at night, and, frankly, I wish it didn't--I 
didn't think about this as much as I do.
    But when we get on the flip side of debt and we are there, 
we are there, 200 basis points, 2 full interests--2 points 
going up, which is frankly within reason, $260 billion. And to 
the ranking member's point, my own party has contributed to 
this situation. I didn't like it when I was told to go out 
shopping when we got into wars. I wanted somebody to tell me 
how I needed to sacrifice. I never heard that.
    But I have taken enough time, and I thank the chairman for 
his extension of time, and I thank the ranking member for his 
comment, and I thank you for your testimony today.
    Mr. Donovan. Thank you.
    Mr. Rigell. Thank you.
    Mr. Crenshaw. And just for the record, Mr. Rigell always 
talks pretty loud.
    Mr. Rigell. I didn't know that.
    Mr. Donovan. And I am from New York, so I am OK.
    Mr. Rigell. Thank you.
    Mr. Crenshaw. We will have time. We will have time. I hope 
you all stick around. We will have another round of questions, 
but let me interrupt that for a second.
    I will say, as I have said in opening statement, Director, 
people look and they see it took 233 years to get to the point 
where we are $10 trillion, that is our national debt. And then 
they can look and see, the last 8 years, we added $10 trillion 
to our debt. I mean, those are things that people understand. 
And I think we are all trying to figure out a way forward--that 
is not good place to be.
    But let me ask you two quick questions about the budget. As 
I mentioned in my opening statement, you cut the Corps of 
Engineers by 22 percent. And as I pointed out, too, that most 
of the cargo internationally goes through our ports. We have 
these post-Panamax ships. They are bigger, they draw more, and 
so our ports need to deepen their waterways to compete 
internationally.
    And so I guess the question is, why did the administration 
propose a 22-percent reduction over the Army Corps' last year's 
budget? And why is there a reduction of $800 million or about 
40 percent for these construction accounts? And those are the 
ones that fund our ports. So can you tell us what went into 
your thinking?
    Mr. Donovan. Look, this is--I think it was Ranking Member 
Lowey asked earlier about tough decisions we had to make in the 
budget. Given that it was basically flat from 2016, there were 
a series of places where we needed to find reductions, and this 
was one of the places that we went.
    On the construction point, the operations and maintenance 
account for the Corps is more fixed, if you will, because they 
have to take care of a set of assets that are there, so it 
tends to be the construction account that suffers the most in 
those cases.
    So this is something where--you know, you and I have met a 
number of times about Jacksonville and the focus on it. We were 
able to get to six new starts in 2016, which was an unusually 
high level. And we have allocated those to the highest-return 
projects.
    But, as you well know, there are far more projects. And our 
hope is that, not only we can do more directly, but we are also 
working, as you and I have discussed, on ways to make sure that 
private resources are coming in and supporting the construction 
of those; and we think there is a lot of opportunity given 
exactly the competitive advantage that you have talked about 
post-Panamax, and there is a lot of ways to bring private 
capital into these projects as well.
    Mr. Crenshaw. So the one new start this year, six last 
year, one this year, is this just kind of a matter of priority 
in terms of not enough money to go around?
    Mr. Donovan. That was the single most important----
    Mr. Crenshaw. What are the criteria--what do you look at 
when you decide what makes a new start? What do you look for? 
Like, on that one new start you suggest, what went into your 
thinking to make that decision?
    Mr. Donovan. Really, it is working with the Army Corps, its 
cost-benefit analysis. So, in every case, the traditional 
starts that we did were over two and a half, cost-benefit 
ratio, so--actually, two and a half, benefits to cost. And so 
they showed a dramatically high level of return relative to 
other projects.
    Mr. Crenshaw. Gotcha.
    And switching gears real quick, some agencies of the 
Federal Government get funded through mandatory appropriations, 
they are not subject to review by the full Appropriations 
Committee, like, I guess, the OCC and this new agency, the 
CFPB.
    And I wonder, how vigorously does OMB look at those budgets 
that aren't annually reviewed by the Approps Committee? Do you 
look at those?
    Mr. Donovan. We spend an enormous amount of time on that. 
Let me just give you a few examples.
    I have already talked about the $375 billion in healthcare 
savings that we are proposing in the budget. That is obviously 
all on the mandatory side. We have a total of about 117 
different cuts, reductions, that we do----
    Mr. Crenshaw. Have you ever cut some of those mandatory--
well, like, let's talk about the CFPB because that is kind of 
what I was focusing on.
    They get a check from the Fed for $600 million. They were 
set up purposefully outside our appropriations process. But 
somebody did an independent performance audit for the CFPB, and 
they recommended that the Bureau expand transparency of their 
funding and expenditures.
    Now, do you think that is a good analysis? Some of these 
that are funded mandatorily, do you think they ought to be a 
little more open and transparent?
    Mr. Donovan. Well, CFPB is an independent agency. It is 
different from the vast majority of programs on the mandatory 
side.
    Mr. Crenshaw. So you never look at that one?
    Mr. Donovan. We don't have authority----
    Mr. Crenshaw. OK.
    Mr. Donovan [continuing]. Over CFPB's budget. We do look at 
mandatory spending broadly in a range of areas----
    Mr. Crenshaw. And when you do, do you look at their 
transparency of their funding and their expenditures, even 
though we----
    Mr. Donovan. Absolutely.
    Mr. Crenshaw [continuing]. Don't, because we are not 
allowed to. Even though CFPB is not one of those. I guess OCC 
might be.
    Mr. Donovan. And we think that transparency is actually a 
very important tool in trying to keep costs down. Drug prices 
is an area where we actually have some innovative proposals in 
our budget this year to create more transparency, which we 
think can help to control drugs costs.
    Mr. Crenshaw. But the CFPB is not one of those agencies 
that is funded outside of the appropriations process that you 
oversee----
    Mr. Donovan. It is funded, as you said correctly, as most 
financial regulators are, through the----
    Mr. Crenshaw. And that is not an area that you oversee?
    Mr. Donovan. It is not an area we oversee directly.
    Mr. Crenshaw. OK. Well, thank you.
    Let's go now to Mr. Serrano, quietly.
    Mr. Serrano. Thank you, Mr. Chairman.
    My concern, Mr. Chairman, is probably more about the 
process and who we are. We are appropriators. And the 
Appropriations Committee has a reputation, a reputation that in 
the 1990s became a dirty thought, that people could actually 
debate and then go have a beer after the debate. That is the 
essence of our democracy. That is who we are as a country. 
There are many countries throughout the world where people 
disagree, and they try to shoot each other after the 
disagreement.
    But lately--maybe it is because it is an election year--
lately, we have decided that President Obama is the worst 
President in the history of the country, he has done nothing, 
and his people do nothing, and that they just drive up the 
debt, and they drive up the debt, and they drive up the debt.
    You know, we are a country, Mr. Chairman, that does worry 
about the senior citizen who doesn't have something to eat, and 
that costs money. We are a country who cares about a child 
going to school and has laws about a child going to school, and 
that costs money.
    We are a country that does try, not as much as I would like 
to, you are hearing this from a liberal, try to take care of 
our veterans to the best of our ability, although liberals 
usually, like me, say don't go to war and when they come home, 
give them whatever they need, give them everything. If it was 
up to me, they would get a house, a car, education, everything, 
just for putting on the uniform. And if they are not citizens 
and they go to war, the minute they put on the uniform, they 
become citizens. That is how much I respect our veterans.
    But I think we have got to understand that we have a 
process here. And we can't just blame one person. So he 
proposes a budget that we don't like. That is why there is a 
guy over in the Senate running for President who wants to shut 
the government every day, because he doesn't like that budget. 
That is his right to do so. But let's not make it sound like we 
don't play a role.
    I have voted for budgets that spend money. I have proposed 
budgets that spend money. But I think it is a disservice by us 
as a group--and I am not picking on anybody--as a group to 
forget that you and I were that close to voting on the same 
bill 2 years ago until somebody in the Senate gave away a piece 
that even you were not interested in giving away; and that last 
year, we all voted for a bill that we weren't crazy about, but 
we knew we had to keep the government open and keep it working.
    So all I am saying is probably something that nobody will 
pay attention to, is that he is a public servant, I am a public 
servant, we are all public servants. We don't get selected. We 
don't get picked. We come and we beg people, be it at a legion 
hall, be it at a foreign wars place, be it in front of a subway 
station in the Bronx, New York, we beg people to vote for us. I 
will be doing that pretty soon. My primary is in June, and I 
will do it again for the 20-something time in my life, to ask 
them to do that. But we have got to be a little more respectful 
of each other and a little more respectful of the process.
    I will close with this thought. The worst word you hear 
these days is ``gridlock.'' Gridlock. Gridlock may be democracy 
working. We didn't come here to agree on everything. We came 
here to present our positions. In China, the budget is always 
on time. In China, the budget is always on time. Is that the 
system we want?
    And so rather than ask a question, I just hope that we face 
this year understanding what it is, and we know what it is, and 
we are trying to elect somebody President, and you folks are 
trying to elect somebody else President. I hope your nominee is 
that guy from New York, that will be a good thing. But, you 
know, we still have a good thing going in this country, and we 
shouldn't make it sound like the country stinks.
    In fact, I will close with this thought. There is a 
gentleman running for President who says: Let's make America 
great again. You know what my answer is? America is great, we 
just need more people to share in its greatness. That is my 
philosophy. If I went around saying America is not great, I 
will probably be run out of time. It is great. It is the 
greatest country under God's heaven. And we should preserve it 
by starting off and understanding what our role is and what we 
have to do to make it right.
    And one last point. If we can get into debt looking for 
weapons of mass destruction that were never there, then we 
certainly can spend some money on education and on housing and 
so on.
    And by the way, I found the weapons of mass destruction. 
They are called failing schools in some cases. They are called 
senior citizens who can't pay their rent. Those are the weapons 
that could destroy us, not the ones we are looking for.
    I am sorry for the preaching, but maybe when you are not--I 
don't know, maybe when you are born in a territory, maybe when 
you are born slightly outside the boundaries, you realize how 
lucky you are to be in this country and how lucky you are to be 
a Member of Congress. And I feel like that every day.
    Thank you, Mr. Chairman.
    Mr. Crenshaw. Well, thank you, Mr. Serrano. And I think we 
all feel like we are lucky to be Americans. And I think we all 
know that government needs money to provide services. But 
sometimes we have to be efficient and we have to make hard 
choices. And I am sure there are a couple more questions. And 
my observation is, we have worked together, and the Director 
knows there is disagreement on a lot of different issues, 
whether it is talking about the budget or whether it is talking 
about the fence or whatever.
    So I hope nobody is kind of--one of the problems in today's 
world sometimes is when people disagree, they tend to demonize 
the person they disagree with. And I don't hear any of that 
today. And I don't think that is a good thing. So I think we 
have had a spirited discussion. We will keep on having a 
spirited discussion.
    So I will recognize Mr. Womack. If he would like to be 
recognized.
    Mr. Womack. I concur with the chairman, and I have an 
enormous amount of respect for the ranking member. We have had 
a lot of discussions, disagree on baseball and many other 
things. And I have an enormous amount of respect for Shaun 
Donovan, and I want the record to reflect that. I think the 
conversation we are having is healthy, and the country needs 
more of it.
    I wasn't around politics in the 1960s when two-thirds of 
the Federal budget was the kind of government that we speak of 
here today. Mrs. Lowey talked very articulately about 
investment of the Federal dollar in projects that stimulate 
growth and development in our country, what we are doing in our 
harbors and in our waterways, building roads and bridges. Those 
are the kinds of things--I was a mayor--these are the kinds of 
things that the Federal Government does that helps give us a 
basis for economic development that creates jobs and 
opportunity for a lot of people.
    I just know today that the percentage of money out of our 
Federal budget that is dedicated to discretionary spending, the 
government as we know it, is getting thinner and thinner, and 
it is putting a lot of pressure on these things, including 
national security, and that gives me a great deal of concern.
    And when I pressed the Director about the date that all of 
our money goes to mandatory spending, it is somewhere out 
around 2030, 2035, in that timeframe, which is not very far 
away, and we have to be addressing these issues.
    So, Mr. Donovan, thanks for your patience over the last 
several minutes. I am sure you were beginning to wonder if your 
presence was even needed any longer. But I want to go back to a 
couple of things and seek your input.
    I want to go to paperwork reduction, because we know the 
regulatory burdens facing our country today are pretty intense, 
and I know what the PRA was designed to do. I am concerned a 
little bit that Federal agencies are using the generic 
clearances process to avoid the requirements of the Paperwork 
Reduction Act, as you know, enacted to minimize information 
collection burdens, maximize quality of information collected.
    While OMB has recognized that in certain instances a 
Federal agency should not have to comply with the PRA's full 
requirements, these instances are limited. They consist of 
situations where there is a need for multiple similar low-
burden collections that do not raise substantive or policy 
issues or specifics of each collection cannot be determined 
until shortly before the data are to be collected.
    OMB has provided three examples in which generic clearance 
is appropriate: customer satisfaction surveys, focus group 
testing, and Web site usability surveys. Even though generic 
clearances are not allowed for collections that raise 
substantive or policy issues, I understand that CFPB, as an 
example, has used generic clearance process to collect data on 
topics that it intends to issue rules on. For example, 
overdraft.
    Is it appropriate for an agency to collect information 
under a generic clearance process that will be used as part of 
its rulemaking?
    Mr. Donovan. So, first, I would just say again, CFPB is not 
under our--power, and we do consult with them, but we cannot 
direct them, and they do not need to follow, generally, our 
rulemaking guidelines. So in this specific case, I don't think 
it is my place to determine what is appropriate for CFPB. But I 
would be happy, if there are other areas where you are 
concerned about this, I would be happy to look at it and 
suggest whether or not we think it violates those--our 
guidelines.
    Mr. Womack. OK. Well, let me ask, maybe not for the benefit 
of the CFPB, which is kind of the driver of this particular 
question, but what steps does OMB take to prevent agencies 
within your jurisdiction from abusing the generic clearance 
process?
    Mr. Donovan. So I would say we have a couple different 
ways. We do pursue regular review of the processes that they 
are taking. There are also a number of outside agencies that 
will look at, whether it is the IGs or otherwise, that will 
look at these kinds of processes.
    The other thing that we are doing proactively is our 
regulatory look-back effort, which I mentioned we have achieved 
over $22 billion in savings. A significant share of that 
savings does come from paperwork reduction.
    So I think it is important that we not just be enforcing 
our standards, but also working with agencies to find 
proactively new ways that they can reduce documentation. Truck 
drivers, for example, we have a major rule at DOT we did last 
year that changes their reporting that dramatically lowered 
their costs there because of paperwork reduction.
    Mr. Womack. Is the Paperwork Reduction Act having the 
desired effects? Could it be enhanced? Could it be better?
    Mr. Donovan. I do think--and this is really what the 
guidance that you are referring--you just referred to tries to 
get at--as with many things in government, we need to make sure 
that they are modernized to keep up with technology. And so we 
do see increasing use of customer satisfaction surveys and 
other things as critical to figuring out whether we are being 
effective as government, whether we are doing a good job.
    And I think the Paperwork Reduction Act wasn't created at a 
time when many of those processes existed, and so we do feel 
like--and we have tried it within our own guidance--I think it 
is worth having a discussion about whether there are some 
statutory changes that might be useful to try to modernize what 
it does.
    And I think in cases we may be missing things. I have seen 
a lot of cases where the Paperwork Reduction is actually 
creating more paperwork, frankly, than it is reducing because 
of modern technology.
    Mr. Womack. I thank the Director.
    I have one other question, Mr. Chairman, that I am not 
going to ask. I will submit it for the record. A lot of 
attention has been given to the fiduciary rule, and I do have a 
question regarding it, but I will submit it for the record so 
as to be respectful of everyone's time.
    Mr. Womack. I thank the gentleman for his work, his 
testimony today, and also for his previous work at HUD. Thank 
you so much for having a good, spirited, and constructive 
debate today. Thank you so much.
    Mr. Donovan. Thank you.
    Mr. Womack. I yield back.
    Mr. Crenshaw. Thank you.
    Mr. Graves is recognized.
    Mr. Graves. Thank you, Mr. Chairman.
    And I want to share my respect for the ranking member, Mr. 
Serrano, and greatly appreciate your reflections a minute ago.
    To Mr. Donovan, who has the unfortunate opportunity to be 
the first hearing after a district work period, what you have 
sensed today is in no disrespect for you or what you have 
presented to us. It is more of a reflection of what our jobs 
are, and that is to be the voices of our constituencies.
    Coming back from a district work period, that is what we 
hear, and that is what you have heard expressed today. I 
understand that we are the voice of our constituencies, and 
obviously, today, you are the voice of the administration. So 
it is two very different roles there for each of us. So thank 
you for your patience as we have expressed our frustration 
after we have sensed the pulse of our districts.
    But just on a different matter, I know you are a member of 
the National Ocean Council, if I could just ask you a question 
or two as it relates to that.
    Can you just help us as a committee understand, in terms of 
funds and personnel, how is that requested or how much is 
requested in the President's budget, fiscal year 2017, as well 
as maybe historically, how many resources have been allocated 
through dollars and personnel since its formation?
    Mr. Donovan. To be frank, I don't have that information at 
hand right now. I would be happy to follow up and get you more 
details on that following the hearing.
    [The information follows:]

    The National Ocean Policy (NOP) is helping to ensure that the many 
Federal agencies involved in ocean management work together to reduce 
duplication and red tape and use taxpayer dollars more efficiently. 
Because NOP work is consistent with other existing agency missions and 
authorizations and is interwoven with base agency programs, it is not 
possible to separate work done to further the NOP from existing agency 
activities. As such, OMB does not track NOP funds and FTE across 
agencies.
    For information on total Federal ocean and coastal spending across 
agencies, not specific to the NOP, please see the 2015 Federal Oceans 
and Coastal Activities Report (https://www.whitehouse.gov/sites/
default/files/microsites/ostp/FOCAR%202012-2015.pdf).

    Mr. Graves. OK. If you could that would be great. Maybe 
also include any of the annual reports that should be publicly 
available over the last couple of years for the committee.
    Mr. Donovan. Yes.
    Mr. Graves. And with that, Mr. Chairman, that is all I 
have.
    Mr. Crenshaw. Thank you.
    Mr. Yoder.
    Mr. Yoder. Thank you, Mr. Chairman.
    Mr. Director, three quick topics, see what we can do here 
in 5 minutes.
    The first one deals with the gas tax, increase in the 
President's budget. The President told students in Georgetown 
University in 2011 that rising prices at the pump affect 
everybody, workers, farmers, truck drivers, restaurant owners, 
students who are lucky enough to have a car. The President 
himself said a $10 rise in oil prices translated to a 25 
percent rise in gasoline prices.
    Given the challenges that working people face already and 
the expense that they have from their Federal Government, I 
believe there is this challenge with trickle-down government, 
where all these taxes and regulations ultimately hit working 
people in my district the hardest, the folks at the poverty 
line, the people struggling to get by, and the Clean Power Plan 
is one of them.
    In terms of this gas tax increase, explain to me why, given 
the challenges hard-working Americans are facing, why the 
President chose this time to put a gas tax burden on Americans.
    Mr. Donovan. Well, first of all, this is a tax that goes 
across oil, not just gasoline----
    Mr. Yoder. Fair enough.
    Mr. Donovan [continuing]. On oil companies directly when it 
is produced at the wellhead.
    But I think, more importantly, we should also be focused on 
the burdens on families and communities that our infrastructure 
and the state of that infrastructure is producing. And so 
whether it is the hours that families spend caught in 
congestion, whether their inability to get to jobs or schools, 
we need to do something to make sure we accelerate our 
investment, not just in infrastructure, but smart 
infrastructure as well.
    Traditionally, this has been a bipartisan issue. We did 
reach a bipartisan 6-year bill last year. But there is more 
that we can do. And investing in the infrastructure of the 
future, whether it is driverless cars or a broad range of other 
areas, the research and development that we need on 
transportation, we think that those costs on families need to 
be recognized as well.
    Mr. Yoder. In 2008, Joshua Bolten, chief of staff to then 
President George Bush, issued a memorandum on May 9 to the 
heads of executive departments and agencies, as well as the 
Administrator of the Office of Information and Regulatory 
Affairs, to encourage them to resist the historical tendency of 
administrations to increase regulatory activity in their final 
months. Later, Bolten noted ``that we did not intentionally jam 
or burden our successors.''
    My question for you is, does the White House intend to 
issue such a similar memo along the lines taken by the chief of 
staff to George Bush in 2008. And at that point, of course, he 
didn't know if the next President was going to be a Democrat or 
Republican. They just said let's not jam everyone up with tons 
of regulations. What is your position? What is the 
administration's position on that?
    Mr. Donovan. In fact, not just are we considering it, 
Howard Shelanski has issued a memo to agencies to try to lay 
out the fact that we will enforce very consistent standards on 
rulemaking throughout the end of the administration and to 
encourage agencies to finish their work as quickly as possible 
and to make sure that they are prioritizing so that we don't 
have a substantial unusual amount of rulemaking.
    Mr. Yoder. Great. Appreciate that, continuing that 
tradition.
    Finally, I will ask you about the deeming rule. I know that 
is something that is under consideration at the OMB. FDA 
submitted the final set of regulations to OMB. OMB has a 90-day 
period to review and it can extend for another 30 days. We have 
currently passed that 120-day mark. So I want to ask you about 
that.
    And then I wonder if you have taken into account the 
regulatory burden in terms of the expense of implementing all 
of that when you have tens of thousands of cigars and vapor 
products, and not just brand name products, but each different 
variation in flavor and size and consent.
    And I guess, so, one, can you clarify where we are in the 
process? We are past the 180-day review. When do you think you 
will actually have a result on that?
    And then wouldn't it be less costly and easier to implement 
and ultimately be, I think, more effective for the FDA to move 
a date forward for the newly deemed products and specifically 
set standards for vapor products? Because every single one of 
them have been made after the deeming date that FDA came up 
with. So it seems like we are putting an unfair burden on my 
constituents who utilize those products and maybe overwhelming 
for the FDA.
    Mr. Donovan. So given that this is a rule we currently have 
under review, I can't speak to the specifics, the merits of the 
rule. It has been under review, as you say accurately, beyond 
the 90-day period. As I said earlier, we will take the time it 
takes to resolve rules, to make sure that we get cost-benefit 
analysis done correctly and accurately. And I expect that we 
will finalize soon, but I can't give you a specific timeline on 
that, given that we are still under review.
    Mr. Yoder. All right. Well, as you are engaging in the 
review, those would be thoughts that you might want to take 
into consideration. I know you have had plenty of comments, and 
the FDA has as well, and I am assuming those are the types of 
things you are wrestling with.
    Mr. Donovan. I can assure you those are exactly the kinds 
of issues that we look at.
    Mr. Yoder. We appreciate your thoughts on that. Thank you.
    Mr. Crenshaw. Thank you.
    Mr. Serrano, do you have any closing comments?
    Mr. Serrano. No. Just to thank the chairman and thank the 
members of the committee for this hearing. It was spirited, 
that is a good thing.
    And thank you, sir, for your service to our country and for 
making New York look good all the time. Thank you.
    Mr. Donovan. Thank you.
    Mr. Crenshaw. And I would just add my words of thanks to 
your commitment to public service, and we appreciate you being 
here today. That is what the legislative process is all about, 
a give-and-take. And just appreciate your spirit and the hard 
job that you have. So we look forward to continuing to work 
with you as best we can to make this a better place for all of 
us.
    Mr. Donovan. Thank you.
    Mr. Crenshaw. Thank you very much.
    Mr. Donovan. Thank you for having me.
    Mr. Crenshaw. Thank you. This hearing is 
adjourned.**************************************

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]





                                           Tuesday, March 22, 2016.

