meeting of the committee will come to order today's hearing focuses on an important issue that has received little attention electric cooperatives and the billions of dollars they control on electric cooperatives are unique structures that provide a lick electricity to millions of customers in rural and suburban areas they are nonprofit utilities that are owned by their customers and at least in theory are supposed to be democratically controlled nationwide there are nine hundred thirty co ops serving over seventeen million customers what isn't widely known is that these co ops control over thirty billion dollars in customer equity in many cases even the consumers don't realize it's their equity and don't know how the co ops are spending their money i want to thank my colleague and friend jim cooper for bringing this issue to the committee's attention it's exactly the kind of issue the oversight committee should be looking at and from what we've already found this is an area in strong need of accountability in fact two of the witnesses we wanted for this hearing every fuse to attend they declined to appear voluntarily and they have evaded federal marshals who tried to serve them with subpoenas the federal marshals believe one of the witnesses whether the having been created in one nine hundred thirty five by a young congressman by the name of lyndon johnson it is now the largest co op in the united states but many fuel burn the former petter now is general manager and bud barnett the former better now is president aren't reflecting the co op's proud history by refusing to explain their apparent self dealings there is compelling evidence that the pets are now this co op used its customers over a million dollars in salary benefits and bonuses in just five years mr fuel burge and the board spent seven hundred thousand dollars to stay in five star hotels like the ritz carlton and four seasons at expensive restaurants and buy themselves fancy chocolates and celine dion concert tickets they also spent millions of dollars in an unsuccessful legal battle against their own customers will learn more about all this from our witnesses which include better knowledge co op members to members of the texas legislature and the newly hired general manager of better knowledge but the questions about the potential abuses of co ops aren't limited to the petter knowledge co op and that brings us back to the thirty billion dollars dollar in customer equity i mentioned a few minutes moments ago the petter knowledge experience tells us we need to examine whether co ops are bringing are being run in a truly democratic fashion and we need to take a closer look at whether there are adequate financial protections for the investments customers have in these entities the seventeen million co op customers equity investment are worth an average of almost two thousand dollars apiece but their appeal appears to be little and accountability for how co cooper has done a real service by setting the right balance for these issues in a recent article in the harvard journal on legislation and i ask unanimous consent to include it in the hearing record without objection that will be the order conduct of rural ector cooperatives across the country i anticipate we will hear marks and most were elected cooperatives are poorly managed and may need further regulation certainly and i had a how i would presume in many areas of the country to serve a critical and positive role in our communities providing service to rural areas at an affordable rate in the northern part of my district in idaho if you look at the map there there are several electric cooperatives providing electricity to just over one hundred thousand residential and business consumers these electric cooperatives serve some of the most isolated rural consumers in our nation on average the electric  cooperatives in idaho serve six customers per mile of wire in contrast to the twenty customers per mile of wire for the investor owned utilities i have serious concerns if by holding this hearing today this committee is suggesting that we must impose more stringent regulations on the rural electric cooperate industry due to the mismanagement of one cooperative regulations already exist at the cooperative board level at the state level and the cooperatives in northern idaho already have transparency policies in place where consumers can review all financial data on a website most cooperative consumers in idaho receive a capital credit refund in the case of clear water power that's the green the map general manager dave hagen stated our consumers have received capital credit refunds since one thousand nine hundred eighty eight amounting to a total of five million dollars additional regulations imposed at the federal level only increase the cost of electricity to our rural communities and small businesses that are already struggling to get by as they struggle with high food prices and high gas prices my constituents cannot afford higher electric bills with the cost of gasoline and food on the rise as well new regulations and higher utility bills are an unnecessary burden especially for my constituents in north idaho who receive electricity from a cooperative because their per capita income is just eighteen thousand five hundred fifty five dollars and they have an average household income of six thousand dollars or less and the other utility consumers in my state  tremendous burden for them for these reasons best chairman i respectfully will oppose any new regulatory burden that would increase the cost of doing business for the rural ector cooperative industry and i would ask my colleagues to do the same thank you m customers so far you know i have not introduced any legislation because my only goal is to return co ops to their roots i don't even want to draw attention to co ops because i know how publicist a shot they are my father helped start a rural electric cooperative and i've represented roughly twenty electric co ops or at least their customers and that's perhaps more than any other member i started learning about electric co ops almost two decades ago when i first attended a co op annual meeting for almost ten years i've been talking privately with various co op leaders speaking at co op conventions both state and to warn them about problems that even i could see as a co op observer i worked hard for many years solve co op problems within the co op family but i was almost every turn so here we are today with one of the largest co op in america and serious scandal to its former leaders hiding from federal marshals and three loads of other co op problems bubbling publicly to the surface for much of the last ten