                        SECURITIES AND EXCHANGE 
                               COMMISSION

                                WITNESS

HON. MARY JO WHITE, CHAIR, SECURITIES AND EXCHANGE 
    COMMISSION
    Mr. Crenshaw. The hearing will come to order. The ranking 
member. Mr. Serrano, has tweeted that the meeting will start 
11:00 promptly, and I know people are anxiously reading his 
tweet at this point, so we will start.
    This is the final hearing of our subcommittee, so I want to 
welcome our witness, the Securities and Exchange Commission 
Chair, Mary Jo White. Thank you for being here today. We always 
enjoy having you before our subcommittee. I know the 
subcommittee members look forward to having a good exchange 
with you.
    The SEC plays a critical role in protecting investors, 
encouraging capital formation, and maintaining fair and 
efficient markets, just as buyers and sellers expect the U.S. 
markets to be fair and efficient, the regulator who oversees 
them is expected to be fair and efficient as well. For fiscal 
year 2017, the SEC is requesting $1.781 billion, which is $176 
million, or an 11 percent increase over fiscal year 2016.
    While the SEC is a fee-funded agency, congressional 
oversight over the Commission is essential in holding the SEC 
accountable in fulfilling its mission, and making sure that it 
is responsive to the markets and investors, as well as 
congressional concerns.
    I look forward to discussing your request, and why the 
Commission believes it needs these additional fundings. For the 
past 3 years, the Committee has set aside resources within the 
overall SEC funding amount to fully fund the Division of 
Economic and Risk Analysis, the so-called DERA. In that time, 
the funds this Committee provided have given DERA the ability 
to grow by almost 50 positions, including 16 PhD economists. 
And I happen to believe that cost-benefit analysis of SEC 
rulemakings is very, very informative, and I support the work 
that DERA does to educate the Commission about the macro, as 
well as the micro, economic effects of SEC rulemakings. So, I 
want to express my support for other DERA functions, such as 
developing risk-based models for the Commission's inspections 
and enforcement divisions.
    In addition to your duties as chair of the SEC, you are 
also a member of the Financial Stability and Oversight Council, 
the so-called FSOC, and I know we discussed this a bit last 
year, but the designation process for systemically important 
financial institutions, SIFIs, still is a concern for me.
    Although FSOC has adopted some transparency measures since 
we last spoke, I am not sure that they go far enough. In 
addition, I still believe the current designation process is 
not flexible enough. Entities should be given the opportunity 
to address systemic risk before being designated. FSOC's 
success should be measured by how it mitigates systemic risk, 
not by the number of institutions it designates.
    Another issue that we discussed last year was liquidity in 
the markets, especially in the fixed income markets. As I am 
sure you know, the fiscal year 2016 omnibus required DERA to 
report back to the committee within one year of enactment, on 
the combined impact of the Volcker rule, Basel III, and other 
financial regulations, and the impact they have had on access 
to capital for consumers, investors, businesses, and on market 
liquidity.
    I continue to have concerns that the cumulative effect of 
these layers of regulations has adversely impacted overall 
market conditions and market liquidity. So, I look forward to 
reading the report and discussing with you today what the SEC 
is doing to address this issue.
    The 2016 omnibus also included a provision which prohibits 
the SEC from finalizing, issuing, or implementing any rule or 
order regarding the disclosure of political contributions in 
the SEC filings. I believe Congress has been very clear on this 
issue. However, I understand that there are some who believe 
the SEC is still able to work on a potential rule without 
actually finalizing that rule. Let me just caution you against 
this interpretation.
    I think the Commission has a lot of work to do, including 
Congressionally mandated work that is more important than 
advancing a policy that Congress has never actually required, 
and in fact, has plainly rejected in statute.
    On a bipartisan note, last month, the House passed H.R. 
3784, that is called the SEC Small Business Advocate Act. Mr. 
Quigley and I were sponsors of the bill, and I hope the Senate 
takes up this legislation soon, because small businesses are on 
the forefront of job creation and technology innovation. The 
SEC's Small Business Advocate Act establishes an Office of the 
Advocate for Small Business Capital Formation, and the Small 
Business Capital Formation Advisory Committee, to assist small 
businesses and small businesses' investors with any problems 
that they may have with the Commission, identify difficulties 
small businesses have in securing access to capital, including 
unique challenges for minority and women-owned businesses, 
analyzing the potential impact of SEC regulations on small 
businesses, and propose changes to SEC regulations which would 
better promote the interests and needs of small businesses and 
their investors.
    I am interested to hear from you, Chair White, on how the 
SEC is currently making small businesses and small businesses' 
capital formation a priority, and any thoughts you might have 
on this bipartisan legislation.
    The SEC should be one of the leaders in helping further 
grow our economy, while at the same time keeping our markets 
fair and orderly. That is an important responsibility, and I 
know that you take it very seriously. We thank you for the work 
that you do, and the staff for the work that they do. We look 
forward to your testimony today, but first, I am going to turn 
to Mr. Serrano, the ranking member, for any comments he might 
make.
    Mr. Serrano. Thank you, Mr. Chairman. Crenshaw and Quigley? 
Was I out that day?
    Mr. Quigley. Yes.
    Mr. Serrano. Yes? OK, thank you. Thank you, Chairman 
Crenshaw. I join you in welcoming Chair White back before our 
subcommittee. It is a pleasure to see you once again as you 
come to testify about the fiscal year 2017 budget request for 
the Securities and Exchange Commission. Your budget request for 
this fiscal year is quite reasonable, in my opinion, given the 
large and growing oversight role that you are expected to 
undertake.
    With so many new responsibilities, not just from Dodd-
Frank, but also the JOBS Act, we could argue that you should be 
requesting even more funding than you are. Your total budget 
request is dwarfed by most big banks, I.T. investments. So, 
despite recent increases, you are always fighting an uphill 
battle with fewer resources that are needed to do the job.
    Last year, we succeeded in increasing the SEC's budget 
level to $1.6 billion, which has allowed you to at least not 
lose ground. Your fiscal year 2017 request asked for a further 
increase of more than $100 million to a total of $1.781 
billion. This will help increase your enforcement capacity, 
your ability to conduct oversight, and examinations of 
regulated entities, and your ability to protect consumers.
    Although the financial meltdown of 2007 and 2008 fades in 
the memories of some people, it remains foremost in my mind. At 
that time, we had regulatory agencies that were negligent in 
their duties to protect consumers and cut back on abusive 
practices. And we all paid dearly for that. People lost their 
retirement incomes. They lost their savings. And the American 
people were forced to bail out actors who had taken unnecessary 
and harmful risks that undermined our economic system.
    That is why a strong and vigilant SEC is vital to 
protecting not just those who invest in the financial markets, 
but the American people as a whole. As we found out several 
years ago, guaranteeing that you have the resources to ensure 
fair and open financial markets is key to every American's 
economic security. Dodd-Frank gave you significant new tools 
and oversight abilities, and it is up to this subcommittee to 
make sure you are able to carry out the intent of that law.
    I do also want to mention another part of this equation 
that threatens to undermine the system of safeguards and 
protections provided by the SEC and other financial regulators. 
As in previous years, last year's House and Senate 
appropriations bills contained numerous riders that are both 
unnecessary and procedurally flawed. These riders opened up 
loopholes in Dodd-Frank, and undermined the ability of the SEC 
to do its job.
    Before I close, Chair White, I just want to thank you for 
your dedication to this agency, and to this Nation. You have a 
tough job to do, and hopefully, this subcommittee makes it 
easier rather than more difficult. I know you are a fellow 
Yankees fan, and since baseball season will soon be underway, I 
am sure I will see you in the Bronx soon. Thank you, Mr. 
Chairman, and thank you, Chairman White.
    Mr. Crenshaw. Thank you. Now, we will turn to Chair White 
for your opening statement. If you could keep it in the range 
of 5 minutes, that will give us plenty of time to answer 
questions.
    So, the floor is yours.
    Ms. White. Thank you. Chairman Crenshaw, Ranking Member 
Serrano, and members of the subcommittee, thank you for 
inviting me to testify in support of the President's fiscal 
year 2017 budget for the Securities and Exchange Commission. I 
appreciate the opportunity to discuss with you why the funding 
of the agency at a level of $1.781 billion is critically needed 
to enable the agency to fulfill its important responsibilities 
to investors, our markets, and companies seeking to raise 
capital to fuel innovation and economic growth.
    The SEC has made great strides in recent years to 
strengthen its operations and programs, adopting strong 
measures, and bringing important enforcement actions to protect 
investors and our markets. We do not want this progress to 
stall, because we fall short in the funding necessary to 
maintain our positive trajectory in fulfilling our mission.
    On the rulemaking and policy fronts, we finished our JOBS 
Act mandates in 2015 with the adoption of both Regulation A 
Plus and Regulation Crowdfunding, and are nearing completion of 
all of our Dodd-Frank mandates. We also advanced other key 
rules and comprehensive initiatives in mission-critical areas. 
Beyond the specific rulemakings, the SEC has, for example, 
continued its review of equity and fixed income market 
structure issues, advanced its disclosure effectiveness review 
to improve the public company disclosure regime for investors 
and companies, and undertaken the modernization and enhancement 
of our regulatory regime for asset managers.
    The Commission also continued in 2015 to hold securities 
law violators accountable in record numbers, with record 
recovery orders, in all market strata, and in a number of 
cutting edge, first-of-their-kind enforcement cases.
    Systemic enhancements in the SEC's national examination 
program, including increased recruitment of industry experts, 
the augmentation of data analytics, and enhanced training have 
led to a more effective and efficient program. We are, 
throughout the agency, increasingly harnessing technology to 
better identify risks, uncover frauds, sift through large 
volumes of data, inform policy making, and streamline 
operations.
    While these achievements clearly evidence a stronger and 
more efficient agency, significant work and challenges remain 
if we are to be successful in executing the SEC's broad 
mandates and responsibilities. Currently, the SEC is charged 
with overseeing approximately 27,000 market participants, as 
well as 18 national securities exchanges, the PCAOB, FINRA, the 
MSRB, SIPC, and the FASB. In addition, the SEC is responsible 
for selectively reviewing the disclosures and financial 
statements of over 9,100 reporting companies.
    Since 2001, the markets and registrants we oversee have 
grown exponentially in size and complexity, with the trading 
volume and the equity markets tripling--nearly tripling, to $70 
trillion, and the assets under management of registered 
advisers more than tripling, from approximately $21.5 trillion 
to about $66.8 trillion. At the same time, as the ranking 
member alluded to, the annual budgets for I.T. alone, for some 
of our largest registrants, are reported to be up to $10 
billion, more than five times the SEC's entire budget.
    The SEC's responsibilities have also dramatically increased 
in recent years, with new duties or expanded jurisdiction over 
securities-based derivatives, hedge, and other private fund 
advisers, credit rating agencies, municipal advisors, and 
clearing agencies, in addition to the responsibility to 
implement and oversee an entirely new crowdfunding regime.
    The SEC greatly appreciates the confidence that Congress 
and this subcommittee have placed in us in recent appropriation 
cycles, and we are seeking that support this year. The 
requested level for fiscal year 2017, which has been carefully 
thought through and targeted, will permit the agency to hire an 
additional 250 staff in critical core areas, and continue to 
improve our information technology. Specifically, the SEC's 
budget for 2017 seeks to increase examination coverage of 
investment advisors, where current funding enables the agency 
to examine only 10 percent of the approximately 12,000 
registered investment advisors; further leverage cutting edge 
technology; protect investors by expanding our enforcement 
program's investigative capacities, including in new, complex 
areas, and to strengthen our ability to successfully litigate 
against wrongdoers; further bolster the SEC's economic and risk 
analysis functions; and hire market and other experts to enable 
the SEC to fulfill its expanded rulemaking and oversight 
responsibilities. The funding we are seeking is imperative to 
protecting investors, and to meeting the challenges of today's 
markets and the SEC's expanded responsibilities.
    As the Chairman alluded to, the SEC's funding is deficit-
neutral, so that any amount appropriated to the agency will be 
offset by modest transaction fees, and therefore, will not 
impact the deficit or the funding available for other agencies. 
Our appropriation also does not count against the fiscal 2016, 
or fiscal year 2017 caps in the Bipartisan Budget Act of 2015. 
I hope and believe that we have shown ourselves to be good 
stewards of the funds we have been appropriated, and we will 
continue to be.
    So, I look forward to working with the subcommittee to 
provide the SEC with the resources it needs to fulfill its 
critical mission, and I thank you again for the support you 
have shown the agency. I would be happy to answer your 
questions.
    [The statement of Ms. White follows:]
    
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    Mr. Crenshaw. Well, thank you very much. We will start the 
questions now, and we will try to observe the 5 minute rule, 
though there will be some members coming and going--there are 
other hearings going on at this very moment. Some are right 
across the hall; some are right down the hall.
    But let me start by just asking you about your budget this 
year, a requested increase of $176 million. And I mentioned 
that is an 11 percent increase over last year. Last year, you 
received a $105 million of an increase, which is $281 million 
over 2 years. But from 2015 to 2016, there was $51 million in 
carryover. I wonder how that happened, and how that works when 
you also have access to a reserve fund that was set up under 
Dodd-Frank. Just talk about the funding over the last 2 years, 
and that $51 million. How does that occur, and what do you plan 
to do with that $51 million?
    Ms. White. I think you are referring to carryover balances, 
and I think we spoke about this last year. The SEC, unlike, a 
number of other Federal agencies have what are called no-year 
funds, so that we are allowed to carryover funds that we have 
not spent during the particular appropriations cycle. It allows 
for better financial planning and smarter hiring. You do not 
want to be rushed to hire the wrong experts, or enter into the 
wrong contracts because you have got an artificial deadline. In 
the last several years, the carryover balances have actually 
come down. Some of those balances are also attributable to de-
obligating funds on completed contracts. So, again, that is 
good financial management.
    We take into account those carryover balances when we make 
our request for the subsequent year. You cannot estimate 
precisely what you are going to have in a given year and it 
depends on when we get our appropriation as well. Obviously, if 
we get it late in the year then that puts more pressure on us 
to spend by the end of that year. But fortunately, because of 
the no-year funds, we are able to spend it smartly, wisely, and 
be good stewards of the funds that Congress appropriates for 
us.
    Mr. Crenshaw. I got you. And last year, you received a $105 
million increase, but it was less than you requested. I think 
$117 million less than that. So, when you do not get as much as 
you ask for, how do you prioritize--of that $105, what will 
your--I know you have done a lot of work in enforcement 
investigations. But when you do not have as much as you had 
requested, tell us a little bit about how the priorities were 
with the money you did receive, including from last year.
    Ms. White. Basically, what we try to do--and obviously, it 
makes a difference what our most pressing needs are in a given 
appropriations cycle. For example, last year and this year, one 
of our very high priorities is to try to increase the number of 
examiners we have to examine that investment advisor space we 
have talked about for at least our last two or three hearings, 
to strengthen enforcement.
    We align the priorities we sought the funding for, and then 
make separate judgments based on the reduced amount that we 
receive. We essentially allocated through a very thorough 
process those positions to best meet the priorities that were 
contained in our budget request.
    So, a number of them went, indeed, to I.A., investment 
advisor examiners. A number went to Enforcement. A number 
obviously went to the Division of Economic and Risk Analysis. A 
number went to--I wish it was a bigger number, but a number 
also went to hiring more market experts, as we outlined, as 
well as to the extent that the money was available it went to 
continue the technology projects that are so critical to us.
    You mentioned the reserve fund. We have used, at the SEC, 
the reserve fund set up by Dodd-Frank, as you indicated, for 
the long-term mission critical I.T. projects that are so 
essential to us. I think we had $25 million of that rescinded 
last year, so we had to deal with, less money than we really 
needed last year. But again, we try to do smart budgeting after 
we get our appropriation, as well as before, when we make our 
request.
    Mr. Crenshaw. Got it. You mentioned DERA, and I mentioned 
in my opening statement that we have carved out money for that 
division. We think that is important in terms of understanding 
the cost-benefit analysis, and I want to get you to comment on 
that. How has that worked out? I mean, has that been helpful, 
across the board, in assisting what you do?
    Ms. White. Well, certainly, I would say that yes, and I 
have said before that I think DERA is one of the great success 
stories of the SEC. I very much appreciate the support that we 
have gotten through the appropriations process for DERA. It is 
also our fastest growing division. And they essentially, in 
addition to cost-benefit analysis on our rulemakings, also do 
what I would call substantive, original research on our 
rulemaking. They are able to do that, as not only we have 
gotten more positions, more economists, but have really built 
the infrastructure for them to be able to do their work.
    So they get involved earlier in the rulemakings. You will 
see, often now, their own studies, their own original research 
is actually put into the public comment file and arena for 
people to comment on.
    And so, that has really come a long way, and you cannot 
overstate its importance to the quality of our rulemaking. They 
also are, now, in the last couple of years at least--maybe a 
little longer than that, really--and increasingly so, 
integrated into the entire agency. They are the ones who 
primarily manage our big data, structured and unstructured, not 
only for themselves and their research, but for the other 
divisions to help them do their job much better.
    They are also the ones that have really designed and 
conceived of and work with the other divisions on these data 
analytics that we have talked about throughout our budget 
requests and in prior hearings so that Enforcement and our exam 
staff is better able to identify high-risk areas. Where do we 
go to examine? Where is this suspicious activity that we need 
to go and look at more deeply? They are really doing, I think, 
fantastic work at the agency.
    Mr. Crenshaw. Well, thank you. I am glad to hear that. One 
of the things that we asked last year in the omnibus bill is 
for them to do a study, and report back to us because I think 
there is some concern that there is an awful lot of regulation. 
I mentioned in my opening statement that you have Basel III, 
and this, that, lots of regulations. And there is some concern 
among folks that there layers of regulations have impacted the 
liquidity of the markets.
    So, we ask for a report to see what they would have to say, 
and I am looking forward to reading that report, but do you 
think some of those regulations--if there is a lack of 
liquidity, was that an unintended consequence, or do you think 
that was part of the plan in cooling down the economy, or 
heating it up, based on your view of what happened in 2008?
    Ms. White. Unintended consequences, is something all the 
regulators must be focused on, at all times, and certainly, 
with respect to the enormous amount of rulemaking that has been 
done since the crisis that also applies. And all of the 
rulemakings we do at the SEC are looked at through that lens. I 
guess I would say two things about this.
    Liquidity is enormously important to the functioning in our 
markets, our economy, and to growth. So, it is an enormously 
important set of issues, I would say, that all the regulators, 
certainly the SEC, are focused on. Determining whether you have 
a reduction in liquidity, to what extent, and if so, what the 
causes are, I think any economist will tell you, whether they 
are in DERA or they are elsewhere, is extraordinarily 
difficult. We have, for example, with our fellow banking 
regulators, and I think the CFTC, reported quarterly to the 
House of Financial Services Committee, on whether we can 
determine whether the Volcker Rule has had a negative impact on 
the corporate bond--the liquidity in the corporate bond 
markets.
    And, thus far, clearly the conclusion is we cannot say that 
it has had an impact. So, it is enormously important to study 
and enormously important to try to figure it out, just what you 
are dealing with, looking for unintended consequences, if you 
find them. And if they are negative, doing something about 
them.
    I did see--and I am glad to see the academic community 
getting into this issue. A fairly recent study that was 
presented, or is to be presented at one of our DERA 
conferences, I think a British Columbia study really looked 
precisely at this question of the combined regulations, but 
more specifically, even the impact of the Volcker Rule on 
liquidity.
    That particular study determined that it has not had a 
negative impact on liquidity, and indeed, you see liquidity 
deteriorating right after the crisis, but you do not see blips 
up after regulators have been put into place. Obviously, there 
will be more studies coming forth, as there should be. So, it 
is enormously important to stay on top of.
    Mr. Crenshaw. So, it is a concern, and it sounds to me like 
you all have looked at that from time and time, and I think 
this study will give us even more information about that. Do 
you ever talk about what is the appropriate liquidity level? I 
mean, you cannot really pin that down, but it is something you 
all talk about as you look at the markets?
    Ms. White. Yes, no question about it. Obviously, you have 
other objectives you are trying to achieve as well that you are 
balancing from time to time with regulations with liquidity. 
But it is enormously important all the time to look at that.
    Mr. Crenshaw. Got it. OK. Now, let's turn to Mr. Serrano.
    Mr. Serrano. Thank you, Mr. Chairman. Chair White, the 
President's budget request of $1.781 billion, an increase of 
about six percent for fiscal year 2016, will support 250 new 
positions. You are requesting 52 new positions in enforcement, 
127 in compliance, four in corporate finance, and seven each in 
trading and markets, and investment management.
    Please explain what functions these will serve, and why 
they are needed. And also, as a follow-up, what would happen if 
you did not get these positions?
    Ms. White. Well, starting with the exam positions, I think 
we have requested 127, about, I think, 105 or 107 of those 
would actually go to that investor advisor space, which we have 
talked about before, where we have resources only to examine 
about 10 percent a year, which obviously creates a very 
significant investor protection issue. So, you know, that is 
what--primarily we would use those for.
    We would also use the examiners in other spaces, as well 
such as our oversight responsibilities over the exchanges, the 
SROs and broker dealers. Enforcement: I cannot overstate the 
importance of strong enforcement, particularly in these markets 
as they get faster, more complex. We need market experts, and 
we need people who know how to use these data analytics and 
apply them smartly.
    We are charging more individuals now in our Enforcement 
program, which I think is very important to stronger 
deterrence. That means, or at least, this would be my theory of 
why that means we have had more trials recently, so a dozen of 
those positions in Enforcement would be devoted to bolstering 
our litigation unit--our trial unit in the office.
    And then, I think 24 of the positions really spread over 
DERA, Corporation Finance, Trading and Market, and Investment 
Management would be for market oversight, and just as our 
responsibilities are diverse and expansive, different ones of 
these hires would be used in order to be able to cover those 
responsibilities as best we can.
    And so, if we were not to get these positions, you 
essentially would see a deterioration in every one of those 
priorities that we outlined in our budget request. We would be 
examining less, therefore subjecting investors to much more 
risk. We would not be enforcing as we should be. We could not 
try the cases that we need to try and prevail in, in order to 
send a strong deterrent message. We have new responsibilities 
under Dodd-Frank and the JOBS Act, and we have to oversee the 
new crowdfunding regime. We have examiners devoted to the 
Volcker Rule.
    So, it is really spread out among, and I think smartly, the 
priorities and the responsibilities that we have. And if we 
were not to get the funding we need, we would clearly be 
compromising our mission, compromising the markets, and 
compromising investor protection.
    Mr. Serrano. Well, I am glad to hear that you used the word 
enforcement because I keep telling this story, but it cannot be 
told enough. Some years ago, this agency--you were not there, 
came to the subcommittee and actually said, ``We do not need 
any more money. We are fine.'' And we later found out why. They 
were not enforcing anything, and only history will tell what 
role they played in that 2007/2008 fiasco.
    Let me take you, very quickly, to Puerto Rico, which is not 
a bad place to take anyone. Puerto Rico is in the midst of an 
economic crisis that is so bad it really is becoming a 
humanitarian one. Your investment management division is urging 
funds, especially those with exposure to Puerto Rico, set to 
monitor, to continually update their disclosure based on the 
risk associated with their investments. Can you talk a little 
about that and any other role the SEC may have in what is 
unfolding in Puerto Rico?
    Ms. White. Yes. I think the guidance update that you are 
referring to really is to make sure that investors are looking 
out for risks they may face--losses they may face that are due 
to market events. And obviously, and sadly and tragically, what 
is going on in Puerto Rico creates those, in some situations. 
So, it is really a prudent set of guidance for investors.
    In terms of the SEC's role in the underlying crisis, beyond 
attending to investors and holdings in funds, which really the 
guidance goes to, we do not have a direct role in that, 
although as a member of FSOC, I clearly am in discussions about 
that with Secretary Lew and the FSOC members who are--and 
particularly Secretary Lew, as you know, is very, very focused 
on the core of that crisis. We also coordinate with our fellow 
financial regulators, just in terms of impacts and possible 
impacts not only on investors--direct investors, but in the 
broader markets.
    Mr. Serrano. Thank you. Thank you, Mr. Chairman.
    Mr. Crenshaw. Thank you. I am going to turn now to Mr. 
Graves, and then Mr. Quigley, but I wanted to note that we have 
been joined by the ranking member of the full committee, Mrs. 
Lowey, and she will be here to ask a question or two along the 
way. So, welcome. Mr. Graves.
    Mr. Graves. Thank you, Mr. Chairman. Chair White, good to 
see you again. I know many of the members of this subcommittee 
have raised concerns related to the DOL and SEC fiduciary 
rulemaking, so I want to talk about that just a minute.
    It was brought up with Director Donovan a few weeks ago, as 
we all met. And there was an area that we feel like has just 
been ignored a little bit too much, and its implications of the 
rule, we feel like impact hardworking constituents that we all 
represent, including hardworking Georgians that I do. Chairman 
Johnson in the Senate produced a report on the problems with 
the Department's rule, and he published it on February 24th, 
and Mr. Chairman, I would like that submitted for the record, 
for the committee.
    And that is a 40 page report, so I do not expect everybody 
to go through it right now, but there is one area I wanted to 
focus on, and I am going to quote the report. It says, 
``Despite public assurances that that the Labor Department has 
collaborated with the SEC, emails between a Labor Department 
employee and an SEC expert revealed discord between the 
agencies about the rulemaking.'' And the report goes on, with a 
senior SEC official stating concerns about reduced pricing 
options, rising cost, and limited access to retirement advice, 
particularly for retail investors--in other words, our 
constituency.
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    Mr. Graves. Twenty-six some odd items of concern were 
raised by your career staff relating to the substantive content 
of the rule, with Labor failing to resolve all of these issues. 
And I think, as we all know, many of your staff, being career 
staff, are considered experts in what they do, and we hope that 
the appointees know the issues as well. But the folks that have 
dedicated their careers are those that we hope we can trust to 
take ``just the facts'' positions.
    So, Chair White, does it concern you as much as it concerns 
me, and I know others on this panel that Labor seemingly 
ignored the concerns of your own career professional staff that 
they have raised, and have not addressed them? Of your staff, 
or of this committee, who have raised the very similar and same 
concerns also?
    Ms. White. I cannot comment on the specific report and the 
exchanges back and forth, but I can say what I have said 
before, which is that the staff of the SEC did provide 
substantial technical assistance to the Department of Labor, 
including bringing our perspective, the staff's perspective, 
and expertise on the broker-dealer model, including on, at 
least, their views about possible impacts as various 
permutations of a rule.
    The Department of Labor also, in their notice and comment 
period, asked about those issues. Obviously, we have not seen 
the final rule yet, but I think--what I have also said about my 
own view for doing a fiduciary duty--uniform fiduciary duty in 
the SEC space is that it is not an easy task, and if we ended 
up at the end of the day really depriving particularly retail 
investors of reliable, reasonably priced advice, then I would 
consider us to have failed in our purpose.
    But at the end of the day, we are independent agencies, and 
the Department of Labor does have responsibility for the very 
important ERISA space. And I think, perhaps, the particular 
exchange you are referring to occurred in maybe 2012. I cannot 
really add to what that meant or did not--I think that was on 
the prior proposal, though.
    Mr. Graves. OK. Well, thank you, and we appreciate what 
your staff has provided and expert advice that they provide. 
And I think it is in all of our interests to make sure that all 
of our constituents have the most options available to them to 
invest wisely and affordably, and not options removed. And our 
concern is that this rule will remove many of those options, 
and if not remove them, make them more expensive, or put 
barriers in place in which people will not seek those options. 
And we believe it is just wiser to be investing in their future 
and in their retirement, and we want to make sure all those 
options are available, and can be made with individuals in 
their communities that they trust that might just be in 
downtown Main Street. So, thank you, Chair.
    Mr. Crenshaw. And just on that, as I understand it, Dodd-
Frank specifically said, your agency was mandated to study the 
issue, and to propose a rule. Do you have any idea why the 
Administration has supported the DOL moving ahead of you?
    Ms. White. First, I think what Dodd-Frank did was to say--
it mandated a study, which the staff did--it was a very good 
study--and gave the SEC the authority, if it decided to, to 
proceed with a uniform fiduciary duty for broker-dealers and 
investment advisers under Section 913 of that Act.
    Again, the initial Department of Labor proposal was in 
2010. They do have responsibility for the ERISA space, and even 
as we sit here today, there are--our broker-dealers which are 
subject to some Department of Labor regulations, and vice 
versa. So, I mean, there is a bit of overlap in those spaces 
before.
    Mr. Crenshaw. But, is the SEC going to look into developing 
their own rule?
    Ms. White. Without question, and I think I said, some time 
ago that my own view, after really extensive study--and the 
agency has been studying this for a lot of years, and I 
certainly spent a lot of time since I have been Chair; my 
conclusion is the SEC should proceed under 913 to do a uniform 
fiduciary duty for broker-dealers and investment advisers.
    Mr. Crenshaw. And who is going to figure out how to 
harmonize the two rules?
    Ms. White. Well, you try to make them at least compatible, 
if you can. The coordination, obviously, with fellow 
regulators, where we have overlapping jurisdiction, is 
enormously important. We have it in the Title VII, over-the-
counter derivative spaces, with not only the CFTC, but foreign 
regulators. But again, I want to be clear. I think this is very 
hard and not quick to do this well.
    Mr. Crenshaw. Got it. Thank you. Mr. Quigley.
    Mr. Quigley. Thank you, Mr. Chairman. Welcome, Chair White. 
It was nice for Chairman Crenshaw to reference the Small 
Business Advocate Act. I am sure you are aware of it, and the 
fact that the House passed it on a bipartisan basis. I only 
assume the Senate will take it up. Can you tell us your stance 
on moving forward with this, and designating a small business 
advocate at the SEC?
    Ms. White. Again, we have not taken a position on the 
particular bill. I think we may have provided some technical 
assistance on it. I mean, look, there is no question--and this 
is true at the--certainly, true at the SEC, throughout the SEC, 
how important small businesses are, and that their different 
needs and different models be attended to very closely.
    We have a small and emerging business advisory committee 
that I reinstituted shortly after I got to the Commission. We 
have in our Division of Corporation Finance an Office of Small 
Business Policy. They advise on all of our rulemakings, with 
the lens of small businesses, and comment on that. I think they 
responded to maybe 1,700 separate inquiries from small 
businesses, you know, last year.
    So, we are extraordinarily focused on that, with a lot of 
expertise. In terms of having a small business advocate, the 
thing that I would worry about with that--because it is 
certainly good in concept; I think we all agree that we want to 
do everything we can for small businesses--is not to fragment 
the efforts that are carried out on behalf of small businesses, 
and certainly, that is true at the SEC. And we really have that 
concentrated, in a way, where there is a lot of expertise and a 
lot of work that goes on regarding small businesses. So, 
however the bill might develop, I would not want to lose that.
    Mr. Quigley. Let me reference another point. A recent study 
conducted by researchers at the University of Chicago and the 
University of Minnesota--seven percent of all active financial 
advisors have been disciplined for misconduct or fraud. The 
study also found that the advisors who have engaged in 
misconduct, of those, 38 percent are repeat offenders. I am 
sure you are aware of the concerns about these things. Are you 
aware of these studies, and what is the SEC currently doing, 
proposing to prevent financial fraud like this, especially for 
repeat offenders?
    Ms. White. I am aware of the study. I have actually read it 
quickly. I have not read it with the care that I will in the 
next week or two. This is an area that I think is enormously 
important, because whether it is a broker-dealer or it is an 
investment advisor, if they are not serving their clients 
honestly, fairly, and I would say, in the best interests of the 
client, that is a big problem.
    And one of the things that we have done at the SEC in 
particular--this is long before the study, is that we have a 
broker-dealer task force. And we have, in our OCIE exam area, a 
priority to really look for these repeat offenders, and 
frankly, look very closely at the firms where they tend to end 
up again.
    In other words, I think one of the things the study 
referenced was not only do you have problems in the past with 
some of these advisors--and I think they are brokers. I think 
the study is on brokers, really. But they show up again at 
another firm, and they show up again at another firm.
    So, our focus has been--FINRA tends to deal with registered 
representatives individually--not always, but certainly to a 
great degree. But we are really focused on the firms--where 
they seem to be residing.
    We have one particular initiative, where we are looking at 
churning by brokers throughout various firms in order to try to 
crack down on that. So, it is an enormously important area.
    Mr. Quigley. I mean, how much of this is resources?
    Ms. White. Some of it is resources. You cannot get away 
from that. I mean, you cannot get away from that, because in 
the broker-dealer space--we have been talking about the 
investment advisor space--but in the broker-dealer space, FINRA 
does today about 80 percent of the examinations of broker-
dealers.
    That is really firms and individual brokers. But that does 
not really take into account all their various offices--branch 
offices, which are not examined with that kind of frequency. 
They do about 50 percent a year, which is better than 10 
percent a year, in the investment advisory space.
    But I think we cannot do enough. I mean, I think our 
techniques are better. I think our data analytics are better. 
We are identifying those patterns. And as I said, for the last 
two or three years, at least, we have been very focused on this 
at the SEC, really trying to identify where those brokers are 
going and getting them out of the industry.
    Mr. Quigley. I thank you for your service. Thank you, Mr. 
Chairman.
    Mr. Crenshaw. Thank you. Mr. Amodei.
    Mr. Amodei. Thank you, Mr. Chairman. Madam Chair, to the 
extent that the chairman is going to manage my time, please do 
not be offended if I endeavor to manage yours. I will try to be 
crisp with my questions. And so, with that in mind, initially, 
I know that you folks have been working on an update for 
Industry Guide 7, which provides guidance for mining companies 
to report the value of mineral resources and reserves. The 
present stuff, that is 34 years old, is inconsistent with 
international reporting requirements. Could I have a point of 
contact in your staff, just to get an update on where that 
stands?
    Ms. White. Yes. I would call Keith Higgins who is the 
Director of our Division of Corporation Finance.
    Mr. Amodei. Great. Thank you very much. I want to go back a 
minute for the Department of Labor stuff. And I guess we will 
call this under the heading of Intermurals. Obviously, you will 
be able to tell from my question that I think your jurisdiction 
is unquestioned. I understand there is an issue there with 
ERISA and some of that stuff. But I am concerned, when you 
speak earlier about unintended consequences, and I hear you 
when you say, ``Listen, it is hard and it is not quick.''
    But I think, ultimately, under Dodd-Frank, the section that 
you mentioned in your earlier testimony, there is in fact 
mandatory language under the Standard of Conduct stuff that 
says--it is under other matters, but it is under the Standard 
of Conduct section. Says that ``The Commission shall examine 
and appropriate, promulgate rules prohibiting or restricting 
certain practices, conflicts of interest,'' blah, blah, blah.
    There is also, I believe, a Supreme Court case out there 
that is not specific to the SEC, but generally says, ``Hey, 
when Congress acts later in time, and specifically, that takes 
precedence over earlier acts, in terms of regulating that sort 
of stuff.'' So, I guess I am concerned about unintended 
consequences.
    Clearly, the 800-pound gorilla issue in the room is, is DOL 
going to have one rule? Is SEC going to have another? Can you 
give me any comfort on how--on what you think your jurisdiction 
is ultimately when you get through this process, and how that 
is going to work, if it is, in conjunction with DOL?
    Ms. White. Well, I think there is no question, certainly, 
at least since Section 913 of Dodd-Frank was passed, that the 
SEC has the authority--not the mandate, but the authority--to 
impose a uniform fiduciary duty on broker-dealers and 
investment advisors. It also provides certain parameters if the 
Commission decides to go forward.
    And again, as I am urged to say more often than I do, I am 
one member of the Commission, even though the Chair--and so, 
this is a Commission decision. But, I believe the SEC should 
exercise that authority to go forward.
    But that is, again, not a quick and easy process. And it is 
not up to me alone as to whether or what the parameters of that 
rulemaking would be, although 913 sets some parameters. Were we 
to go forward--in terms of your question on consistency--
assuming that there was a Department of Labor rule that 
preceded ours that overlapped, we would continue to talk about 
coordination and making our rules and the regime as compatible 
as possible. But they are not--they do not always land 
identically. And that is something that is--you try to make 
them land identically, if you can. But we are separate agencies 
with separate statutory mandates.
    Mr. Amodei. Time frame?
    Ms. White. For us? I cannot say that----
    Mr. Amodei. I mean, you have got some decisions, I know, to 
make, but it is like, so----
    Ms. White. I cannot give you a time frame, other than to 
say again what I have said before, that it is complicated and 
not fast by any means. And where it stands right now is 
essentially that the--you know, the staff's parameters of 
recommendation are being discussed with my fellow 
commissioners.
    Mr. Amodei. OK. I guess, final question is: So, if DOL 
comes out with a standard before you folks get through your 
process, you are going to enforce their standard?
    Ms. White. Again, they have some enforcement authority on 
their own. I mean, our enforcement authority is under the 
Federal securities laws. So we do not enforce the Labor 
Department rules per se. Obviously, again, the conduct can 
overlap with our jurisdiction. So it is not, as easy a 
situation as maybe my initial response would imply. But we 
enforce the Federal securities laws and our rules.
    Mr. Amodei. Well, and I appreciate that. I am just saying 
that you talking to the committee saying, ``It is not easy as 
you might think,'' I get that. But the other problem is, 
somebody who is now the subject of an investigation based on 
whose rule it is and who is interpreting what is even less 
easy, if you will, than--I would much rather be the regulator 
than the person who finds out, ``I thought I was in good shape 
with the SEC, but now I got the DOL bird swooping in on me, and 
we were compliance folks.''
    Ms. White. And I think that is why we try, in all of our 
spaces where we overlap, and it is not just the Department of 
Labor, to be as consistent as we can. I will say again, though, 
that we have had parallel rules and do have parallel rules now 
that are not totally consistent. And we do our best to give 
guidance and clarity. But they are not identical and they do 
overlap.
    Mr. Amodei. Thank you. Thank you, Mr. Chairman. I yield.
    Mr. Crenshaw. Thank you. And I think we will have time for 
another round of questions. But now let me turn to Mrs. Lowey 
for either a statement or a question, or both.
    Mrs. Lowey. Well, thank you very much, Mr. Chairman. I 
appreciate your leadership and I do want to say how fortunate 
we are to have a chair who is so experienced. Your years and 
years of experience have contributed to your outstanding 
management of this very difficult agency. We thank you very 
much.
    When I look at the numbers, the markets you are policing 
have a lot of new registrants--more than 2,300 private funded 
advisors have registered with the SEC since the effective date 
of Dodd-Frank, and more than 800 municipal advisors are 
expected to be registered in 2017. In the next two years, the 
number of new registrants are expected to be subject to 
examination, including swap execution facilities, security-
based swap data, repository swap dealers, crowdfunding portals. 
How do you prioritize examinations, given how large your 
existing portfolio is? How much larger will it become with all 
of these new registrants? How many of those do you anticipate 
being able to examine?
    How can investors have confidence that everything is being 
done to prevent another meltdown when so few of these entities 
are being examined? And will your budget request help build 
that confidence?
    Ms. White. The budget request will help. I think there is 
no question that the SEC is a significantly under-resourced 
agency, despite the increases--which we are very appreciative 
of, that we have gotten in the last few years--to do the job we 
have been given to do.
    I would say that unequivocally, even before we were given 
the additional responsibilities under Dodd-Frank and the JOBS 
Act. And your reference to the private fund advisors, which 
includes hedge fund advisors and municipal advisors, and the 
securities-based swap dealers who will be registered and come 
online; those are all add-ons, to our responsibilities.
    And so, there is in our request this year a request for, 
really, limited positions for those that will come online. But 
clearly, there will be a gap there. What do we do about that? 
And we try to make as smart a use of the resources that we 
have. I certainly come in and try to be as eloquent as I can, 
for more resources, so I can do the job.
    But we try to do more risk-based identification of where to 
go. We do desk reviews of data. When we got the private fund 
advisors, initially we did presence exams, which were more 
limited exams. But at least we had our arms around and a boot 
or two on the ground. But in order to carry out our investor 
protection mission, we need significantly more resources in all 
those spaces.
    Mrs. Lowey. I think it is important for my colleagues to 
note that in 2015, the work of your division of enforcement 
resulted in a record amount of sanctions--$4.2 billion. A 
record 507 standalone actions were filed, as were an additional 
300 follow-on proceedings in delinquent filing cases. If you 
could share with us, what trends have you noticed in securities 
fraud? Are they just getting smarter? How will your budget 
request help you spot fraud and take action against those who 
perpetrate it?
    Ms. White. Yes, the markets we have to police are getting 
smarter, more complex, bigger, faster all the time. One of the 
ways that we try to meet that challenge is through smarter use 
of the data analytics that we have been talking about. We have 
a software tool, for example, called Artemis that actually was 
developed in-house, that basically allows us to identify 
insider trading--suspicious patterns, at least--among traders. 
You do not have to wait for an event and then look behind that 
and see who traded.
    But it is also a budget issue. I am very proud of the 
record in enforcement. I mean, not just the numbers, which I 
think are very impressive, but the kinds of cases and how 
complex they are. But if you think about, where is the value-
add when you are thinking about how much to fund an agency, 
enforcement alone last year obtained orders for returning $4.2 
billion. Our request here is $1.7 billion. And think of all the 
other value-add that the SEC provides.
    So, what are we seeing in terms of trends beyond just more 
and more complex? I think the complex financial instruments 
area is one, which clearly requires market experts. Again, we 
seek those in our budget request. More data analytics to 
analyze and identify those pyramid schemes and financial 
reporting frauds, which is also a place for more market experts 
and more data analytics. When I said we thought out and tried 
to target our budget request--you will see, that is among who 
we have asked for.
    Mrs. Lowey. That is very helpful. And lastly, in fiscal 
year 2015, this committee asked for an update on the SEC's 
efforts to modernize corporate disclosure requirements, 
including cyber security. You informed us that in March 2014, 
the Commission held a roundtable to discuss cyber security in 
furtherance of the Commission's efforts to better inform 
itself, the marketplace, fellow agencies, and the private 
sector.
    I would be interested to know what lessons you learned from 
that roundtable. Should companies that file with the SEC be 
required to disclose cyber-attacks, to engage with the private 
sector in other ways on cyber security? And I just want to say, 
Mr. Chairman, I remember years ago--when Ray Kelly was NYPD 