years i don't really know for sure whether my co op worries were justified but then i saw the outstanding reporting of margaret newkirk of the atlanta journal constitution and of claudia the solace of the austin american statesman chronicling the abuses of georgia and texas also found that t v a the tennessee valley authority inspectors general have been complaining about annecy co op misbehavior for a long time but due to co op and many pressure hiding their report from congress and as the i g put it in writing from shrill media attention also stumbled upon the national co op trade associations own secret password protected website and discover that some of my worst fears about co ops were substantiated by the trade association itself and r e c a the same organization that had been stonewalling me so that's when i decided to write a law review article that the chairman mentioned if you got to wash your dirty laundry in public you might as well get a clean one to make seven quick points number is the only electric co op scandal in america then you believe that there can only be one cockroach if such abuses can happen in the largest co op in the country founded by a former us president within sight of the regulators in the state capital in austin texas i think it can happen anywhere co ops that her fortunes of forty seven states can have a map of they serve seventy five percent of the land area of america and i'm thankful for that overall they've done a super job but we already know of separate unrelated major co ops scandals outside atlanta and birmingham and fort worth is your state next how could you even know unless you've seen the audited co op financials or are you willing just to take a copple obvious word for our friends in the texas legislature did that for too many years point number two co ops don't have to be mired in scandal to still have serious problems it doesn't take a spike in temperature to have a sick patient a chronic low grade fever can be just as damaging the n r a has been issuing reports for over thirty years warning all co ops in the country that they need to be refunding more money to customers because if they don't they risk losing their tax exempt status for decades too many co ops have turned a deaf ear to their own trade association on this and other important issues involving their precious tax exempt status why would an r e c a go to so much trouble and pay for such expensive secret reports of this one i can only be found on their password protected website unless they were really worried about an r s crackdown under current law ironically much of this hearing will be spent just reinforcing and our own that said to its own members point number three our co op customers being treated fairly today remember here that co ops were founded under franklin roosevelt's new deal to be probably the most pro consumer organizations in america co ops always brag about the quote co op differen ca itself has written that countless co op customers particularly in the most rural areas pay an extra two hundred twenty dollars a year while just so that their own can remain inefficient according to the n r a ca itself a small co op simply merged with other co ops they could save their customers two months of electricity bills a year would it be nice to give customers a two month holiday from their li or number for private property rights co op customers really do own their co op this isn't any theoretical interest like taxpayers who may have an undivided interest in the smithsonian museum co op customers literally have or will have a legal title in their own name to a piece of the thirty plus billion dollars in co op equity that's about as much stock as amazon dot com it averages out to eight hundred twenty four dollars per customer an amount comparable to the economic stimulus checks that congress voted for just a couple months ago here's the picture yet how many co op customers has have ever been told exactly what's in their co op account have any i have not found one yet except for one top power company executive who got all his money out every time he moved from one co op to another why can't regular co op customers get this benefit or is it reserved for  after all internal co op software calculates individual ownership to the penny yet co op some now run out of ink on the monthly bills before they disclose your ownership stak concluded that this thirty billion dollars plus may be the largest loss pool of capital in america i estimate that co ops could safely return between three billion and nine billion dollars a customer's own money to them this money could help millions of rural right payers today who are having a hard time in a soft economy and it's not a government handout this is just a return of the customer's own money mr cooper thank you very seeking recognition as well and mr davis thank you let me just thank mr cooper for bringing this up to the committee's attention we're here because questions have been raised about the vulnerability and even the relevance of venerable business model that helped modernize post depression rural america and today serves over forty one million consumers in forty seven states rural electric cooperated member own power generation and distribution companies bring the power of economic development and growth to diverse communities it might otherwise languish off the national grid but the apparent plundering of one large co op the paper now is in texas by entrenched directors and officers has caused some to ask more broadly for these tax exempt federally subsidized organizations are governed democratically managed efficiently regulated effectively or operated transparently enough to prevent self dealing and abuse in the pattern now is case millions of dollars of capital owned by co op members was misspent on excessive compensation packages phantom employees class travel in luxury hotel expenses high living insiders even paid two thousand dollars for celine dion t so it's fair to ask as our committee colleague representative cooper does if this useful new deal tool has become a potentially bad deal for taxpayers and customers in this post enron sarbanes oxley era of strength in corporate governance accountability and transparency it's worth asking what were elected co ops are doing to keep pace with regulatory standards and governance reforms in the increasingly complex and changing electric industry at the same time there is little to suggest the abuses uncover are symptomatic of widespread fiscal praga see through out the national network of nine hundred thirty one elected co ops that critical infrastructure transmits power over seventy five percent of the nation's vast