police commissioner, they were always behind the ball, because 
corporations were afraid their stock prices would go down if 
they admitted that they lost $7 billion or whatever in a cyber-
attack. I would love to know where you stand on these issues.
    Ms. White. Yes. First of all, I do not think there is any 
greater risk that the financial sector, and really beyond the 
financial sector, faces than cyber risks. And that is private 
sector, the government, our spaces as well.
    In terms of disclosure by public companies, and obviously, 
we are just talking about public companies, the SEC did do 
guidance to companies some time ago, really alerting them to 
the range of issues that would require disclosure if there is 
an attack, or simply the risk, to their business. If that is 
material, they must disclose it. We look at the disclosures 
every year in our annual reviews.
    But we also are focused with our fellow agencies and the 
private sector on this really much deeper, broader risk than 
the SEC's jurisdiction really reaches to. We pay a lot of 
attention with respect to our registrants. And again, our 
examiners have gone out really ahead of the curve, I think; and 
good for them in going out and looking for cyber preparedness 
at investment advisors and broker-dealers, and then publishing, 
obviously not by name and chapter, but really, publicizing 
observations to that population what to look for, how to 
enhance what your system is, what are the best practices out 
there. We continue to have that as an exam priority.
    We also, in our Trading and Markets Division and Investment 
Management Division, meet with our registrants, talk to them 
all the time about preparedness for the cyber-attacks that are 
going to come and how to report, and whether to report. But a 
lot of this has to go on a broader scale than even where the 
SEC can function. And it has got to be private sector, 
government, Department of Homeland Security, the Treasury 
Department. And we are very active in those inter-agency groups 
as well.
    Mrs. Lowey. Thank you, Mr. Chairman. I just want to say in 
conclusion, because we sit on many of the same subcommittees 
that cyber security is such a huge threat. In my discussions 
with many of these public companies and some large private 
companies, they all have their own systems in place.
    So, how we all coordinate, how much disclosure--so we can 
learn from what has happened--there are so many issues involved 
here. And I appreciate you are right in the middle of it. I 
thank you, Mr. Chairman.
    Mr. Crenshaw. Thank you. Mr. Yoder, and then Mr. Bishop.
    Mr. Yoder. Thank you, Mr. Chairman. Madam Chair, good to 
see you again. Thanks for your service. There is a pending rule 
before the Commission that would increase the number of firms 
that have to register with FINRA. I am hearing from market 
participants that the rule, as drafted, while well-intentioned, 
is overly broad. It would require some firms to register with 
FINRA with little regulatory benefit that could be achieved 
otherwise. I know you are studying that.
    As you know, this committee is responsible for oversight of 
your budget, which is why we are here today, of course. But it 
got me thinking, who is responsible for oversight of the FINRA 
budget? The rulemaking, by definition, will increase their 
budget, increase their oversight. How can this committee be 
sure that they are using the resources effectively, 
efficiently, and not creating undue burdens on certain parts of 
the market?
    Ms. White. Well, the SEC does have oversight 
responsibilities over FINRA as an SRO. And we exercise that 
authority, including exam authority. But it is a membership 
organization, basically. I think you are talking about the 15b9 
proposal, I think.
    Mr. Yoder. 15b9, yes.
    Ms. White. Yes. The 15b9. Yes. And I think that is one 
where it is a proposal, and we are in the comment period now. 
And so, we will certainly be considering all those comments 
very carefully and including the costs as well. And so, FINRA, 
many, if not most, if not nearly all of their rules have to be 
approved by the SEC. So that is a check. That is a safeguard, 
too.
    Mr. Yoder. And in terms of those dollars, you feel like the 
oversight that you are in charge of, that you can appropriately 
know that their budget grows, that we have, I guess, the 
understanding that that is being handled appropriately? How can 
we, as a Congress, do our oversight duty and trusting in your 
leadership, of course, but----
    Ms. White. One of the things that has been a focus since I 
have arrived as Chair of the SEC in 2013, is that I think we do 
need to enhance the oversight that we do at the SEC. Obviously, 
Congress has its, you know, separate responsibilities.
    One of the things that we are trying to do in order to get 
greater coverage of these investment advisors I keep talking 
about, in terms of examinations, is also very soon to actually 
transition some of our broker-dealer resources to the 
investment advisor space. And that is because, in part, FINRA 
really does 80 percent of those broker examinations. But that 
means that we need to up our oversight over FINRA, if that is 
the move that we are going to make. And I think just in 
general, we are looking to enhance our oversight as well.
    Mr. Yoder. Well, I appreciate that. And I appreciate your 
studying the 15b9 rule and making sure you are finding that 
right balance and not over-regulating to where we do not 
actually receive the benefit, but cost folks that do not need 
to be registered and would do probably more harm than good. So, 
I appreciate your leadership there.
    I want to ask you about the 30e-3 rule on printing. It 
sounds like the structure of the rule is getting a bit 
complicated. And I know that you have been studying this for 
some time, too. The process is pretty simple today. There are 
some concerns, I hear, from market participants, that replacing 
it with a series of steps might actually make it more 
complicated. And now even supporters of the rule are concerned 
about that as well. Where are you in that rulemaking process? 
And does it make more sense just to step back and start over 
rather than pushing the rule as it is now, in terms of the 
complication?
    Ms. White. Well, we have gotten a lot of comments on this 
aspect of the rule. And we are studying them very carefully. We 
will proceed, obviously. We do not hesitate, if it is called 
for, to re-propose something if that seems to make sense. I am 
not suggesting we are at that juncture now, but we are 
certainly seriously studying the range of the issues that have 
been brought to our attention and that we are aware of, from 
our own work.
    Mr. Yoder. OK. And then the ranking member brought up the 
topic of cyber security. And I wanted to associate myself with 
her remarks and then I wanted to just talk about your internal 
control.
    So, certainly one thing is external threats. You know, I 
had a chance to deal--your counterpart with the CFTC was in the 
Ag Committee recently, which I serve on as well. And we talked 
about the Reg T rules. And there are concerns that I have heard 
from market participants that they might put their source code 
in the hands of CFTC, and nefarious actors, either within or 
without, could somehow release that. And that is sort of their 
secret sauce, so to speak.
    You know, in light of the potential harm for data being 
released, internally, what are your internal controls that 
would help assure the committee that any of that sensitive data 
that might get into the hands of the SEC would not be released 
or somehow not be compromised?
    Ms. White. I think there is no more important an issue--I 
mean, we have to be able to regulate, but we also have to give 
the requisite assurances that can be given that we will be able 
to safeguard that very sensitive information. I think this 
particular budget request, just to bring it back to the budget 
for a second, requests $14.7 million to enhance our internal 
security system. And this is really coming up with us in a 
number of places, but including our proposals in the asset 
management space, where we are asking for additional 
information.
    And one of the issues we are dealing with there is not only 
making sure we are enhancing our systems, which we are very, 
very focused on, but also how much can we say about how we are 
enhancing in order to give assurance and a confidence level. I 
mean, it is a bit of a balance, because you do not want to be 
too detailed about that, or you are giving a roadmap, right? 
So, that is one of the things. But I think we need to be able 
to get ourselves to a place where we can say more than we may 
have in the past about that.
    Mr. Yoder. I appreciate your leadership there, and I think, 
you know, the SEC, as well as the CFTC, they ultimately cross 
paths with a lot of sensitive information that could 
compromise, you know, entities that they regulate. And so, the 
importance that you place on that, I think, is critical to, you 
know, maintaining that information. So, I appreciate it. Thank 
you. Thank you, Mr. Chairman.
    Mr. Crenshaw. Thank you. Mr. Bishop, and then Mr. Womack.
    Mr. Bishop. Thank you very much, Mr. Chairman. Thank you, 
Ms. White. According to a 2013 GAO report, which was three 
years ago, minorities accounted for only 19 percent of 
management positions in the financial industry, and even worse, 
minority women accounted for only 13 and a half percent. Can 
you tell me what steps the SEC has taken to improve this 
drastic disparity and what are the current stats? Hopefully 
they are improved. And tell me what steps you think Congress 
could take to give you additional tools to increase minority 
participation?
    Ms. White. I think there are at least two spaces to talk 
about there. One is within the industry in the private sector 
and our registrants and there, we, together with a number of 
our other financial regulators under Section 342 of Dodd-Frank, 
have focused on our registrants, focusing on the diversity of 
their staffing, among other things. In terms of our own agency, 
we basically look in three areas--our own staffing that we 
have.
    Obviously, I have mentioned the registrants. We also have a 
certain amount of--not huge amounts--but amounts that are 
meaningful of contracting dollars. And so, one of the things 
that our OMWI office really focuses on, and has made a lot of 
progress in, is to make sure that minority and women-owned 
businesses know how to, ask to get in the procurement process, 
in order to be able to at least bid for or compete for those 
contract dollars. And we have had a lot of success there. We 
have challenges at the SEC, certainly, with respect to the 
number of minorities and women in our most senior positions, 
and we are very focused on that in terms of taking specific 
measures.
    We have seen some improvement there, but we remain very 
much focused on that. But I think it is a public and private 
sector set of issues, not easy ones to solve, but I think we 
have to remain very focused on them and I think we have to use 
all the tools at our disposal.
    Mr. Bishop. Anything that we could do to help you in that 
regard?
    Ms. White. Budget? No, I mean, I do not mean to make light 
of this at all, because I do not, because I consider this 
enormously important. I think we are right now, at least at the 
SEC, kind of midstream in really seeing how some of our 
initiatives are working, some of our outreach is working. We 
have expanded----
    Mr. Bishop. I was going to ask you about recruitment.
    Ms. White. Yes, and in recruitment, that is one of the 
areas where, again, I think we have really made great progress, 
and I forget the number of outreach events that we did this 
past year. But it exceeds 150 or something, and it is in the 
right places with the right people at them. And I think I would 
like to see how successful those initiatives are before I would 
suggest what might be helpful from Congress.
    Mr. Bishop. OK. Let me change gears a second and follow on 
Mrs. Lowey's question. According to your budget request, the 
SEC has never examined approximately 40 percent of all 
registered investment advisors. With the growing number of 
registered advisors, which you claim has been an increase of 
nearly 35 percent over the last decade, how do you plan to 
address the shortfall without impacting investigation of at-
risk advisors?
    Ms. White. We have had, for the last 2 years, what is 
called our never-before examined initiative. And that really 
looks at registrants that have registered with us in the past 3 
years, in order to ensure that we are at least covering that 
space.
    We also do something as simple as this. It is a bit of a 
variant of our presence exam for the private fund advisors, 
which is to call up every registrant and just sort of say, Here 
are the rules. Here we are. We are present. Obviously, that is 
not boots on the ground. That is not a thorough exam. But it is 
more presence. And so, in every year we are devoting the 
resources we think are wise to making sure that we are at least 
covering as much of that space in one way or another as we can.
    Mr. Bishop. OK. Last week, the SEC approved for the first 
time, a lender to use funds from public investors to back loans 
for small businesses. This crowd lending is an innovative 
financial product established for the JOBS Act of 2012.
    The company approved under Regulation A plans to initially 
offer the loans to veteran small business owners as an 
alternative to high-interest payday lenders. Allowing crowd 
lending is a positive development that could expand 
opportunities for small business owners and it is especially 
encouraging to me to see that veterans will be the first to 
utilize this. What other steps is the SEC taking to encourage 
liquidity for small businesses?
    Ms. White. Where we pass on issues like that is in our 
Regulation A space and our more traditional role of reviewing 
filings to make sure that the right disclosures are given, 
basically.
    Among the things that we are looking at in terms of small 
business and small business liquidity, is that we are doing--it 
begins I think in October--the tick size pilot you may have 
heard about to see what the data shows about increasing 
secondary liquidity for smaller businesses. We continue to look 
at venture exchanges as possibly a way--I mean, we have 
approved venture exchanges before, but look at different 
variations of venture exchanges to see whether we cannot 
increase liquidity for small businesses. The crowdfunding 
mechanism, which becomes effective in May, is also a way to 
raise money.
    Obviously, you have got to attend, after you raise money to 
the liquidity that needs to follow for investors. But we really 
are spending an awful lot of time on that issue for small 
businesses.
    Mr. Bishop. Thank you, and I think my time has expired.
    Mr. Crenshaw. Thank you. Mr. Womack.
    Mr. Womack. Thank you, Mr. Chairman. Chairman White, always 
great to see you. Thank you for your service. Last year, when 
you were with us, I spoke briefly to market structure, 
particularly when it came to errors or glitches such as the 
``flash crash,'' which was then addressed through the working 
groups established by both the Depository Trust and Clearing 
Corporation and the New York Stock Exchange.
    If I recall, you touched on the regulation SCI, but it is 
my understanding that industry group suggestions may have been 
more comprehensive. I would like to follow up by seeing if we 
could get the list that I had previously requested, noting 
which of these recommended changes by the DTCC and the Stock 
Exchange have been implemented by the SEC, and why or why not, 
if that is possible.
    Ms. White. It is possible, if we have that information. I 
will say that after our session last year, basically the staffs 
followed up with each other to try to identify precisely the 
space that you were intending for us to respond to. And we did 
respond as we thought the question was put. But I had a sense 
that there might be something else that we had not responded 
to.
    Mr. Womack. Let's have a staff-to-staff follow-up.
    Ms. White. Yes, absolutely. Absolutely.
    Mr. Womack. I appreciate that, still focusing on structure, 
particularly the National market system planned governance. You 
may know that there is a discussion draft in the House put 
forward by my colleague from Virginia, Mr. Hurt.
    This legislation would install broker-dealer representation 
on the operating committees of the National market system plan, 
such as a consolidated audit trail, tick size pilot, and so on. 
What would be the downside of having broader industry 
participation in the development and operation of these 
critical market utilities?
    Ms. White. That is an issue that we have in our Equity 
Market Structure Advisory Committee and four subcommittees 
including an NMS subcommittee. And among the issues that the 
committee looks at, our staff is looking at, are those 
governance questions. I cannot get ahead of that analysis to 
give a view until I have gotten the full input. But it is an 
issue that we are very focused on.
    Mr. Womack. Yeah, and then, just a parting comment. In your 
testimony, you note that volume and equity markets have 
drastically changed over the years, but so have other major 
aspects, such as exchanges moving from not-for-profit and 
member-owned-for-profit, and publicly-traded. This would seem 
to emphasize needs for reform, yet countering the exchange 
evolution, it is often cited that indirect participation in NMS 
governances available through advisory committee membership.
    With that said, I would note that advisory committee 
members are most often given little actual voice, citing among 
other things, the fact that much meaningful business is done in 
executive sessions, from which, I know you are aware, advisory 
members are excluded. I believe that the SEC has the ability to 
positively affect this governance structure already, separate 
from broad reforms. But if need be, Congress, of course, will 
continue to weigh in. So, thank you very much for your 
testimony and again for your service. And Chairman, I yield 
back.
    Mr. Crenshaw. Thank you. We have time for another question 
or two. I will start. You and I talked, I think last year, 
about FSOC. And I mentioned you are a member of FSOC. It is a 
relatively new agency. One of my concerns has always been the 
transparency involved in the designations. I think it is fair 
to say if there are systemically important financial 
institutions, and they are designated as such, they have 
additional burdens, et cetera. It seemed initially that the 
goal was to designate institutions as opposed to mitigate the 
risk involved with institutions.
    And so my first question is: Would you agree with me that 
it would be more important to mitigate the risk to our system 
and that you ought to judge the success of that by the 
mitigation of risk as opposed to the number of designations 
that are made?
    Ms. White. I think you want to basically look at the most 
meaningful metric. The mission of FSOC is to identify and 
address risks to the financial stability in the financial 
system that are found. One tool is obviously the designation 
tool.
    Mr. Crenshaw. Let me ask you about the designations. There 
is some question that it seems like the big banks all got 
designated. Is that based on their size or based on their 
activity?
    Ms. White. That was largely, I think, it was before my 
time. But I think that is largely a size designation for them. 
But if you actually look at the number of designations 
certainly outside the banking context, there have not been that 
many, but I think your point is very well taken, nevertheless. 
I think FSOC is sensitive to that. Certainly I am, and I think 
other members are too, which is to be as transparent as one can 
be, in terms of the particular factors that may have driven a 
particular decision to designate.
    Now, as I think we discussed before, that I think it is 
often a business model. So, it is not like you can kind of 
change this piece and you would not be considered under the 
analysis systemically important, but I think the more one can 
advise as to what those factors are. I mean, the idea is not to 
have the systemic risk in the system, right? And so, whatever 
tools or information FSOC and others can give to bring that 
about is what we should be doing.
    Mr. Crenshaw. I do not know if you are familiar, but last 
year at our full committee markup, I offered an amendment that 
I wanted to be sure everybody on the committee got to look at 
and discuss, and it was kind of an off-ramp, a way for 
companies to de-risk prior to designation, particularly the 
non-banks, the asset managers, or insurance companies. It did 
not preclude FSOC from designating them, but it gave them an 
opportunity to be notified. Here is a problem with your 
business model. Can you tell us how you might cure it?
    And still, if FSOC felt like that did not solve the 
problem, did not mitigate the risk enough, the designation 
could still occur. That seems like a commonsense, reasonable 
approach. I am wondering if that would simply add some 
flexibility, because again, the goal is not just to--and I know 
there have not been that many designations--but the goal is not 
to go out and find people to designate them. The goal is to 
keep our financial system safe, secure, orderly, et cetera. So, 
did you see that language? And what are your thoughts about 
that kind of flexibility?
    Ms. White. Well, I think I did see that language. It has 
been a while since I looked at it, so I should put that caveat 
in. And there is increased engagement, certainly, between FSOC 
staff, and the companies that are being looked at. So there is 
an awful lot of dialogue back and forth. We have obviously had 
a number--not a big number--but a number of designations now, 
including non-banks where the reasoning is quite detailed, 
actually, publicly, and then even more detailed in what is 
provided to the companies.
    And companies are clearly free at any time prior to 
designation to change their business model, and then they would 
be analyzed as they were presenting to FSOC as they were 
considering them as changed. And so, I would hope if that was 
realistic--again, a lot of these are so intertwined in terms of 
the factors that lead to designation that it is not a simple 
``gee, if you were not doing that, or you did less of that you 
would not be systemically risky or you would not be 
systemically important.''
    But I certainly think that exchange of information ought to 
occur. And I think more of it is occurring now, actually. We 
also have the off-ramp or the review anyway. It is not an off-
ramp, but as I said, it is not called an off-ramp, but it is 
the annual review of each entity that is designated to 
determine whether or not they should remain designated.
    So, if there have been changes since the designation, and 
frankly that occurs even if the company does not seek it. So, 
that is an automatic review. We have done that only for 2 years 
now. I think this is the second year. And I think it is getting 
more exacting and becoming a better process.
    Mr. Crenshaw. Well, it is good to hear the process is 
becoming a little more transparent. Particularly when you get 
into the question of whether the designation is based on size 
or based on activities. When you move away from large banks, 
like asset managers, for instance, they are very large, but in 
terms of their activity, you can argue about how much systemic 
risk occurs when you are managing somebody else's money.
    But, I think we will continue to have that dialogue, 
because as you point out, even at the end, to say if maybe we 
mitigated enough risk, they do not need to be designated 
specifically anymore, but at the front end, it might be 
appropriate to give more understanding to what the activities 
are, what the size is, before that designation occurs. So, I am 
encouraged to hear your thoughts on that. Mr. Serrano, do you 
have a question?
    Mr. Serrano. Yes, I do. Thank you. Chairman White, I want 
to bring you back to this issue of Puerto Rico, because in the 
26 years that I have been here, I have never seen all the years 
focus in on something so quickly on both sides of the aisle and 
both Houses to try to deal with what they know has become a 
humanitarian issue. With that in mind, I am going to call an 
original co-sponsor of the Puerto Rico Investor Protection Act, 
which would terminate the exemption of companies located in the 
U.S. territory from coverage by the Investment Company 
Protection Act of 2015. And we thank you for your technical 
assistance that you gave us on putting that bill together.
    Could you please speak to the effect of the bill and how it 
can help the situation there? Now, I realize, as you have told 
us before, you are not directly involved, but this one is about 
investors. And so, you might be more involved with that.
    Ms. White. Yes, this one is, I mean, at least in some 
aspects. Again, the Commission has not taken a formal position 
on the bill. But I think I have discussed my views on at least 
aspects of this publicly, which is that I think that exemption 
was born in another time and a different situation, where you 
based the exemption from the Investment Company Act.
    And the requirement was, I think in part, based on the 
theory that the government did not have the resources or the 
ability to travel to the territories, including Puerto Rico, to 
do what they needed to do. So, I think it is a loophole. I 
think it ought to be plugged.
    Mr. Serrano. Just for the record, you know, the 
territories, and you do not see it more clearly and evident 
than in this committee, usually the attitude with the 
territories is whatever is left over. And I have stories, I 
tell you, that would make people laugh if they were not sad. 
That one is sad, that they did not think they could travel to 
the territories or whatever, so they did not include the 
territories--you know, American citizens.
    I remember in front of me the FCC once, I asked them how 
come there is no satellite radio in Puerto Rico yet. They have 
it now. They said the satellite will get there. And I thought 
the whole essence of a satellite is it can get anywhere. So I 
said, ``Borrow one from the CIA, and you will be able to get 
there and elsewhere.'' So, now they have it, and some people 
like me and some people do not like me, you know, terrestrial 
radio.
    But let me ask you something. You have so many new 
responsibilities now, and one of them that always keeps coming 
up--and I know you have been asked this, but I just want to 
stay on it because it is important to me, and it is important 
to a lot of people--are you really keeping up fully at this 
point in the I.T. area? Because it seems to me, and I do not 
think this will ever end, I mean, it does not end in our own 
offices.
    I mean, we buy equipment in our offices and the staff 
celebrates the fact they have all this new equipment, and a 
year later, the equipment is not that good anymore compared to 
other agencies. So, the banks out there have much better stuff 
and you have better equipment. What can we do about that, other 
than keep pumping money? And I am against pumping money. I do 
not want to sound like a Republican, but----
    Ms. White. It clearly is, you know, there is a significant 
resources component, right, of this? We talked about the $10 
billion a year on the I.T. budget alone of some of our largest 
registrants. So there is no question about that, but it is also 
a matter of expertise and attracting that expertise and keeping 
that expertise at the government agencies.
    And so, we are never going to be able to pay those experts 
as much as the private sector can pay them. But one of the 
heartening things that I have found since being at the SEC, 
particularly in the I.T. area and this applies to our 
economists as well, is how attracted they are--you have to pay 
them enough, which is a challenge--to coming to the SEC for 
public service, number one.
    Number two is that they have access to data they find, 
particularly in the case of the economists, fascinating that 
they do not have outside because we, obviously, have access to 
some data that the public does not have. And so, you will see 
in our request, I say it over and over again how much more we 
are seeking out market experts and quants and other kinds of 
technical experts. But it is a real challenge. I mean, you are 
always playing catch up even with all the resources you can 
imagine, right? You must have the resources.
    But it is also the talent and the people that both know how 
to use your tech systems but also to design them. I mentioned 
the Artemis software application, which has been tremendous. It 
has produced a number of important insider trading cases and 
was actually developed in-house. So it was not a big resources 
issue. It was a brain issue; right?
    Mr. Serrano. You know, and one of the things that I have 
noticed, Mr. Chairman, is that what she is talking about is 
really so true. We have young people in this country--not that 
I am knocking the experts who have been around a while--young 
people that are really whizzes when it comes to technology, and 
we have not found a way in government to attract them, to bring 
them in. You know, government is not something they understand.
    I remember that I either sarcastically or very profoundly 
during the Obamacare roll out that created some problems, I 
said, ``Why do you not just go to a college dorm? It will be 
resolved in a half an hour, if you get some of those kids in 
here.'' And I think that we are missing a disconnect in this 
country between the fact that we have a younger generation that 
understands technology well, that comes up with incredible 
inventions that they later sell for $1 billion to someone, you 
know, and we rely only on what we think we know. I have no 
problems at my office hiring someone who is 24 and say, ``Fix 
that computer,'' because I know they know how to. And I think 
that that might sound simplistic, but I think it is something 
that we are missing and we--so I am glad to hear you say what 
you said.
    And lastly, let me just follow up on something Mr. Bishop 
said, and then I will let you go for my part. There have been 
some questions recently about whether investors have enough 
information on the composition of the boards of publicly-traded 
companies. Numerous letters have been sent to you asking that 
the SEC act to require to disclose--disclosure of more 
information pertaining to the diversity of boards. Do you think 
that more needs to be done in this area and, if so, what sort 
of timeline is the SEC looking at?
    Ms. White. I spoke about this I think in late January 
where, basically, I share the concerns, at least some of the 
concerns that have been expressed. The SEC has a rule now and 
has for a number of years of requiring companies, if their 
nominating committees have a diversity policy to say what it 
is, how they use it, how they monitor it for effectiveness and 
so forth.
    But there is also a fairly recent GAO study that shows how 
few companies have been disclosing anything in that space. The 
current SEC rule does not define diversity, and so one of the 
things that is urged is that we at least include in the 
definition of diversity race and gender and ethnicity, along 
with the other kinds of skill sets and experience that may 
figure into diversity when a nominating committee is deciding 
how to optimize their board.
    And so, I have directed the Division of Corporation Finance 
to both look at the disclosures that have occurred over time 
with an eye to my concerns that we may need to provide more 
information to investors to make it useful, in terms of 
information about, gender and race and ethnicity.
    There are a number of issues as there are with anything in 
this. What you do, for example, with board members who may not 
wish to have that disclosed. But I think it is something that--
my personal view is we should proceed on it and I am quite 
focused on it both in terms of reaching that conclusion on my 
part and then, if so, to moving it along.
    Mr. Serrano. Well, I want to take this opportunity, Chair 
White, in closing, to thank you for your service, you know. 
November is coming soon so we do not know where we are all 
going to be after November. But I want to thank you, and I want 
to ask you a personal favor on behalf of everybody.
    It is a personal favor, and that is to try to continue to 
do what you have done, to put the SEC as that watchdog, that 
detective, that cop on the beat, that we need so that the Wall 
Street fiasco does not come back. If you put it on its road, it 
may be difficult for some people to undo it in the future, 
although some will try to go back to the days when we did not 
care what Wall Street was doing. Let's just try to get it on 
the road and I know you are the person to do it. Thank you.
    Ms. White. Thank you.
    Mr. Crenshaw. Mr. Bishop is recognized.
    Mr. Bishop. Thank you very much. Let's talk about flash 
crashes. In August of last year, fears of a slowdown in China's 
market prompted volatility in U.S. markets. Some investors were 
surprised to discover that ETFs were trading at much lower 
prices than their underlying investments on the morning of 
August 24. Parts of this resulted from delays in opening stocks 
and U.S. markets, while ETFs were immediately available for 
trading.
    Additionally, the flash crash, like others before it, has 
been partially blamed on the application of automated 
investment tools on a large scale, without a sufficient 
safeguard against panic selling. While the flash crash of 
August 24th, 2015, was nowhere near the turmoil experienced in 
the flash crash of May 6th, 2010, it demonstrates that stock 
markets are still susceptible to human and computer errors and 
are largely unpredictable. What is the SEC doing to prevent 
flash crashes and their artificial instability in the U.S. 
stock markets?
    Ms. White. Quite a bit, and we have done quite a bit. I 
guess I would first say that I think what happened on August 24 
was a--sort of unwelcome, mini-stress test. But I actually 
think that it showed the resilience of our critical market 
infrastructure.
    I would take issue with saying it was a flash crash, sort 
of compounded by various kinds of errors. Having said that, 
however, clearly, it was a significant set of phenomena. The 
staff actually put out a research note on this in late last 
year. It was really very, very useful data and analytics.
    We also have requested certain information from the 
exchanges and other participants on that day to see what 
measures should be taken to deal with some of the phenomenon 
that did occur. And among the issues obviously that are, under 
the microscope, so to speak, are the limit up/limit down rules 
that were put in after the flash crash in 2010. How do they 
operate? Market circuit breakers were actually not triggered 
but, clearly, limit ups/limit downs were particularly in 
certain ETFs, and you did have the phenomenon that you note in 
terms of underlying values departing from share value.
    And so, there have been some adjustments already made, I 
think, in terms of the price collars and the size of the price 
collars. But there are other issues under consideration to try 
to make sure that the issues that did occur there, that really 
did not reflect fundamental values, at least fast enough of the 
stocks, the ETFs, are dealt with. And so I think you will see 
some measures taken in response to that. And we look at this 
all the time.
    Our SCI rule that we talked about earlier is meant to 
increase the resiliency of our critical market infrastructures. 
When an incident does occur, it is reported to the SEC sooner 
rather than later so we can take action. So we are constantly 
dealing with issues like that, and with a great deal of 
seriousness. You want to optimize the markets, in terms of 
their functioning, as well as making sure they are reflecting 
fundamental value for investors and also serving the companies 
that seek to raise capital.
    Mr. Bishop. Thank you.
    Mr. Crenshaw. Well thank you, Chair White. We want to thank 
you for your service. I think everyone on this subcommittee 
appreciates the work you are doing. It is a big job, lots of 
responsibility, and we know how seriously you take that. So 
thank you for that, and we look forward to continuing to work 
with you so that you have the resources to do your job. So, 
thank you very much. This meeting is adjourned.
    Ms. White. Thank you very much.
    
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                         Wednesday, March 16, 2016.

                       DEPARTMENT OF THE TREASURY

                                WITNESS

HON. JACOB J. LEW, SECRETARY, DEPARTMENT OF THE TREASURY
    Mr. Crenshaw. Well, if everybody is ready, we will get 
started. This hearing will come to order. Good morning. I would 
like to welcome our witness, Secretary Jack Lew, Secretary of 
the Treasury.
    Today, we look forward to discussing the Department's own 
budget request, as well as, some of the assumptions and 
policies included in the President's overall request for fiscal 
year 2017.
    Last month, we had a very loud discussion with OMB Director 
Shaun Donovan about the debt generated by the President's 
budget. While there is more than one way to measure the size 
and the effect of debt on the economy, in the simplest terms, 
the President's budget spends more than it takes in, and that 
results in more debt.
    This debt is an economic burden that must be repaid by our 
grandchildren and their grandchildren because the President's 
final budget does not address the unavoidable question of how 
to distribute the economic cost of an aging population across 
the generations.
    The Federal debt, in gross terms, exceeds $20 trillion for 
the first time in our Nation's history. It took 233 years to 
get to this first $10 trillion in debt, and it only took 8 
years to get to the next $10 trillion. And because of this, Mr. 
Secretary, I wanted you to think back to your first tenure as 
the OMB director, when you predicted that the United States 
would be debt free by 2013.
    Now, obviously, a lot has changed since then, but the 
formula for retiring debt has not. Spending as a percentage of 
GDP must be lower than its historical average, and revenue as a 
percentage of GDP must be higher than its historical average. 
The budget before us, however, projects that both spending and 
revenue, as a percentage of GDP, will remain above the 
historical averages through 2026. In other words, this budget 
is a permanent source of debt.
    Growing along with the debt is Treasury's own budget 
request for the fiscal year 2017. The Treasury Department is 
requesting a massive 12 percent increase, including $1 billion, 
or a 9 percent increase for the IRS. Instead of making some 
tough choices, it seems that Treasury proposes unrealistic 
increases, budget gimmicks, and new mandatory spending.
    I believe the IRS request is unrealistic. They have not 
received either a dollar or a percentage increase of that 
magnitude in the last 20 years. The IRS request assumes a 
discretionary cap adjustment that the budget committees have 
rejected for 5 consecutive years.
    In addition, the Treasury seeks to spend an additional $8.5 
billion outside of the appropriations process. The request also 
proposes a new cybersecurity enhancement account to the tune of 
$110 million. Without a doubt, cyber threats are real and they 
are serious, and the committee has been continually supportive 
of funding for cybersecurity as a part of the agency's annual 
budget request. However, I would caution the administration 
against the temptation to create an endless number of new 
accounts across government spending, and calling that a 
cybersecurity plan in order to get new funding for an old 
problem.
    Make no mistake, we must harden our Nation's information 
technology infrastructure, but it should be done with a 
critical eye. New programs with new names aren't going to solve 
the Federal Government's perpetually out-of-date, over budget, 
behind schedule, information technology.
    I hope, with further discussion today, we can find some 
common ground to work on together. As you know, a matter of 
great interest to me, and concern to me, is the Financial 
Stability Oversight Council's process for designating 
systemically important financial institutions and, in 
particular, nonbanks.
    Following up on our conversation from last year, I hope we 
can shed some light on how FSOC has improved transparency with 
regard to entities under consideration for SIFI designation as 
we adopted last year.
    Another issue that was important, I would like to bring to 
your attention, is that in the 2016 Omnibus, we required the 
SEC's division of economic and risk analysis to report back to 
this committee within a year of enactment on the combined 
impact of the Volcker rule, Basel III, and other financial 
regulations, what kind of impact they have had on access to 
capital for consumers, investors, and businesses, and the 
impact on market liquidity.
    I look forward to reading that report later this year, but 
in the meantime, I hope we can talk a little bit about how you 
will work with the SEC economists, if and when asked. I have 
serious concerns that the cumulative effect, of these layers of 
regulations, have resulted in an alarming lack of liquidity in 
U.S. markets, particularly in fixed income markets.
    I believe we need to continue to monitor this issue 
closely, and I look forward to discussing these concerns with 
you today.
    And finally, let me say one thing about the Omnibus last 
year. We included an additional $5 million for Treasury's 
Alcohol and Tobacco Tax and Trade Bureau. That was to expedite 
the label and formula processing. And I believe that by 
appropriating these funds for the Bureau, we can help countless 
small businesses that depend on the Treasury for approval of 
their labels and formulas to get their products to market.
    Mr. Secretary, I hope this funding makes it clear that this 
is a priority for Congress. I know it is a priority of our full 
committee's chairman, and I hope the Department will assist the 
Bureau in accomplishing their mission.
    So again, I want to thank you for taking the time to meet 
with us, Secretary Lew. I look forward to your testimony, but 
first let me turn to the ranking member, Mr. Serrano, for any 
opening statement he might make.
    Mr. Serrano. Thank you, Mr. Chairman. And I would like to 
join you once again in welcoming Secretary Lew before the 
subcommittee to discuss the Department's budget request for 
fiscal year 2017.
    The Treasury Department plays a broad and important role in 
guiding our economy, ensuring a fair Federal tax code, managing 
our Nation's finances, promoting economic opportunity, and 
conducting important international activities. You provide 
assistance and leadership in a number of diverse roles, and I 
thank you for all your efforts.
    One area where your continued leadership is desperately 
needed is on the island of Puerto Rico. The Treasury Department 
has been playing a leading role in helping to address the 
fiscal and economic crisis on the island. Last year's Omnibus 
bill included language allowing Treasury to provide technical 
assistance to Puerto Rico to help it work on ways to balance 
its books and improve its economy.
    While this is a good step, and I hope we will discuss it 
today, it is clear that more needs to be done by Congress on 
this issue. The humanitarian toll this is taking on American 
citizens is truly appalling. The Speaker has committed to 
action, and I expect him to keep his word.
    Let me just mention that again, Mr. Chairman, because 
unfortunately, there are too many Members of Congress and the 
American people who don't know that everyone who was born in 
Puerto Rico is an American citizen.
    A significant contributor to the island's fiscal woes is 
its continued inequitable treatment under numerous provisions 
of both the Federal tax code and the Federal grant programs. 
Your budget request proposes to remedy one of these issues by 
creating a mandatory funding stream that would essentially 
allow working families in Puerto Rico to receive the Earned 
Income Tax Credit, something that no one living on the island 
is currently eligible for. I commend you for this proposal and 
believe it will provide some relief for families on the island.
    Beyond this vital issue, your fiscal year 2017 budget 
request includes new funding for the Community Development 
Financial Institutions fund. The CDFI fund has helped entities 
invest billions of dollars in economically underserved areas, 
including, in my district in the Bronx. I commend you for a new 
initiative proposed within this program this year, the small 
dollar loan, which will help reduce reliance on the payday 
lenders. Access to mainstream financial services is a serious 
problem in the Bronx and elsewhere, so I think this new effort 
is a great program and a great potential.
    Now, as I have said to you privately and publicly, this 
CDFI is a great program, and to strengthen it is really going 
in the right direction. Your budget request also builds on last 
year's increases for the IRS providing for further investment 
and to try and better address enforcement and service 
priorities.
    Although I am pleased that we were able to get a 
significant increase for the agency, the IRS has still lost 
thousands of employees over the past several years, and its 
budget is still 19 percent below fiscal year 2010. These 
reductions have made it significantly more difficult for the 
agency to help those with questions and to go after tax cheats. 
Your budget request helps restore capacity at the IRS, which is 
important in ensuring the fiscal health of our Nation.
    Lastly, I do, also want, to mention the Department's 
central role in reforming our policies towards Cuba. Treasury 
issued new travel regulations yesterday in advance of the 
President's trip there, and I hope we will get a chance to 
discuss these further.
    The impact of your Department's policies, in all of these 
areas, show just how central the Treasury Department is to our 
Nation's economy, our government's fiscal health, and our 
communities' economic opportunities. I think the Department has 
done a great job in all of these areas in the past 8 years, and 
I want to commend you, Secretary Lew, for a job well done over 
the past 3.
    If I had the ability to keep people around for the next 
administration, you would be at the top of my list for many, 
many reasons, but I didn't win any of the primaries, so I am 
not involved in this.
    But I just want to finish up by saying you have been a 
great friend of the Commonwealth of Puerto Rico, and any, any 
help that you can continue to lend, because it is sad, and it 
is sad that the public is not aware of what is happening, and 
as you know, anything that happens in Puerto Rico affects Wall 
Street, affects New York, affects the United States, where 
there are 5 million Puerto Ricans living, and they are part of 
who we are. They are part of the system.
    I was born there, as you know, and the most important point 
to me is that the suffering is affecting veterans in Puerto 
Rico at the veterans' hospitals and elsewhere. And at the 
minimum, we should stick to our word that we never turn our 
back on veterans, and those veterans in Puerto Rico are as much 
veterans as they are anywhere else in the country.
    So I thank you for your help to the whole island and 
especially to the veterans. Thank you. Thank you, Mr. Chairman.
    Mr. Crenshaw. Thank you. And our chairman of the full 
committee, Mr. Rogers, is en route, and when he arrives, if he 
wants to make an opening statement, we will recognize him.
    But right now, Mr. Secretary, we recognize you for your 
opening statement. If you could keep your remarks in the 
neighborhood of 5 minutes and you can submit your full 
statement for the record, but please proceed.
    Secretary Lew. Thank you very much, Chairman Crenshaw, 
Ranking Member Serrano, members of the committee. I appreciate 
this opportunity to testify on the Treasury's 2017 budget 
request.
    Thank you for the kind words, Congressman Serrano, but as I 
hope you can understand, I look forward 10 months from now 
living full-time in the Bronx again.
    Since my testimony last year, our economy has continued its 
record breaking streak of private sector job creation, which 
has reached 6 consecutive years, and 14.3 million jobs. Over 
the last 2 years, we have experienced the strongest job 
creation since the late 1990s. At 4.9 percent, the unemployment 
rate is half of its 2009 peak, and we continue on a sound 
fiscal path from fiscal year 2009 to 2015. The deficit as a 
share of gross domestic product (GDP) fell by almost three-
quarters from roughly 10 percent to 2-and-a-half percent.
    And Mr. Chairman, I appreciate your comments about the 
performance of the budget during the years that I was OMB 
director in the 1990s, and I did, in 2001, project a surplus of 
over $5 trillion for the upcoming 10-year period. Obviously 
policies changed after that, and when I came back to the Office 
of Management and Budget (OMB), it was a very different 
situation because the money had been spent on things like tax 
cuts, and new benefits, and wars, and then we had a financial 
crisis. What this administration has done is put our country 
back on a path of fiscal responsibility, and I look forward to 
having a chance to discuss that.
    The passage of the Omnibus spending bill in December has 
helped really build on the momentum in our economy now. It has 
really contributed to economic growth, and it has also helped 
us rebuild our international leadership. The agreement, I think 
in another way, demonstrates that we still have the capacity of 
finding common ground on difficult issues. It lays the 
foundation for addressing some of our long-term challenges, but 
there is a lot of work that still remains, and that is why this 
year's budget includes critical investments in both our 
domestic and national security programs.
    Treasury's 2017 budget makes investments in cybersecurity 
and infrastructure and financial intelligence activities, 
including efforts that are directed at ISIL. It also includes 
strategic investments in the IRS so that the agency can return 
to providing the level of customer service and privacy 
protection that Americans expect and deserve. It is important 
to investments in America's small businesses, in distressed 
communities, to help grow the economy and ensure that all 
Americans benefit from growth.
    Finally, the 2017 Treasury budget makes a number of 
investments to support the ability of both our domestic and 
international offices to further Treasury's mission.
    Cybersecurity is an urgent challenge facing the country and 
the Treasury Department. Our budget proposes a new $110 million 
department-wide cybersecurity investment account to enhance 
information technology (IT) management across our bureaus and 
improve our ability to protect against, and respond to, cyber 
threats.
    The proposed investments will enhance electronic 
authentication procedures for access to Treasury digital 
services, expand existing security systems on internal networks 
and public websites, and safeguard data across the Department.
    The fiscal year 2017 budget also includes strategic 
investments in the Internal Revenue Service (IRS) to improve 
service to tens of millions of taxpayers, to reduce the deficit 
through more effective tax administration, and to provide 
privacy protections that Americans expect and deserve.
    I appreciate the increase provided by Congress in fiscal 
year 2016, but as many of you are aware, the IRS remains 
severely underfunded. Despite its crucial role and growing 
responsibilities, the IRS budget is nearly $1 billion lower 
than it was in fiscal year 2010, while the volume of income tax 
return filings has increased by nearly 7 percent. Budget 
reductions at the IRS cost the country billions of dollars each 
year in lost revenue, contribute to inadequate customer service 
for taxpayers, and leave necessary cybersecurity protections 
underfunded.
    A sustained deterioration in taxpayer service, combined 
with diminished enforcement capacity, could create serious 
long-term risks for the U.S. tax system. Our request provides a 
$530 million increase above the 2016 enacted levels. With these 
investments, the IRS will increase staffing for traditional 
taxpayer services, improve the quality of assistance available 
to taxpayers, who call the IRS, and bolster defenses against 
stolen identity refund fraud.
    In fiscal year 2015, full year telephone level of service 
plunged to just 38 percent. With the additional funding that we 
received in 2016, we expect to reach 47 percent this year, and 
with full funding in the 2017 budget, we could bring that level 
back to 70 percent.
    The budget also invests in new IT architecture that will 
enable the IRS to continue to modernize and secure its online 
services, and provide taxpayers with an experience comparable 
to what they have come to expect from financial institutions. 
Treasury's request also proposes an additional $515 million 
increase through a program integrity cap adjustment, to 
increase enforcement of current tax laws, investigate 
transnational organized crime, root out abusive tax schemes, 
and enforce the Foreign Account Tax Compliance Act (FATCA).
    These targeted investments are expected to return roughly 
$6 to the government for every $1 invested and reduce the 
deficit by $46 billion over a 10-year budget window. In fiscal 
year 2017, Treasury outlined key investments in evidence-based 
programs that will support America's small businesses, working 
families, and distressed communities.
    I would like to focus on one in particular. I share the 
concerns that Congressman Serrano raised with regard to Puerto 
Rico. I very much appreciate the committee's inclusion of 
technical assistance authority for Puerto Rico in last year's 
funding bill, but more does need to be done. Puerto Rico's 
economy continues to suffer. Its unemployment remains above 12 
percent. Its debt is unsustainable, and out migration continues 
to accelerate.
    The administration has proposed a comprehensive plan to 
address Puerto Rico's financial challenges, and we encourage 
Congress to act with the haste that this crisis requires with 
legislation that will allow financial restructuring along with 
new oversight, neither of which cost any taxpayer dollars.
    The budget also proposes a $600 million annual allotment 
index to inflation to create a refundable locally administered 
Earned Income Tax Credit for residents of Puerto Rico. Unlike 
Americans living in the 50 States and the District of Columbia, 
residents of Puerto Rico are not eligible for the Earned Income 
Tax Credit (EITC), and it would increase employment in Puerto 
Rico's formal economy, as well as improve the Commonwealth's 
tax compliance and tax revenue.
    Finally, the fiscal year 2017 Treasury budget makes a 
number of investments to support the ability in both our 
domestic and international offices to further Treasury's 
mission. While not under this subcommittee's particular 
jurisdiction, I want to highlight Treasury's international 
programs budget request. It provides a cost-effective way to 
promote international financial stability and to continue U.S. 
leadership in international development, advance national 
security, and expand export markets for American businesses.
    In closing, I want to take the opportunity to thank the 
talented team of public servants at the Treasury Department. I 
am proud to represent them here today, and on behalf of these 
hard working men and women, I want to say how much we 
appreciate the continued support of this committee.
    Thank you very much, and I look forward to your questions.
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    Mr. Crenshaw. Well, thank you, sir. And we will start with 
the questions, and we will observe the 5-minute rule if we can, 
just so we can have everybody ask a series of questions. And I 
think we will have time for another round after that.
    But let me start, Mr. Secretary. I mentioned in my opening 
statement about this new agency called FSOC, which you are the 
chairman of, and as you and I talked last year about one of my 
concerns that there is not a lot of transparency in this whole 
designation process, and I think your point last year was, 
well, it is really--it is kind of a binary decision. We either 
designate somebody or we don't designate somebody.
    And I guess the question becomes, isn't it more important 
to mitigate the risk than it is to simply designate someone. 
And so this subcommittee, last year, adopted some language that 
I proposed to say, before you go out and designate someone, you 
would maybe let them know what FSOC thought the potential 
problem was, give them an opportunity to understand what the 
problem is, and give them an opportunity to actually derisk or 
cure that problem, and still, FSOC would have the final 
authority as to whether to designate that institution as a SIFI 
or not.
    And particularly in terms of nonbanks. It is 
understandable, more so, in the big banks, the Too Big to Fail 
concept, I think that is what gave rise to this whole SIFI 
designation, but when you get into nonbanks, life insurance 
companies, or asset managers, this lack of transparency is 
still a concern, I think, to me and to this subcommittee.
    So talk a little bit about that. I mean, isn't it more 
important? We want to have an economy, we want to have capital 
markets that are safe and secure, and that is more important, 
mitigating the risk there than simply designating people either 
SIFI or not a SIFI. Wouldn't you agree that that really is the 
goal?
    Secretary Lew. Mr. Chairman, the goal of FSOC is to keep an 
eye on risks to financial stability and to, when necessary, 
designate firms for a level of scrutiny that is appropriate to 
the level of risk that they present.
    Since we talked last year about this, and we have had some 
conversations in the middle, we have actually taken steps to 
provide more information earlier in the process to entities 
that are being reviewed. We have very intense back and forth 
conversations with them. They know exactly what the analysis 
is. They present a lot of information, and there are not dozens 
or hundreds of nonbank designations.
    There is less than 10, and they are firms that are very 
large firms. They are amongst the largest financial 
institutions in the world. And I think we ought to remember 
that the financial crisis didn't begin exclusively in regulated 
banks. It actually had its roots, in part, in some nonbank 
financial institutions like AIG, which was designated early on 
in the process.
    We have gone through the process listening and learning as 
we go along. I think we have been very prudent and made only a 
very small number of designations, because this is not an 
authority that should be seen as potentially a risk to small 
institutions that do not present the kind of financial 
stability risks that FSOC was meant to keep an eye on.
    I am happy to continue the conversation. Obviously, FSOC is 
still a young organization. I think it has performed very well 
and very prudently, and I think we are in a better place today 
because we have more visibility into these very significant 
institutions that are now scheduled to be reviewed in an 
appropriate way.
    Mr. Crenshaw. You mentioned that you are having those 
conversations, and particularly, in terms of the nonbanks, and 
there was, I know life insurance companies have been 
designated. There was some concern that some of the asset 
managers, and the question would become, what risk they posed 
overall, in terms of there are other people's money that is 
being invested. They don't seem to pose the same kind of risk, 
but if you are having those kinds of conversations, do you 
agree that the language we added last year, does that make 
sense that as you move forward in these discussions, that you 
would come to a point where you would give credence to that 
language to say we will sit down with you, if you are having 
those discussions.
    And if these are areas of concern, I want to make you 
aware, Mr. Institution, of those concerns, give you an 
opportunity to look at them and say, maybe we can help mitigate 
that risk, and if so, does that make sense to have that kind of 
process so that before you just designate them, you at least 
let them know--it sounds like you are trying to do that now.
    Secretary Lew. Yeah, that----
    Mr. Crenshaw. But why not codify that so that it gives them 
some--I guess some comfort, that they are just not going to 
wake up one morning and somebody says, well, you are now a 
SIFI?
    Secretary Lew. So I think the way the process works, there 
is a great deal of visibility into what the analysis is, and in 
each of the firms that have been designated, the issues are 
core to what the businesses are. So it is not as if they are 
small kind of bolt-on businesses that if you sold this small 
business, it would change the fundamental shape of the firm.
    I do not think that there is a mystery as to why the firms 
were designated. Some firms may choose to restructure their 
business activity because it is in their business interest to 
do so. We already have seen one of the designated firms, though 
they have made the case that it is not at all because of a 
desire to get out of the SIFI designations, but because of a 
core business decision, to separate, become a manufacturing 
company, not a financial services company. That will be 
reviewed by FSOC fully and transparently to the company in the 
next year's review, if those transactions go forward.
    So I do not think there is a lack of transparency or lack 
of information. What I think we do have to be careful about is 
creating more procedural hoops and potential delays. It is 
roughly a 4-year process from the beginning to the end for a 
designation.
    I think that a financial crisis does not give you 10 or 20 
years of warning. I think we have a process that is very 
deliberative, very thoughtful, very iterative, and interactive 
with the parties that are being reviewed, and I would be very 
cautious before putting any overlay of new procedural 
requirements that become the basis for delay or prolonging the 
process.
    There is one party that has challenged the designation in 
court. That will be resolved by a court. That is how the law 
was set up, and the court will decide. But I think to add 
additional procedural hoops would frankly put us at risk of 
missing a target for designation when it is timely to prevent a 
problem.
    As I said in my initial response, it is not like there are 
dozens or hundreds of firms that are on the edge of being 
designated. This has been used very judiciously for only the 
very largest firms, and it is a very long process that permits 
a great deal of visibility by the party that ultimately is 
subject to review.
    Mr. Crenshaw. Well, it seems like then, we tend to agree, 
that it gives you, both FSOC and the institution, an 
opportunity to mitigate that risk. Now, it sounds to me like 
that is what you would like to see happen. You may not want to 
write that down, but that is what you are doing today, and 
again, it is important to mitigate risk, not just to designate. 
You would say, look, if you can mitigate the risk, that is 
probably better than just getting designated and staying there 
forever, which brings up another question, just very briefly.
    After somebody has been designated a SIFI, is there any way 
to get undesignated a SIFI?
    Secretary Lew. Yeah.
    Mr. Crenshaw. Because once again, it seems to me, from your 
standpoint, as the regulator, what you would want to do is to 
say if there is some risk involved, we want to tell you about 
it, we will designate you, but we would really rather you 
mitigate the risk and not be designated, and so I wonder, will 
there ever be a way to get undesignated if all the mitigation 
takes place and the risk has gone away?
    Secretary Lew. There is an annual review of each 
designation based on submissions made by the designated firm, 
and that is a real review, so----
    Mr. Crenshaw. Has anybody ever been undesignated?
    Secretary Lew. No one has been undesignated, but I think 
that there is a full understanding that if there is a material 
change in the business plan, then the basis for being reviewed 
and for the designation being reviewed is very real. We have 
not seen something come up for review where there has been a 
significant change in the business plan. I anticipate that that 
may well happen in the coming period of time.
    It is not our job to decide what the size of the firm 
should be. That is a business decision the firm makes. If their 
level of risk goes down, on review, and they don't meet the 
threshold, that is a basis for deciding the designation should 
not go forward.
    So we do not start out with a desire to have more firms 
designated. We start out with the mission mandated by the act, 
for us to look at whether there are significant risks to the 
financial stability, and if so, to make the appropriate 
designations.
    I think that it has been used in a very cautious way, and 
it is something that we can be proud that we have now created 
the ability to see what is going on at firms that are large and 
have that kind of systemic impact. If firms change their 
business plan and they are no longer presenting that kind of a 
profile, we would review it and make a different judgment, but 
that is really--that is the process.
    It exists, and I don't know whether it will be in my 
tenure, because we are in the last year, but I have full 
expectation that if there is a major change of business plan, 
it would be reviewed, and that determination could go one way 
or the other.
    Mr. Crenshaw. I am encouraged to hear that I think when 
FSOC got created and you became the chairman, nobody knew 
exactly what was going to happen. And I think some of the early 
indications, early actions were that all you can do is say yes 
or no, and now it sounds to me like there is an evolution of a 
process, and we are just trying to help bring that along. And 
if the proposal is to write that down, that doesn't get in the 
way of the overall regulation. We hope we can move in that 
direction. So thank you for that.
    And now I would like to turn to Mr. Serrano.
    Mr. Serrano. Thank you, Mr. Chairman. To your surprise, I 
actually understood that argument. It got a little interesting 
for awhile. I thought we were talking about designating minor 
league ballplayers back to Triple A or something.
    But Mr. Secretary, let me bring you back to what, you know, 
is taking so much time, and rightfully so, in my community, 
both in New York and in the Commonwealth of Puerto Rico. In 
trying to help in the omnibus bill, we gave some technical 
assistance language, including economic forecasting, budgeting, 
cash management, spending controls, information technology 
upgrades, multiyear fiscal planning, revenue, and expenditure 
projections, improving tax collections, and grant management.
    What are you doing with that new authority? What progress 
has been made? And is there any new authority the 
administration needs and is looking for?
    Secretary Lew. Congressman, as you know, before that 
authority----
    Mr. Serrano. And I want to take this opportunity again to 
thank you for all you have done. You have understood and, I 
think, you have made many, in the administration, understand 
the importance of not letting one of the territories fall 
apart. In the past, I can tell you as an appropriator, and this 
chairman happens to be very good at it, and the full committee 
chairman in helping us, but the territories are seen as 
something else.
    This morning I was watching one of the major stations, and 
they are saying, well, Hillary has won this, and Trump has won 
that, and Bernie has won that, of course, we are not counting 
the territories. I say, well, why not, they have delegates, 
too, and they gave delegates to the candidates, and that is 
part of the attitude. We never count the territories.
    Secretary Lew. Congressman, my view, and the view of the 
President is that we are talking about what happens to 3-and-a-
half million American citizens, many of whom are veterans, many 
of whom have served their country, all of whom deserve the same 
attention that Americans living on the mainland do, and that is 
how I have approached it, in terms of what resources we put 
into dealing with it.
    Before the law was passed, we were working closely with 
Puerto Rico for quite a period of time, informally advising 
them, but doing it within the limits of what we could do with 
an authority that did not give us the ability to provide them, 
kind of in-place technical advisers. I think that was helpful 
to them, but frankly, they had a need for more.
    Since the law was enacted, we have assigned technical 
advisers, the kinds of people that we use in our international 
programs in the Office of Technical Assistance who are very 
skilled at going into a government, seeing where problems are, 
helping to design solutions, train people to do the work, and 
then leave, and leave in place an infrastructure that is 
stronger.
    As I travel around the world, I cannot tell you how much 
praise I hear for the work that those folks do. Now, Puerto 
Rico is part of our country, so this is not an international 
program. We did not have the authority to send people into a 
subdivision of the United States. The law gave us that ability. 
We now have a team there that is working on a range of issues, 
including revenue collection, including keeping their books in 
a way that is more straightforward, and we are looking for 
opportunities of how to expand it.
    In general, these are small teams. You know, you go to a 
foreign country and we will have 2 or 3 people there, and they 
do an enormous amount of work. This is something we are 
dedicating the resources that we need, and we will find the 
people as the needs expand.
    I have a lot of confidence that we will do good 
constructive work, but I do not want to suggest that technical 
assistance alone can solve the problem. There is a deep problem 
in Puerto Rico right now, which is one of insolvency. There is 
more debt than the Commonwealth can repay. The Commonwealth's 
budget is heavily burdened by debt payments and healthcare 
payments, and that is why the proposals we made on Medicaid 
reimbursement are so important.
    The time-critical issue right now is that in May and July, 
Puerto Rico faces very large bond payments, which they do not 
appear to us to be able to meet. Action needs to be taken in a 
timely way, so that in the May, June, July period, we do not 
see a disorderly unwinding of Puerto Rico. Not only will that 
endanger the well-being of 3.5 million Americans, but it puts 
at risk all the bondholders who will not benefit if the island 
does not have money to pay back their obligations.
    So an orderly workout process, with an oversight authority, 
is critically important. I appreciate the Speaker's commitment 
to have action taken in the first quarter of the year. We have 
been working closely with everyone on this, but the time to act 
is now.
    Mr. Serrano. Well, you personally answered one of my other 
questions, which was, within which you are allowed to tell me 
in public, what you are allowed to tell us in public, what role 
are you playing in the Speaker's promise, which we know he will 
hold and keep, to have something ready by the end of March, or 
the beginning of April?
    Secretary Lew. Well, since the end of last year, we have 
provided technical assistance to any committee of Congress that 
was looking to deal with the problem, the crisis in Puerto 
Rico. I just have to say, the crisis is not a future one. It is 
a present one. Right now schools are closing, hospital wings 
are closing, millions of people are looking at whether they can 
leave the island. It is at a rate that is not sustainable. The 
economy will just be destroyed if people leave at the rate that 
they are leaving, and we are providing technical support.
    We cannot write the law. The committees will have to write 
the law. I certainly hope that the process leads, in the next 
weeks, to the kind of process that all stakeholders can trust 
as being fair. We have never advocated a one-size-fits-all 
approach. We understand that there are different interests that 
have to be balanced, but it has to be informed by legislation 
because there is no structure for the orderly restructuring of 
Puerto Rico's debt.
    It does not have bankruptcy protection. There is nothing in 
the contracts that provides for it. This would go through the 
courts, and it would take 5 or 10 years to be resolved, and in 
that time, Puerto Rico's economy would just be destroyed.
    Mr. Serrano. Mr. Chairman, just in closing, am I to gather, 
from your information, from what you told us, that there is a 
sense of urgency on the part of many Members of Congress, some 
who, perhaps in the past, were not engaged with Puerto Rico in 
any way, that this is an important issue that has to be dealt 
with?
    Secretary Lew. I have to say, Congressman, having talked to 
probably over 100 Members of Congress, since November, on 
Puerto Rico, the level of urgency that I perceive today is much 
broader on both sides of the aisle. There is an understanding 
that these May and June payments are just not manageable. 
Obviously, the challenge is getting through the congressional 
process with something that can get bipartisan support. I hope 
that that can be achieved within the next few weeks.
    Mr. Serrano. Thank you. Thank you, Mr. Chairman.
    Mr. Crenshaw. Thank you. Mr. Yoder is recognized.
    Mr. Yoder. Thank you, Mr. Chairman. Mr. Secretary, welcome 
to the committee. I appreciate your testimony. I certainly 
appreciated the dialogue you were having with the chairman 
regarding SIFIs, in particular, mutual funds. And I think the 
point that, you know, I would like to associate myself with 
comments the chairman made and just add to that. You know you 
hold, Mr. Secretary, and you know, government regulators hold 
the power.
    Over 90 million Americans have funds invested in mutual 
funds. If you have got a pension or a 401(k), this could affect 
you, and it is a pretty significant impact on a lot of folks' 
retirements. Wall Street Journal wrote last year that it could 
have a 25 percent reduction of your ultimate retirement 
benefits. I mean, that is huge, to knock down someone's 
retirement benefits by 25 percent. And you also end up making 
those mutual funds, which many of us believe aren't banks and 
aren't going to cause a meltdown, you make them now back up 
other SIFIs that might actually cause a problem. Now those 
mutual funds are potentially at risk.
    So I think one could argue, Mr. Secretary, that you could 
actually make our constituents' retirement accounts more at 
risk, not only less, and so I just want to reiterate that.
    Secretary Lew. Congressman, if I could just----
    Mr. Yoder. Yeah, please.
    Secretary Lew [continuing]. Respond quickly.
    Mr. Yoder. Real quickly.
    Secretary Lew. We have been working on asset managers for 
quite a while now in FSOC. We started out by reviewing 
individual firms. We made the decision that what we really 
needed to do was look at activities that presented risk. We are 
continuing that. The Securities and Exchange Commission (SEC) 
has some draft rules out. Our analysis is obviously going to 
take cognizance of the work that the SEC is doing.
    But the questions that we have to ask are: Is the migration 
of enormous amounts of financial resources into whether it is, 
mutual funds, or hedge funds, or other kinds of nontraditional 
financial institutions, creating the kinds of risks that could 
lead to real financial stability questions? That is the 
question we are asking.
    Mr. Yoder. And I think that is a very appropriate question 
to ask, and I think many, Wall Street Journal and others, have 
analyzed that and said the answer is no, and that actually by 
burdening 90 million Americans with these new regulations, and 
capital requirements, potentially, you actually lessen their 
retirement outcomes. Right, so that is a cost that they are 
going to bear if you go forward because----
    Secretary Lew. The financial crisis was not good for 
people's----
    Mr. Yoder. Well, but--
    Secretary Lew [continuing] Retirement accounts.
    Mr. Yoder. Right, but----
    Secretary Lew. And that is probably----
    Mr. Yoder. But punishing people----
    Secretary Lew. And that is what we have to try to avoid.
    Mr. Yoder. But punishing people that weren't part of it, 
you know, our----
    Secretary Lew. We are not trying to punish anyone----
    Mr. Yoder. Well, it would be----
    Secretary Lew. We are trying to make sure they do not get 
punished----
    Mr. Yoder. Well, if you punish my constituents by making 
them have to back up other risky transactions, and their 
transactions aren't risky, you put them in that same pool, now 
90 million Americans, their retirement accounts are at risk 
because they are backing up other SIFIs, number one, and number 
two, the capital requirements then, according to the Wall 
Street Journal, could reduce their net retirement benefits by 
25 percent, so we can agree to disagree, but I want----
    Secretary Lew. We do not have a plan, so it is not like----
    Mr. Yoder. I understand. I understand.
    Secretary Lew [continuing]. I am sitting here advocating 
something. The question is when we have to ask----
    Mr. Yoder. Too many other things to make sure you are 
taking in consideration.
    Secretary Lew. Yeah.
    Mr. Yoder. OK. Mr. Secretary, it is my understanding the 
Treasury Department has failed to comply with the House 
Financial Services Committee's May 11, 2015, subpoena for 
records pertaining to the administration's debt ceiling 
contingency plan, which records were first requested in 
December 2013, and the House Financial Services' Too Big to 
Fail investigation first requested in June 2013.
    It is my understanding the Treasury Department has also 
failed to comply with several of the Financial Services 
Committee's information requests, including those pertaining to 
FSOC designation processes.
    Is the Treasury Department withholding subpoenaed and 
requested records from the Financial Services Committee?
    Secretary Lew. There are conversations going on now, as 
there always are, when there are subpoenas' between counsel, 
and they are trying to work through these issues.
    Mr. Yoder. So Mr. Secretary, you have not denied that you 
are withholding documents, and so will you----
    Secretary Lew. No, I said we are engaged in a process with 
the committee.
    Mr. Yoder. Will you commit to our committee, to this 
Financial Services Committee today to promptly producing all 
the subpoenaed requested records?
    Secretary Lew. As always, there are questions of what is 
appropriate, and that is what the counsels are working through.
    Mr. Yoder. So you won't commit to producing all the 
documents?
    Secretary Lew. Well, we only commit to doing what is 
appropriate.
    Mr. Yoder. Well, part of the requirement is that the 
committee's request require, either your counsel to either 
certify that you produced all the records located, or after 
conducting a search, reasonably calculated to locate all 
responsive records, have you and your counsel made the required 
certification?
    Secretary Lew. I will have to check with counsel where we 
are right now in the process.
    Mr. Yoder. Do you as Secretary, do you intend to ever 
certify completion?
    Secretary Lew. Congressman, there are conversations going 
on now, as they always do, when there are requests like this, 
and when there are subpoenas. I am not going to answer a 
hypothetical. We hope----
    Mr. Yoder. That is a very direct question. Will you ever 
respond to the Financial Services Committee subpoena?
    Secretary Lew. Well, we have discussions going on.
    Mr. Yoder. I understand there is discussion. We are having 
a discussion right now.
    Secretary Lew. Right.
    Mr. Yoder. And I am asking you a direct question.
    Secretary Lew. The outcome----
    Mr. Yoder. Can you tell this committee will you comply?
    Secretary Lew. Based on the outcome of those conversations, 
we will take appropriate actions.
    Mr. Yoder. So you won't tell us whether you will comply.
    Secretary Lew. Well, I----
    Mr. Yoder. Even if you are not going to comply, you still 
certify--I mean, when does this end? When will you resolve this 
issue? I mean, this has been going on since 2015. Some of these 
requests are 2013.
    It is very hard for the House and the administration to 
work together if we can't get cooperation in responding to 
congressional subpoenas.
    Secretary Lew. Yeah. And that is why----
    Mr. Yoder. It is very frustrating to the process. It breaks 
down trust and the ability to do our jobs.
    Secretary Lew. The appropriate place for that conversation 
to take place is where it is taking place. We are trying to 
resolve these issues. I certainly am hopeful that we will be 
able to resolve them. I just cannot respond to a hypothetical.
    Mr. Yoder. Well, they are not hypotheticals. They are 
direct questions. I wish, on behalf of the Financial Services 
Committee and our efforts, to understand these issues, that you 
would comply with these subpoenas and do so in a timely fashion 
so we can do our job, and I appreciate your testimony. Thank 
you, Mr. Chairman.
    Mr. Crenshaw. And I think you know, we expect you to do 
this, and we appreciate it.
    Mr. Quigley.
    Mr. Quigley. Thank you, Mr. Chairman. Welcome, Secretary 
Lew.
    Secretary Lew. Good to be here.
    Mr. Quigley. Deep breath. In January, Secretary Kerry said 
that--he indicated that if Iran is found to be funding 
terrorism, they are, quote, ``going to have a problem in the 
U.S. Congress.'' Can you provide an update on Iran's current 
terror finance apparatus and speak to what the Treasury is 
doing to monitor and follow up with sanctions on Iran?
    Secretary Lew. So, Congressman, we, as you know, have 
continued to maintain all the non-nuclear sanctions, even after 
Iran complied with the nuclear agreement, so the sanctions on 
terrorism, the sanctions on regional destabilization, the 
sanctions on human rights violations remain in effect.
    Treasury has the responsibility to implement many of those 
sanctions, and we have continued to review, in each area, to 
identify and designate parties. We have designated a number of 
parties involved with Hezbollah. We are continuing to look at 
these activities. As we build a record that warrants 
designation, we will continue to take actions.
    The nuclear agreement was very important. It set back 
Iran's development of a nuclear weapons program, and I think, 
has greatly added to the security of both the United States and 
the world. But Iran still engages in very malign activities, 
including support of terrorists. We will continue to find the 
places where we have the ability to take action.
    I would just note that even when the most severe nuclear 
sanctions were in place, it was very difficult to stop the flow 
of all money to terrorists and to regional destabilization, and 
we are going to continue to work on it as we did before.
    Mr. Quigley. Yeah, I mean, can you evaluate, to the extent 
you can publicly, the agency's ability to monitor this? It is a 
complicated world. Iran is elusive.
    Secretary Lew. Well, look, we have an excellent group of 
intelligence analysts and investigators who, I think, do just 
an incredibly good job. They punch way above their weight. They 
are broadly respected in the national security community for 
that. They can only operate based on information that they have 
access to.
    It is hard information to get. It requires a cooperation 
with our broader intelligence community, which is very good, 
very strong, and people work day and night and weekends. They 
are committed. There is a passion in our team.
    Mr. Quigley. I assume that after the Iran deal, and the 
first level of compliance, that there was a lot more work to be 
done, given the anticipation. It wasn't as much money as most 
had said that was going to be released or made available 
because it was tied up in so many other things, but are you 
gauging more activity after this compliance in effect, that 
resources, or more resources, are available to Iran?
    Secretary Lew. Well, actually very little of the money has 
flowed back to Iran at this point. It is something that we hear 
from both Iran and other countries about, that banks around the 
world are being very slow to respond to requests for money that 
is freed up. So the pace has not been a rapid one.
    The amount, as you noted, is much smaller than the kind of 
headline number because there is only about $58 billion of the 
roughly $100 billion that is theoretically available that could 
go back to Iran, because it is tied up overseas in ways that it 
cannot be released. Iran's own estimate is more like $30 
billion than $50 billion, and very little of that has flowed 
back at this point.
    They have enormous domestic needs in Iran. When they talk 
about resuming oil production at historic levels, they are 
going to have to spend a huge amount of money rebuilding their 
infrastructure for them to get back even close to old levels of 
production. They have been withholding salaries in sensitive 
areas like military salaries because they have been strapped 
for cash.
    All evidence we have is that they are still under enormous 
financial stress. So I think, that the first dollars that go 
back, there are going to be a lot of domestic demands, so the 
money will not just flow into malign purposes. But I have to go 
back to what I said. Even when they were under the most severe 
nuclear sanctions, they were still finding resources to put in 
to support terrorism and regional destabilization, so I do not 
think we can assume that is going to stop, but I do not think 
it is going to grow to a level that is materially different 
than where it was, and we are going to do our level best to 
shut down the way the money flows to support terrorism as we 
have been doing over time.
    Mr. Quigley. Very good. Thank you. My time is expired. 
Thank you, Mr. Chairman. Thank you, Mr. Lew.
    Mr. Crenshaw. Before we turn to Mr. Amodei, we have been 
joined by the chairman of the full committee, Mr. Rogers, and I 
would like to ask him if he would like to make a statement.
    Mr. Rogers. Thank you, Mr. Chairman. I apologize for being 
late. We have got simultaneous hearings going on with these 
subcommittees, and I just left one across the hall.
    Mr. Secretary, it is good to see you. It is good to have 
you here, and I apologize, Mr. Chairman, again for running late 
here.
    Treasury's budget, perhaps more than any other agency, 
should be viewed through the lens of the President's entire 
budget request and the state of our Nation's economy. As has 
been highlighted in recent months, deficit reduction and the 
reduction of our national debt is critical to our long-term 
economic and national security interests. The annual deficit 
reached a high water mark at $1.4 trillion in fiscal year 2009, 
has since fallen to under $439 billion in fiscal year 2015, 
largely, I might say, due to the hard work of this committee 
and this Congress.
    Since 2009, we worked to reduce discretionary spending by 
around $195 billion. Of note, mandatory outlays, including debt 
interest, has continued to increase significantly during the 
same time period. If we want to continue to reduce our deficit 
and chart a course for long-term economic security, we have got 
to get the mandatory side of the ledger under control.
    The President's 2017 budget request proposes an increase of 
$2.5 trillion in Federal spending and $3.4 trillion in tax 
increases over the next decade. Unfortunately, once again, 
there is sadly no leadership in addressing the challenges 
associated with ballooning mandatory spending.
    If we were to blindly follow the President down this path, 
by 2020, our country would spend more money on interest 
payments on the national debt than we would on protecting and 
defending our Nation. This threatens to squeeze out all of the 
worthwhile programs that many of our constituents care for, 
from transportation projects and medical research, to housing 
assistance, and homeland security.
    Mr. Secretary, I hope that you can shed some light on the 
administration plans to address what, I think, is a looming 
crisis.
    The 2017 budget request for Treasury is $13.1 billion. That 
is a $1.2 billion increase over current levels. The majority of 
that proposed increase would be utilized by the IRS to 
implement Obamacare and the Foreign Account Tax Compliance Act 
for program increases and relies on a discretionary cap 
adjustment. There are a number of issues with this request, but 
two, in particular, stand out.
    First, the bipartisan budget agreement does not allow for a 
discretionary cap adjustment for the IRS. As you know, that 
would require a statutory change outside the jurisdiction of 
this committee that has been rejected by both the House and 
Senate Budget Committees for 5 consecutive years.
    If the activities funded by the discretionary cap 
adjustment are important to the administration, then they 
should operate within the amount allowed under the bipartisan 
budget agreement. Mr. Secretary, the IRS needs to prioritize 
its spending like every other Federal agency.
    Second, I am very disappointed to see that the IRS budget 
proposal eliminates three administrative provisions that have 
been enacted on a bipartisan basis for several years. Since the 
IRS targeting and spending scandals, appropriations bills have 
included prohibitions against targeting U.S. citizens for 
exercising their First Amendment rights, targeting groups for 
regulatory scrutiny based on their ideological beliefs, and 
making videos without advance approval. We are dealing with 
taxpayers' dollars here, and these provisions lay out what most 
people would consider commonsense policies.
    Finally, let me end my remarks, Mr. Chairman, on a positive 
note, by thanking you for maintaining the $5 million increase 
Congress provided last year to the Alcohol and Tobacco Tax and 
Trade Bureau, as you mentioned, I think, in your earlier 
statements. This relatively small office at Treasury does great 
work on behalf of the many distilleries in my State and around 
the country which support a booming industry nationwide. This 
additional funding will help reduce the average processing time 
of distilled spirits' labeling applications.
    So Mr. Secretary, it is good to have you here. Thank you 
for being here.
    Mr. Crenshaw. Thank you, Chairman Rogers. And now let's 
turn to Mr. Amodei, and after that Mr. Rigell.
    Mr. Amodei. Thanks, Mr. Chairman.
    Mr. Secretary, I want to talk with you just for a minute 
about the health of community banks and CFPB and all that other 
sort of stuff. We have never met, so you have no reason to be 
familiar, but I represent the part of Nevada that isn't Las 
Vegas, which translates to pretty rural neck of the woods, 
which translates to community banks, small credit unions, kind 
of an important part of our financial infrastructure.
    And I have got some information here that indicates that 
after the passage of Dodd-Frank, we have had a pretty rapid 
decline in the number of community banks in the country and 
that some of this is attributed to the actions of CFPB, which 
hasn't, as you know better than I do, the folks that are on 
that, interesting groups of folks, but I am looking at a study 
here that is by the Harvard Kennedy School, the ``State and 
Fate of Community Banking,'' which was February of last year 
that it came out and talks about some of the things they 
attribute it to. And a lot of it, a lot of the stress they 
attribute in the industry is to a regulatory one-size-fits-all 
policy, if you will, that is centered in CFPB.
    And so you are saying, well, OK, so they are not in touch 
or whatever, what is the problem, that sort of thing, but yet 
when you look at the information, in the report and who it is 
attributed to, community banks have lost market share at a rate 
double that before the bureau's existence. Information is in 
the Harvard Kennedy study. The study is based on data provided 
by the FDIC whose chairman sits on FSOC. According to CFPB 
itself, community banks are, quote: A lifeline to hard working 
families paying for education, unexpected medical bills, and 
homes.
    The loss of FSOC voting board, Federal Reserve Board of 
Governors, the loss of community banks could result in total 
loss of credit in some rural and small markets.
    And I will just do one more: Interpersonal relationships 
are the backbone of community bank lending, according to all of 
the above authorities, and CFPB promulgates one-size-fits-all 
rules that remove the flexibility for community banks and 
credit unions to use judgment and work with their neighbors on 
lending. They do this, and this is, I think, the important 
part, in spite of the fact that community bank default rates 
hover around 3 percent, as opposed to larger bank rates of 10 
percent.
    And so I am sitting here trying to process all this, and it 
is like--I guess first question is--I mean, when FSOC talks 
about significant economic harm and you talk about what has 
happened with community banks, even if you say, well, they are 
consolidating, it is OK. It is like, hey, that is a trend that 
for those of us who care about small banking available, and 
other than the major financial centers, that appears to be 
going on without concern by the institutions that are below 
you. Tell me, how am I wrong in that analysis?
    Secretary Lew. Congressman, we share the view that 
community banks are very important to our communities, and I 
think the history here goes back before the financial crisis. 
There had been a pattern of consolidation beginning, and it has 
continued. Some of it has to do with the structure of the 
industry.
    I think if you look at the whole range of prudential 
regulators, they have each taken a view that there should not 
be a one-size-fits-all approach, that where there are 
differences that are material because of size, there ought to 
be a recognition of that, and the flexibility that is built 
into many of the statutes should be exercised.
    I think that when it gets to issues of consumer protection, 
some of them are not size specific. I mean, to the extent that 
there is a clear way to put into plain English what a mortgage 
looks like so people know what they are signing, it is not a 
big or a small bank issue.
    The capital requirements for small banks, community banks 
are not the same as they are for large institutions, and we 
have been open to ideas like having less frequent reviews of 
smaller banks because we do understand that there are 
differences.
    I have to say, in all candor, that there are a lot of large 
financial institutions that kind of present themselves as if 
they are community banks, and they are not. There have been 
proposals, for example, to change the threshold for enhanced 
prudential standards to $500 billion. That is not a small bank, 
and I think you know that. So we have to be really talking 
about small banks when we are talking about community banks.
    Mr. Amodei. Thank you for that. And I apologize for not 
managing your time the same way the chairman is getting ready 
to manage mine.
    So where I would like to end it, if I might, Mr. Chairman, 
is just to say I would like the ability to return to you 
outside of the committee process and say, here are some 
examples of what we think----
    Secretary Lew. Sure.
    Mr. Amodei [continuing]. And some of it may be just 
communications between CFPB and the others, and kind of get 
your response to those.
    Secretary Lew. I would be happy to respond.
    Mr. Amodei. Thank you very much, Mr. Chairman. I yield 
back.
    Mr. Crenshaw. Thank you.
    Mr. Rigell.
    Mr. Rigell. Thank you, Mr. Chairman.
    And, Secretary Lew, thank you for being here and for your 
testimony today.
    I appreciate Chairman Rogers bringing up, though, our 
overall fiscal condition. It caused me to seek this office 
about 6\1/2\, 7\1/2\ years ago, my first, because of my concern 
about our fiscal trajectory and our condition. And that is what 
I want to discuss with you briefly here.
    Let me first say that I believe that both sides have 
contributed to this. I think the evidence is pretty clear on 
that. As a fiscal conservative and as a Republican, I believe 
that we fought for this a lot harder, though, and I want to 
walk through that just a little bit.
    If I look at where we are on this growth, about 6 years of 
growth, our economy is cyclical, we are probably due for some 
type of correction here in the future. And then interest rates, 
I am convinced, can only go one way, they can only go up.
    And all of this is really troubling to me. I think the 
consequences of us not addressing this are far more severe 
than, I think, most leaders in Washington. And I don't say that 
with any hubris, like I have got some special insight into it. 
In fact, I hope I am wrong on all of this. But the evidence, I 
think, doesn't point to that.
    Here is a quote by then Senator Obama in 2006: ``America 
has a debt problem and a failure of leadership.'' I mention 
that because I am mindful of the feeling that I had when I left 
the State of the Union address not long ago, and I thought 
about what he didn't say. He didn't really address our fiscal 
situation. I think he has failed to grasp our fiscal situation. 
I don't say that in a partisan way. He is my President right 
now, right, and I was really disappointed in my President. I 
don't think history is going to be kind to us.
    And I am going to give you time to respond to this and 
maybe you can tell me: Congressman Rigell, it is not as bad as 
you think it is. I am not sure how you can work through that, 
though, because every trend is going the wrong direction. And I 
am convinced that your administration, the administration, and 
I would respectfully submit that you as the Secretary of the 
Treasury have a duty to raise the alarm level here and put more 
a sense of urgency about this.
    And I want to give you some time to respond. And thank you 
for being here.
    Secretary Lew. Congressman, I think the economy is in far 
better shape than you have just described. I think that we are 
seeing very strong consumer demand, we are seeing housing come 
back, we are seeing job growth at very sustained, strong 
levels.
    We have a lot more work to do, but when it comes to our 
fiscal condition, you cannot compare where we are today to 
where we were 7 years ago, when we had a financial crisis and a 
recession driving the deficit, after a period of just building 
it up through policy decisions, and we have reduced the deficit 
from 10 to 2.5 percent of GDP.
    Mr. Rigell. Let me say this. And I only cut you off because 
our time is so limited. Every administration official that has 
testified here, at least the ones that I have heard, there is 
always a backward looking--and, look, let's just say I--let's 
just even say hypothetically--I don't--let's just say I agree 
with that. What I am not seeing is this really fighting for 
mandatory spending reform. It is just not happening. It just 
isn't.
    Secretary Lew. So, Congressman, if you look at the 
trajectory under our budget, even under the baseline for the 
next 10 years, we have restored stability to a situation that 
was out of control.
    There is much more policy that needs to be discussed. It is 
not all mandatory spending. There are tax issues as well. We 
have done a lot to reduce the deficit. We have reduced 
discretionary spending. We have solved some of the tax 
problems, though not all of them. While I know we do not agree 
on the Affordable Care Act, through the Affordable Care Act we 
reduced spending on healthcare programs.
    So we have done a lot over these 7 years. We now have a 
foundation to work together. If we could get into a space for a 
bipartisan conversation like we had in the 1990s, perhaps we 
can make more progress----
    Mr. Rigell. Well, part of this, the President has got to 
lead and make the case with every American that for us to get 
out of this, that there has to be the thoughtful and 
substantive reform on the mandatory side. I have not seen it.
    Look, I had an opportunity to speak to him once privately. 
I did. He said: Scott, what is on your mind? I said: Mr. 
President, we are not doing enough on this, we are not doing 
right by our children. And he is not fighting for it. I just 
haven't seen it.
    And I know that the clock is ticking on the 
administration's time, but I would implore you, just as a 
fellow American, to make this case, because if we don't, we get 
on the flip side of debt, and we are about there right now, and 
then your lender starts telling you what to do.
    I thank you. And out of respect for my chairman, I think I 
will yield back.
    But thank you, Mr. Chairman.
    Secretary Lew. If I can just take 30 seconds.
    Mr. Crenshaw. Please.
    Secretary Lew. I have spent most of my professional life 
trying to point this country in the right direction on a fiscal 
path. I presided over three surplus budgets. No other living 
budget director, no past budget director can say that. I 
understand the importance in the right time of having a 
balanced budget.
    Right now if you asked me what is the most critical thing 
for the economic future of this country, it would be getting a 
bipartisan consensus on things like building infrastructure, 
dealing with immigration reform, doing the things that would 
build the foundation of our economy. Those are immediate 
pressing needs. I actually think we have some time to deal with 
these other issues.
    Certainly there is more work to do on the entitlement side, 
there is more work to do on the tax side. I think we have gone 
too far on the appropriations side. It was meant to trigger 
action on the other issues. It has incrementally had that 
effect. That is how we got an agreement last year and 2 years 
ago.
    So I think if you look at where we have come over the last 
5 years, in pieces we have put together many of the elements of 
what was once called a grand bargain. We have more work to do. 
We do have more work to do. But I think we are in a very strong 
place going forward.
    Mr. Rigell. I thank you for your testimony.
    And I thank the chairman for giving you that extra time. 
Thank you.
    Secretary Lew. Thank you.
    Mr. Crenshaw. Thank you.
    And now I would like to recognize Ms. Herrera Beutler.
    And we are glad to see you back, your smiling face.
    She has been dealing with some family health issues.
    And we welcome you. And please proceed.
    Ms. Herrera Beutler. Thank you, Mr. Chairman. It is good to 
be back. And everything is going well at home. So it is 
exciting to get to come back and be a part of this hearing this 
morning, although I will tell you, some of these issues seem 
like repeats, like a little bit like Groundhog Day. I am going 
to switch gears a little bit and see if I can't break myself 
out of the Groundhog Day feel.
    Thank you, Mr. Secretary, for coming. A number of my 
colleagues have written you and Ambassador Froman about 
concerns relating to the data localization provisions of TPP 
that exclude the financial services industry, and I know you 
have commented on this. I understand you are working with the 
Trade Representative and regulators in the industry on the 
issue, and I just wanted to see if you could update the 
committee on where your efforts are.
    Secretary Lew. I am happy to.
    Data localization is something that as a general principle 
we have opposed in trade agreements. In things like electronic 
payments, I put an enormous effort into making sure there were 
not data localization provisions, because it was pure and 
simple a trade barrier. It was either making it more expensive 
for a firm from the United States to do business there or it 
was a way to create local jobs, but it was not appropriate.
    In the case of financial services and prudential 
regulation, there is a very difficult issue, and it is one that 
I think there is a reason to be cautious on. That is, that 
prudential regulators need access to information in a timely 
way, and our experience has been that there have been moments, 
particularly in moments of crisis, when prudential regulators 
could not get the information they needed from international 
sources.
    Because we have a principled position that data 
localization in general is bad, we are working to see if there 
is a way to thread this needle to make sure that the prudential 
concerns can be addressed without having it become something 
that could become a real problem for financial services 
companies.
    It is a hard needle to thread. The regulators are focused 
on it. We are trying to find a pathway there. And I have put a 
fair amount of my own effort into trying to make sure that it 
is taken very seriously.
    Ms. Herrera Beutler. So you think we could be somewhat 
close to reaching----
    Secretary Lew. So, first we have to separate TPP from some 
kind of future policy. TPP is locked, and what you can do to 
change TPP, obviously, is very limited. There is the 
possibility of having some kind of side agreement, but I do not 
want to exaggerate what can be done with the 11 countries in 
TPP.
    We are looking to see is there something, particularly 
going forward, that would inform future discussions on things 
like the Transatlantic Trade and Investment Partnership (TTIP) 
and any other binational trade agreements, and that is where 
the vast number of countries would come into play.
    It is a complicated issue, so I am going to be cautious 
rather than being overly optimistic. But I can tell you that I 
have gotten the attention of all the regulators, they are 
looking at this, they are trying to find a way to thread the 
needle, and we are going to do the very best we can to work it 
through.
    Ms. Herrera Beutler. Good. Thank you.
    Switching again, recognizing the importance of protecting 
the financial services sector from cyber attack, which is a 
tall task. Do you agree there should be a coordinated approach 
among the regulatory agencies and key stakeholders to 
cybersecurity regulation across the financial services sector? 
Because what we are seeing is siloed efforts, everybody's 
coming up with their own solution, and with technology that is 
not going to work. So I would like your comment on that.
    Secretary Lew. Well, I actually do not think that it is 
true that they are all coming up with their own solution. There 
has been a broad embrace of the National Institute of Standards 
and Technology (NIST) standards as being best practice, and 
there is a lot of coordination and discussion not to have 
conflicting standards.
    I think where the question comes up is each prudential 
regulator has its own supervisory approach, and how you take 
the standards and apply them in a supervisory context is 
something that is historically a challenge to coordinate, 
because each has slightly different parameters.
    There are conversations going on to try and do as much as 
can be done to deconflict there. I have asked my deputy 
secretary, Sarah Bloom Raskin, to take the lead for Treasury 
coordinating the cyber issues across the Department. She has 
put an enormous amount of time and energy into working both 
within the Department, where we have very substantial concerns, 
but also across the regulatory community. We get very senior-
level participation in these coordinating meetings, and we now 
have legislation that gives us the ability to work more with 
the community outside the private sector.
    So it is a concern that we share. I cannot tell you that 
there will be no differences between how different prudential 
regulators do their oversight of banks, but there is very much 
an attempt to get best practices.
    Ms. Herrera Beutler. So it seems like you are saying that 
they are going to approach it from a different side from the 
oversight position, not that they are going to talk about 
creating their own standards. Is that the clarification?
    Secretary Lew. That is certainly where the goal is, to have 
as close to single standards as possible. We do not get to 
impose on prudential regulators their standards. It is really 
what they do by reference to a single standard like the NIST 
standard.
    Ms. Herrera Beutler. Got it. Got it.
    Secretary Lew. It is a serious question, and I appreciate 
it.
    Ms. Herrera Beutler. I think some of my challenges is we 
have heard, like, whether it is futures trading or whether it 
is the standards--we have heard talk of different actual 
standards, not we are going to approach the way we administer 
it differently. And as you can imagine, it is hard enough in 
industry, but if the Federal Government can't within one agency 
have the same standards, we're going to have challenges.
    Secretary Lew. Part of the challenge is there is not a one-
size-fits-all approach, because different platforms have 
different characteristics and requirements. So I think there 
will be inherent differences. The question is, do they all 
reference back to the same kind of core principles, which I 
believe they do, and if they do not, we need to keep working on 
it.
    There will be differences. Securities and banks have 
different systems because they do different things. So I do not 
want to suggest that we would have some arbitrary one-size-
fits-all approach, that would not make sense. But the goal is 
to have as little conflict as possible.
    Ms. Herrera Beutler. Thank you. I yield back.
    Mr. Crenshaw. Thank you.
    Mr. Graves.
    Mr. Graves. Thank you, Mr. Chairman.
    Mr. Secretary, good to see you. Thank you for appearing 
before us. We are always grateful for your thoughtful and 
thought-provoking responses each and every time.
    I have about six questions. Most of them are very redundant 
and I suspect your responses may be redundant as well, but that 
is OK. I think it is important for the record.
    Following up on Mr. Yoder's thoughts as well and our role 
as providing some accountability and assisting the Financial 
Services Committee as well in some of their responsibilities, 
could you just answer for us, why are you withholding 
subpoenaed internal Treasury records pertaining to the 
administration's debt ceiling contingency plans?
    Secretary Lew. So, again, as I responded earlier, we have 
conversations going on with the committee, our counsel and 
their counsel, and we are continuing to hope to resolve these 
issues.
    Mr. Graves. Thank you. And then the same, why are you 
withholding subpoenaed records pertaining to the Financial 
Services Committee's ``Too Big to Jail'' investigation?
    Secretary Lew. So I do not want to pretend to be deeply 
familiar with every request. I have to get back to you on that.
    Mr. Graves. OK.
    Secretary Lew. I mean, our general approach is always to 
work with the committee and try and find an appropriate 
accommodation. But I will check on that.
    [The information follows:]

    Treasury is committed to working with Congress, including 
the House Financial Services Committee to provide the 
information needed to fulfill its oversight role. We have been 
working with the Financial Services Committee for several 
months to understand and accommodate its priorities related to 
its inquiry into criminal prosecutions of large financial 
institutions. We have made responsive documents available to 
the Committee.

    Mr. Graves. OK. Thank you. And very similar, why are you 
withholding the records the committee has requested pertaining 
to the processes the FSOC uses to designate and de-designate 
nonbank financial institutions as systematically important 
financial institutions?
    Secretary Lew. Well, obviously, I have testified widely on 
the subject, including here this morning, and we work with the 
committees to try and provide appropriate information.
    Mr. Graves. Thank you. And then one other. On what legal 
basis--and this is maybe just sort of bringing it to an end--
what legal basis are you withholding these records from the 
Financial Services Committee?
    Secretary Lew. So I am really going to have to just say we 
are leaving these discussions to the appropriate conversation 
between lawyers.
    Mr. Graves. Understand. And then one other related. On what 
legal basis of withholding the subpoenaed records relating to 
the $5 billion in unlawful payments to insurance companies that 
has been requested by the Ways and Means Committee?
    Secretary Lew. I am sorry. I did not understand that last 
question.
    Mr. Graves. On what legal basis have you been withholding 
subpoenaed request of records relating to the $5 billion in 
unlawful payments to insurance companies as requested by the 
Ways and Means Committee 1 year ago?
    Secretary Lew. So, Congressman, all of these requests are 
going through a process where lawyers are working through them. 
I will have to check on that specific request. I have not 
looked at it recently.
    [The information follows:]

    Treasury is committed to working with Congress, including 
the House Committee on Ways and Means, to provide the 
information needed to fulfill its oversight role. We have been 
working with the Ways and Means Committee for several months to 
understand and accommodate its priorities related to its 
inquiry into the cost-sharing reduction payments. We have made, 
and will continue to make over the next few months, responsive 
documents available to the Committee.

    Mr. Graves. Understand. And I just had a duty to ask those 
questions.
    Secretary Lew. Yeah.
    Mr. Graves. And I know you have a response there and a duty 
to respond as you have. And I guess for this committee's sake, 
just trying to help us understand, what are the consequences of 
noncompliance or nonresponse to a subpoenaed request by 
standing committees of the House of Representatives?
    Secretary Lew. Well, look, I have always endeavored in my 
many decades of doing this to try and be responsive and to 
reach an accommodation that gives committees material that is 
appropriate. There are some materials that are not appropriate 
to be provided, for a variety of reasons. It depends on what 
the particular material is. So that is why I am avoiding giving 
an answer that would be very general.
    Mr. Graves. But is there a consequence to the agency, to 
you as Secretary or to the agency if you just choose never to 
respond? And this is a fair question.
    Secretary Lew. I think congressional oversight is an 
important function. We endeavor to provide appropriate 
information to support congressional oversight and we certainly 
look for a relationship of comity with the committees that we 
deal with. So we always endeavor to work through these issues.
    Sometimes there is a request for information that is not 
appropriate to provide, and we have in the past always been 
able to work through those issues. Obviously, Congress has some 
remedies of its own, and then there are issues of privilege 
that can sometimes be invoked. But it always depends on the 
circumstances, so there is not a general answer.
    Mr. Graves. Understand. And so just let me point out to the 
committee here that many of these subpoenaed requests of 
records have been 1 year, 2 year, if not almost 3 years in the 
waiting from the Secretary and his associates, and the 
discussions, I guess, have been ongoing for that long as well.
    But one of the remedies to this as a committee, I would 
hope, is that we take this into consideration, that duly 
elected and appointed committees of the House of 
Representatives have rightfully asked for records and have been 
denied those, because discussions are ongoing. But as we 
consider the request by the Secretary, I hope we take that into 
consideration.
    Thank you, Mr. Chairman.
    Mr. Crenshaw. Thank you.
    Now I would like to turn to Chairman Rogers for a question 
or two.
    Mr. Rogers. Mr. Secretary, since we divided off Secret 
Service into Homeland Security, does your Department retain any 
concerns about counterfeiting or is that solely with the Secret 
Service?
    Secretary Lew. We have very much direct responsibility. We 
and the Fed together work on the design of our currency to make 
sure that it is as difficult as possible to counterfeit. That 
is where the technology comes in. We work with the Secret 
Service, who do the principal investigation when there are 
counterfeiting events. I think it is at the highest level of 
importance that we maintain the integrity of our currency and 
we put all the attention that it requires into it.
    Mr. Rogers. Well, I should ask this of the Secret Service, 
and I will, but I was recently, last week, in Peru, the 
counterfeiting capital of the world, I am told.
    Secretary Lew. I wish there were only one.
    Mr. Rogers. But anyway, it is apparently wholesale big time 
there. We have only got one person there that I am told to work 
with the Peruvian Government to try to stop it. But could you 
check into that?
    Secretary Lew. I would be happy to, Mr. Chairman.
    Obviously, when the Secret Service was under the Treasury 
Department we had more direct accountability for their 
resources and they would do the investigations.
    I can tell you that we are trying to stay ahead of 
counterfeiters. As we look at the next generation of currency, 
we are looking at new kinds of technology that will make it 
even harder to counterfeit. We obviously are going to have to 
stay a step ahead, because it is a world where counterfeiters 
are out there.
    Mr. Rogers. Well, Peru apparently is the real hot spot, and 
I hope that you could work with Secret Service to get some more 
effort going there with the people----
    Secretary Lew. I will follow up on that.
    [The information follows:]

    The U.S. Secret Service is responsible for enforcing U.S. 
counterfeiting laws, please direct your questions to the U.S. 
Secret Service's Office of Government and Public Affairs. U.S. 
Secret Service, Office of Government and Public Affairs, 245 
Murray Ln., Washington, DC 20223, 202-406-5708.

    Mr. Rogers. Thank you.
    Quickly, Bitcoin. The Office of Terrorism Financing and 
Intelligence within your Department is the only Federal agency 
solely devoted to tracking and disrupting of the financial 
means of our enemies for the purpose of ultimately defeating 
them, and the head of that office said last year: ``What keeps 
me up at night when I am thinking about digital currency, the 
real threats out there these days, we are thinking a lot about 
ISIS.''
    And the use of digital currencies, Bitcoin, to be used by 
groups like ISIS seems to me to be a real threat. It is an 
unregulated form of online currency, circumvents the 
traditional banking system. Is it on the government's radar 
since it could serve as an ideal placeholder for terrorist 
assets and provide a way for terrorists to exchange money?
    The Bitcoin website, Bitcoin.org, describes the ease with 
which anyone can send and receive virtual funds. I quote it: 
``Sending bitcoins across borders is as easy as sending them 
across the street. There are no banks to make you wait 3 
business days, no extra fees for making an international 
transfer, and no special limitations on the minimum or maximum 
amount you can send.''
    It is the first worldwide decentralized currency, can be 
sent person to person without any third-party involvement, and 
can be used by groups like ISIS to spread their evil worldwide.
    What do you think about it?
    Secretary Lew. So, Congressman, we obviously are looking at 
many ways that ISIL will get money and we are trying to shut 
down every path that we can identify.
    Let me take a more general approach to the question of 
Bitcoin. It is in that area of financial technology that 
captures people's imagination because it has the possibility of 
creating easier ways to do business in the future. We have from 
the start said that we do not want to be anti-technology. The 
things that will create the right platforms for the 21st 
century will come out of disruptively changing ideas.
    On the other hand, we have to hold a new system, a new 
platform like Bitcoin to the same standards we hold traditional 
financial products. We track cash because cash can be used 
anonymously to support illegal or malign activities. Our 
Financial Crimes Enforcement Network (FinCEN), which is part of 
the Office of Terrorism and Financial Intelligence (TFI), right 
from the beginning laid out criteria that we need to keep an 
eye on what is going on in Bitcoin that is fully consistent 
with the way we approach both formal banking and cash.
    It is challenging, and I am not going to suggest that there 
are not threats there. There are real threats there. But our 
team is on top of it and, I think, very much looking to see 
what do we need to do to make sure that it does not become a 
funding stream to support bad actors.
    With regard to ISIL, we have taken dramatic actions to try 
and shut down formal banking in areas that they control, 
working with the Government of Iraq. We have taken military 
action to set back their ability to generate revenue through 
oil development and shipping. We have worked to shut down the 
flow of salaries into territories they control.
    So we are doing everything we can. They are stressed. You 
can see it in the fact that they are having trouble paying 
their soldiers. But that is not good enough. We have to keep at 
it until we really dial back their ability to promote the kind 
of terror that they are all about.
    Mr. Rogers. Well, you are exactly right. And your 
Department is the leading edge of that effort on the financial 
strangulation of these organizations. So we wish you well and 
urge you on.
    Secretary Lew. Thank you. We, in just December, had a 
meeting at the U.N. Security Council, the first time in the 
history of the Security Council that finance ministers met in 
the Security Council. I chaired the meeting, because it was our 
Presidency, and we unanimously passed a resolution to treat 
ISIL the same way we treat Al Qaeda and to get the whole world 
to say they are going to cooperate.
    A lot of countries do not have the kind of resources that 
we have in TFI. One of the things we have to do is help them 
build that, and our technology assistance and technical 
assistance program and working with international organizations 
to do that is part of what this is about.
    Mr. Rogers. Thank you.
    Secretary Lew. Thank you, Mr. Chairman.
    Mr. Crenshaw. Thank you, Mr. Chairman.
    We have got a few minutes left. I have a couple more 
questions. I think Mr. Serrano might, too.
    So let me ask you, Mr. Secretary I mentioned in my opening 
statement my concern about the lack-of-liquidity in the 
economy. After the crisis, an awful lot of new rules and 
regulations were put into effect, and I have always had a 
concern that they might somehow impact this liquidity issue 
that deals with our economy. A lot of other people have that 
same concern. Just recently, I think, a couple of members of 
the Fed said they believe there is a linkage between the post-
crisis regulatory framework and liquidity.
    So my first question is, do you think that was by design or 
do you think that was an unintended consequence?
    Secretary Lew. Well, first, I want to go back to first 
principles. I am not sure that the linkage is as clear as some 
people have argued that it is. We are at a time of an 
inflection point, in many ways, in the economy. We are leaving 
a period of historically low interest rates and low volatility. 
We are seeing markets evolve in a way that there are more and 
more nontraditional and electronic participants in the market 
with huge volumes. We have also seen corporate bond issuance 
surge in recent years, and there has been quite rapid growth of 
the asset management industry. So there is a lot changing in 
the financial landscape.
    Now, on top of that, we have had new regulatory 
requirements put in place, and I have said before that we will 
continue to look at whether there are unintended consequences 
there. I think that many have jumped prematurely to a 
conclusion that that is the case.
    I will give you an example. When there was the round trip 
on October 15, a year and a half ago, where the market went up 
and down very quickly, for weeks people were saying that was a 
result of liquidity caused by regulation.
    We went back and did very careful analysis. We had all the 
different regulators who had different pieces of visibility 
work together, and that is not the conclusion that you reach 
when you study the data. You see that there were very dramatic 
moves in high-frequency trading that had a distorting effect.
    You are seeing things happen, which I do not have the full 
explanation for, but in asset management funds closing 
positions at the end of the day algorithmically.
    So there is a lot going on.
    What we have done through financial reform is we have put a 
foundation that is solid underneath our financial system. So 
right now when you have a period like January and February with 
volatile markets, there was a lot of confidence in the 
integrity of the U.S. financial system. That is of enormous 
benefit.
    So we have to keep an eye on whether there is spillover 
effect. To the extent that there is a lack of liquidity for 
high-risk products, that is different than if there is a more 
general liquidity issue for prime corporate----
    Mr. Crenshaw. Because that is really what I am talking 
about, wild market fluctuations. You hear Mr. Amodei talk about 
the community banks going out of business.
    Most people, maybe not everybody, but if you got people in 
the Fed saying: Look, I think there is a linkage here when you 
have got all this new regulation, and clearly there is a little 
bit of lack of liquidity just in everyday business startups, 
things like that. And you might say: Well, I don't see the 
linkage and I don't----
    Secretary Lew. There are also different ways of defining 
liquidity.
    Mr. Crenshaw. And that is what I was going to ask you, 
because if you don't think that that really is impacting, 
maybe--you said you have done some studies. As I mentioned in 
my opening statement, we asked the SEC to do a study, and they 
might coordinate with you, but it would be interesting to see 
what the results of a more formal study would produce in terms 
of lack of liquidity. So you would say, A, I am not sure that 
there is a linkage, and, B, then you would certainly say----
    Secretary Lew. I am not dismissing the question.
    Mr. Crenshaw. No, but you don't think anybody sat in a room 
and said: Look, if we do all these new regulations, we can take 
some of the liquidity out of the market. Nobody thought----
    Secretary Lew. No. I think it was a general proposition 
that was the case. There were some things during the pre-crisis 
period, one could argue there was too much liquidity in some 
high-risk markets, there was overleverage. But that is not what 
you are asking about.
    Mr. Crenshaw. No, no. When you all sit down and talk about 
liquidity, what would you argue is the right mix of liquidity?
    Secretary Lew. So, look, I think that in terms of markets, 
the question is can you match up buyers and sellers in real 
time for securities, for stocks and bonds.
    Mr. Crenshaw. But also in business startups, small banks, 
all the lending, it seems to me you hear a lot that these 
community banks are all going out of business, big banks are 
getting bigger, but it is harder and harder for somebody to go 
start a business or buy a home. It seems to me that has some 
sort of impact, and maybe that is at a lower level than you 
look at.
    Secretary Lew. No, we look very much particularly at home 
ownership. I have said many times that the credit box shrunk 
more than regulators meant for it to. You look at what banks 
are doing, they are not operating at the outer limits of what 
regulators think is a comfortable place to lend. You look at 
the FICO scores for loans, they are too high, where you kind of 
gap out and you cannot get mortgages.
    The Federal Housing Administration (FHA) is looking at some 
things that they can do to try and provide some clarity there. 
I believe they may have even put out something this week.
    So those issues are very much in our focus. That is 
different than a broad question of market liquidity. So it is 
important to define what it is, which piece you are talking 
about.
    Mr. Crenshaw. I am glad to hear you say that--it would seem 
fairly obvious--that you are concerned about liquidity in the 
market.
    Secretary Lew. I think creditworthy individuals and 
businesses should have access to credit.
    Mr. Crenshaw. Exactly. I think we all want to say we want 
reasonable regulation, but we want to be careful that if too 
much regulation creates problems, then we want to be sensitive 
to that. Not enough regulation also creates problems. There is 
a balance somewhere.
    Secretary Lew. There are some issues that have arisen in 
terms of how legal matters are resolved, the aftermath and the 
derisking that is taking place in the financial sector, where 
we are seeing financial businesses withdraw from areas that 
they are just deciding are not worth being in because they see 
risk and they do not see a lot of benefit.
    We are putting a lot of attention into that, frankly, 
whether it is individuals in the United States or countries 
that we want to have commercial relationships with the United 
States. We are not in a better place if people and countries 
are cut out of the formal financial system, but firms do have 
to have an idea of what do they need to do to comply reasonably 
with all of the standards that are out there. That is something 
we are putting a great deal of effort into in our last year.
    Mr. Crenshaw. Thank you. Thank you.
    Mr. Serrano.
    Mr. Serrano. Thank you.
    Mr. Secretary, the President's announcements on Cuba and 
Cuba travel have been met with great support from a lot of 
people, and I am happy to see that the outcry we all expected 
from 10 years ago didn't take place.
    What have you seen as changes affecting what you have to 
do? What needs to be done still? And can you talk to us about 
the new announcement that was made just yesterday?
    Secretary Lew. Congressman, we have as recently as 
yesterday taken a series of actions to try, within the fairly 
tight boundaries of law, to open up more contact between the 
American people and the Cuban people, to create a basis for 
driving change in Cuba by having the influence that we have 
when people get to know us and our values and our standards.
    Yesterday, we eased up on some travel restrictions, we 
eased up on some financing restrictions. We have done 
everything consistent with the laws that, as I say, 
circumscribe how much we can do. So I would not describe where 
we are as normal commercial relations, normal in any way.
    We are seeing an increase in activity. That is a good 
thing. I believe that if you look at the history of the last 50 
years, it has not worked, cutting Cuba off has not worked. It 
has put us at odds with most countries in our own hemisphere 
and it has left the Cuban people cut off.
    The most positive thing we can do is demonstrate by our 
example what it is our values are, to have the freedom of 
business and the freedom of ideas start seeping into a system 
that has not seen that kind of freedom.
    So I do not think there is a disagreement between us and 
those who oppose our policies on the fact that there is a need 
for change in Cuba. There is a difference in what we think are 
the effective means to accomplish that. I think the history 
does prove that the path we have taken has not worked.
    We believe the path that we are embarked on now, subject to 
the limitations of an embargo and the Libertad Act and all 
kinds of restrictions, is going to help. With changes of law, 
it could be done in a much more normal way.
    Mr. Serrano. I am trying to remember who it was, and I 
can't at this moment, but someone before this committee told us 
that the biggest change they saw was when the President went to 
Latin America and he was meeting with a group of leaders from 
Latin America. Was that you that told us that?
    Secretary Lew. Well, I may have. It happened to him.
    Mr. Serrano. The point was how excited they were.
    Secretary Lew. It happened to him. It happens to me on a 
regular basis when I interact with my counterparts from Latin 
America. This has been an issue where they have had to be at 
odds with us, and they are not at odds with us, as much or even 
at all, because of the changes. I think it is a good thing for 
the U.S. to be a leader in our hemisphere, and part of being a 
leader is figuring out how to address issues like this.
    There is a lot that needs to change in Cuba, so nothing 
about this policy embraces practices that need to change. It is 
really a question of what is the most effective way to 
accomplish that change, and I think our leadership role in the 
world and the Western Hemisphere is very important as well.
    Mr. Serrano. One last question. One of my favorite programs 
is the CDFI program, and we notice that you asked for a 
relatively small increase compared with some of the other 
numbers that we have discussed today. I hope we are not putting 
them at risk in any way, because that is an agency that has 
been very effective in my community. It has a lot of fans on 
both sides of the aisle.
    Secretary Lew. Urban and rural.
    Mr. Serrano. Yeah.
    Secretary Lew. Yeah. I am a big fan of the CDFI program. I 
feel like I was present at the creation in the 1990s. I have 
tried to in my period of time at Treasury nurture it and help 
it to grow. We have tried to be responsive in areas like the 
Bank Enterprise Award Program and request the funding level for 
that important program. I think we have requested a level of 
funding that will give CDFI the ability to grow and to do well.
    Something that we did last year that is very important is 
we worked to have credit unions qualify as CDFIs, tremendously 
expanding the base of institutions that are eligible for 
participation.
    As I have traveled around the country and visited CDFIs, 
one of the things that has been striking to me is that it is 
not just the direct activities that we fund. We create anchors 
to bring together a variety of Federal services, local 
services, to coordinate an economic development engine in a 
community to help young people find training and jobs. You have 
to have an anchor, and in a lot of these communities the CDFI-
funded organization can be that anchor.
    Mr. Serrano. Well, they have done a great job.
    And let me just in closing say that this will be the last 
time you come before us, I think, in an official capacity. We 
will keep talking on different issues and working on Puerto 
Rico and so on. I want to thank you for your service.
    Secretary Lew. Thank you, Congressman.
    Mr. Serrano. And like I said, I didn't win any primaries 
for President, so I can't reappoint you. I would have loved to 
do that. And if you come back to the Bronx, as you have stated 
before, we welcome you again as always. That is your home?
    Secretary Lew. I vote in the Bronx, I pay taxes in the 
Bronx, I look forward to living there again.
    Mr. Serrano. OK. Thank you.
    Mr. Crenshaw. Thank you.
    Mr. Yoder has another question or two.
    Mr. Yoder. Thank you, Mr. Chairman.
    Mr. Secretary, Treasury and other agencies recently put out 
a broad request for information on the changing structure of 
the market for U.S. Treasury securities. This comes on the 
heels of a joint report on the October 2014 flash rally and 
numerous public discussions on the changing profile of the 
market in terms of participants and overall structure.
    Are the particular areas within the market where Treasury 
is particularly focused concerned that either new structures or 
new participants may be impacting the overall efficiency and 
liquidity of this important and unique market?
    Secretary Lew. Yeah. Thank you for the question. I, while 
you were out, addressed it, so I apologize for repeating.
    But if you look at the report we did on October 15 and the 
request for information, it outlines the kinds of questions 
that we have. These are questions. We do not have certainty 
about what the answers are. And it is quite an important 
process.
    What we have seen is a change in where the level of 
activity is by kind of firm, kind of activity. The amount of 
activity that is algorithmically generated, high-frequency 
trading, for example, it is a very large part of the market.
    We are also seeing that funds that move large amounts of 
securities have activities at the open of the day, the close of 
the day, that have patterns that seem to be having potentially 
some impact.
    This is important to understand, because this is the 
plumbing of our financial markets. If the system is changing, 
we have to ask, whether the things that we have done in the 
past to make sure you maintain an orderly market and liquidity 
are appropriate and working.
    So we do not start out with an idea that there is 
something, like, bad that needs to be addressed. We start out 
with a very complicated evolution of our financial markets that 
needs to be fully understood. I think Treasury has a 
responsibility for driving that kind of questioning, which is 
why we have the request for information out there. I very much 
look forward to the responses to it.
    This is not a case where we are starting out with an answer 
and looking for a record to support it. This is saying we have 
now observed a lot of things that suggest there has been 
dramatic change in the structure of the market. We need to 
understand that in order to know how to respond.
    Mr. Yoder. I appreciate your answer.
    I would be remiss if I didn't take a moment to talk about 
the budget a little bit. I know there has been extensive 
testimony and we have differences as parties about this, but 
numbers are numbers.
    Do you know what the projected debt is under the current 
budget projections for the next decade, in additional debt?
    Secretary Lew. I have not added it up, but I know that we 
have reduced the growth rate of the debt for 3 quarters.
    Mr. Yoder. I respect that. I know. And we have a debate 
about what we have done.
    Secretary Lew. We can get back to you with the answer.
    [The information follows:]

    In its Mid-Session Review of the FY 2017 Budget released on 
July 15, 2016, the Office of Management and Budget projected 
that debt subject to the statutory limitation would increase 
from $19.4 trillion at the end of FY 2016 to $26.7 trillion at 
the end of FY 2026, an increase of $7.4 trillion over the next 
decade. (Ref: Mid-Session Review of the FY 2017 Budget, Table 
S-11, page 61) Note: As of August 15, 2016, actual debt subject 
to limit was $19.386 trillion.

    Mr. Yoder. Yeah. I mean, just a basic, you are the 
Secretary of the Treasury, what is the projected debt over the 
next 10 years? I know you know this answer.
    Secretary Lew. I walk around with a lot of numbers in my 
head.
    Mr. Yoder. You don't know the answer to that question?
    Secretary Lew. I do not have the number in my head----
    Mr. Yoder. Come on.
    Secretary Lew. I know that we have reduced the annual 
accumulation of debt to a level that is----
    Mr. Yoder. With all due respect, Mr. Secretary, I know that 
is the sort of company answer and I respect that that is what 
you have got to go with, but I just--I want to have a 
discussion.
    Secretary Lew. It has the virtue of being true.
    Mr. Yoder. I want to have a discussion about where we are 
going, not a debate about the past.
    Secretary Lew. There is no doubt that the debt will 
continue to----
    Mr. Yoder. Our projection, I think your projection, since 
you are not coming forth with it, the debt is going to continue 
to grow. You agree with that, right?
    Secretary Lew. It definitely grows and----
    Mr. Yoder. Would you say $7 or $8 trillion over the next 
decade?
    Secretary Lew. Obviously, GDP is very large and growing. So 
if your debt as a percentage of GDP is even flat, it is going 
to grow by a large number.
    Mr. Yoder. Fair discussion.
    Secretary Lew. The question is, what is it as a percentage 
of GDP that is sustainable?
    Mr. Yoder. Right. So do you know that answer?
    Secretary Lew. It stays in the 70s, which is higher than it 
was, but it is not at a record level. And we have long-term 
challenges ahead of us. But we are not looking at it breaking 
through a level that is a crisis level.
    Mr. Yoder. And I appreciate that you know the debt-to-GDP 
ratio, but you don't know the total debt number.
    Going forward, I think we have concerns about the solvency 
of Medicare. Your own folks, the Medicare trustees, have 
concerns about the solvency of Medicare, and I know we are 
going to talk about how we have made it better, and we have in 
some regards.
    Secretary Lew. We have more work to do.
    Mr. Yoder. But we have more work to do.
    Secretary Lew. Absolutely.
    Mr. Yoder. You know, 10,000 seniors retire every day. My 
grandmother is 104, right. We have longevity. These are great 
things.
    Secretary Lew. I wish her a healthy and long life.
    Mr. Yoder. Thank you very much. I will pass that on to her. 
Thank you. One hundred five in June.
    But the question, I guess, for you, I will just give you 30 
seconds here, you oversaw a balanced budget in the 1990s, 
Republican House and Senate, Democratic President, you have 
bipartisan workings together on that. If you could balance this 
budget over the next 10 years, what would you recommend?
    Secretary Lew. Well, I think that the time to balance the 
budget is not now, because I think we have----
    Mr. Yoder. I mean, over the next 10 years, over the future.
    Secretary Lew. Yeah. There is a reason that we did not 
present a balanced budget in the 10-year window. Coming out of 
the deep, deep recession, we have other much more immediate 
challenges that I think would help our economy if we dealt 
with. If you gave me a choice of balancing the budget or 
rebuilding our infrastructure, it is a more immediate challenge 
to rebuild our infrastructure.
    The ability of our economy to meet the needs of the 21st 
century is going to be undermined if we do not do that. We have 
a bit of time to deal with entitlement spending and to deal 
with taxes in a bipartisan way.
    Look, I have been part of bipartisan budget deals over a 
period of four decades. The right way to do this is through a 
bipartisan conversation where we agree on the need to protect 
senior citizens, where we agree on the need to have a fair and 
more simple tax system, and where we have an honest discussion 
about what the tradeoffs are.
    The last few years have not given rise to the kind of grand 
bargain, but over a period of years we have taken incremental 
steps that have gotten us a long way there. We went a little 
too hard on discretionary spending. I thought so at the time. 
Now I think things like the budget agreement put some mandatory 
savings in to back out some of the discretionary savings.
    We did the Affordable Care Act, which did reduce our 
healthcare spending dramatically, and we did raise taxes, which 
we thought was necessary, on the people who were most able to 
pay.
    That does not mean we have did it all, but we have done a 
lot over the last 7 years, and I think there is more to do. I 
hope that my successor is able to work in an environment where 
there can be the kind of bipartisan discussion that, frankly, I 
have tried very hard to foster and have enjoyed being part of 
in the past.
    Mr. Yoder. Well, I think invariably this conversation, when 
we had the OMB Director in as well, turns to a discussion about 
what the administration has done. And I think Congress and the 
administration both have an obligation to engage in adult 
conversations, and you outlined the premise by which that would 
occur in terms of bipartisan discussions, protecting Medicare 
for seniors, reforming and flattening out this tax code. I 
mean, the principles are there.
    And I just throw out for the sake of conversation, it is 
March, we have about a year. I would love to see the 
administration lead those efforts and see while you are 
Secretary and while we are here working under the current 
framework, why not try to address some of these long-term 
problems now. Because I think you agree that the longer we wait 
to address them, the harder they will be and the more difficult 
it will be for your successor and for ours. And so we just--I 
have got young girls, we all have children.
    Secretary Lew. I have young grandchildren.
    Mr. Yoder. Yeah. So I think you should be--I mean, I know 
you are as concerned about this as we are, and so I just offer 
that I am ready to engage, I think we are all ready to engage. 
We would love to.
    Secretary Lew. I have always been ready to engage.
    I would say that on the tax side, if we could figure out a 
way to work together to stop inversions, that is something that 
the American people are offended by on the Democratic and the 
Republican side alike. We find it wrong, and we know how to 
stop it. I hope we can at least come together on that.
    Mr. Yoder. Thank you, Mr. Chairman.
    Mr. Serrano. Mr. Chairman.
    Mr. Crenshaw. Yeah. We can fix the tax code. That is the 
way we will stop it, right?
    Go ahead. I have a question, but you have a comment?
    Mr. Serrano. Just a quick comment. I really respect the 
gentleman's comments about balancing the budget. I think that 
is so important and something everybody wants and so on and so 
forth.
    The Secretary has made it clear that sometimes you get into 
a little debt by building highways and you create a million 
jobs at the same time, and it is something you should look at.
    But I have been around here long enough to remember when we 
cut taxes when we weren't supposed to cut taxes and when we got 
into a war we weren't supposed to get into. We had a surplus 
and then we blew the money away, along with a lot of our 
respect throughout the world. We are still looking for those 
weapons of mass destruction, but they cost billions of dollars.
    So I think if we learn anything from that it is to be 
careful about the future, protect our country, try to give the 
working class people in this country less of a tax burden. But 
we made some serious mistakes at that time, and we are all 
guilty of it. We cut taxes when we shouldn't have and we threw 
away a surplus on a war that we shouldn't have been involved 
in.
    And now we hear the gentleman speak honestly, but I think 
we have to revisit that every so often to remember how we got 
into this mess.
    Thank you.
    Mr. Crenshaw. Let me ask one final question, Mr. Secretary, 
about mandatory spending, because I know, your agency has a lot 
of bureaus that are funded through mandatory funding that are 
outside the appropriations process. And I understand, that 
FSOC, which we have talked a lot about, are going to have a 23 
percent increase in their budget. And so I wanted to ask you 
why you think that is.
    But in a broader sense, I read a report that said this new 
Consumer Financial Protection Bureau had an independent 
performance audit and it was recommended that the CFPB expand 
their transparency of their funding and expenditures, which 
kind of brings up that broader question about these agencies 
that aren't under the appropriations process: how much scrutiny 
goes into those budgets? For instance, it used to be the OMB 
Director.
    I wonder in those days how much attention did you pay or 
does the OMB today pay to some of those agencies that are 
funded outside the appropriations process. What kind of 
critical review do they get? Can you talk a little bit about 
that? Because I think that is a concern to everybody.
    For instance, that 23 percent increase, you say, well, tell 
us about that. But in general, since they are not under the 
process that the public sees with every other agency, are you 
comfortable with the amount of scrutiny they get before they 
spend the dollars that they spend even though they are 
mandatory?
    Secretary Lew. Congressman, with regard to FSOC and OFR, 
they are funded through the Financial Research Fund, which was 
established as part of Dodd-Frank as a permanent source of 
funding. As part of each budget cycle, OFR and FSOC provide the 
public with detailed information that justifies planned 
expenditures during the upcoming year. The Financial Research 
Fund is subject to appropriate internal controls and has been 
subject to periodic audits.
    I think it is important to have these independent 
regulatory activities funded the way they are funded. That has 
been a tradition with bank regulators. And I also think it is 
important that they provide the public with detailed 
information that shows how they are using the money. We would 
look forward to working with you to make sure that that 
happens.
    Mr. Crenshaw. Great. Well, thank you very much. And I 
think--Mr. Graves has no more questions.
    Again, I want to thank you personally for your long career 
in government. Not that you are going away, I know you are 
going to the Bronx, you may come back. But thank you for your 
service to the country. Thank you for working with us. And we 
look forward to continuing to work together to make things 
better in this country.
    Secretary Lew. Thank you, Mr. Chairman.
    Mr. Crenshaw. So, again, thank you so much.
    Secretary Lew. And thank you for the cooperative way that 
you have worked with the Treasury Department to start meeting 
some of these very important needs.
    Mr. Crenshaw. Thank you.
    This meeting is adjourned.
    
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Donovan, Shaun...................................................    61
Koskinen, John...................................................     1
Lew, Hon. J. J...................................................   309
White, M. J......................................................   183