geography at every juncture c member owners have the legal rights and powers under state incorporation and utility regulation laws to police or replace irresponsible directors and managers eventually prevail as customers regain control of the company and co opt democracy remains the most potent safeguard against mismanagement and waste but in the face of global energy pressures and modern mandates to diversify co op activities for economic and social reasons the quaint all ways of doing business that worked in the fifty's in the sixty's can begin to look a bit threadbare even newly expanded i r s disclosure requirements for nonprofits may not give co op members regulators or taxpayers enough timely information to prevent the next person allies from blooming in the crevices of a patchwork regulatory oversight system so we need to know how safeguards can be strengthened and how rural electric co ops can continue to fulfill their potential and stable responsible drivers of economic development and community growth we appreciate the testimony of our ability frasier has been involved in the co op part of legislation for many years and i'm a self i'm a co op customer i do business with three different co ops it's still my believe that the governance co op should stay at the local level and in the state level i believe the actions of the state the state took to correct problems were appropriate and i believe they have a handle on it and i deeply appreciate you guys coming up today and participating in the hearing because i think in the long run this will be a good day for the co ops a day where co ops will be able to explain and to the public and answer some of these allegations thank america where you see the physical infrastructure of rural america frankly the telecommunication infrastructure where people are paying more for last water rights are under attack in rural areas now we see co ops one th inspection by exploiting the resource of the members you have to remember let's go back historically why we saw rural electrification and why these co ops were created to make sure that people in rural areas had reliable access to electricity at a low cost because the big energy companies didn't want to spend the money and invest in infrastructure they want to do that so our mission as you can see committee i hope i going to be to find a way to not just these particular individuals in accounting as we should much but to find a way to make sure that we protect the philosophical underpinnings of rural electri can have access to electricity at a low cost so the rural areas can find a way to survive in this and he's very troubled economic times thank you mr duncan well thank you mr chairman thank you for calling th hearing is very appropriate considering the scandal that has gone on in texas with this largest to go up in the u s but first of all i want to say that i have the greatest respect for my colleague congressman cooper  who is a good friend of mine and i salute him for raising these concerns and asking these questions he used to represent a very rural district in tennessee and and  has studied the this issue in these co ops for many years and i have not so he knows far more about this than i do he and i now represent the two fastest growing areas in tennessee and i represent he represents the nashville area and i represent primarily an urban suburban district in and around knoxville only about twelve percent of my constituents are served by co ops but overall i understand that about a third of the people in tennessee are served by a co op so this is very important to to tennessee and i'm told that the average profit per member in limited to three things keeping rates low paying down debt or investing in infrastructure or they could i suppose do all three and any one here those those seem like good thing me and i haven't read any articles about any co ops in tennessee doing anything even remotely close to what has happened in texas but there's certainly nothing wrong about thank you mr chairman and thank you for holding today's hearing where we will be examining the managerial practices says  ops are created doing the era of president roosevelt's new deal and their purpose was to supply millions of dollars of america supply millions of americans who lived in an underdeveloped rule community with electricity presently the conditions of modern and rural areas are not in the dire situation they experience during the great depression but seventy years later nine hundred thirty are still responsible for providing electricity for the seventeen million americans across the country paid in dollars has been providing reliable electrical service to rural texans for over seventy years however recently they have been numerous allocations ranging from excessive personal spending of co op funds by board members under current compensation for former board members improper election methods non beneficial investment practices and numerous i r s reporting infractions even though this hearing is focusing mainly on the questionable practices of paid analysis it is important to find out if the problems are widespread throughout the cooperative industry and mr chairman i hope that we will consider holding a future hearing that will examine the nature of financial practices of other cooperatives in the end what this committee desires to uncover is why pater analysis and board members allegedly took advantage of other member customers how these practices were carried out with the use of company funds and if the practices of the board members could plausibly be repeated in other electric cooperatives around the country so i look forward to hearing from the panel and especially the testimony of mr hu in english the c e o of the national  trick co operative association and i hope that he can provide more insight on the co op industry and give us a general overview on the use of co op funds in the industry as a whole you you know we talk about expertise on the part of fellow members of congress but congressman cooper's expertise in this area is so deep that he would easily be qualified by a judge in any court cases an expert witness all of the research that he's done in his own personal and professional experience with co ops a hearing like this predictably will produce a response among sort of three categories of actors there will be those who engage in outrageous practices who better start quickly figuring out how to fix the situation will be those who maybe could do better than they have done and ought to look at that and then there will also be those who acted in a responsible manner  i don't have any electric cooperatives in my district in maryland we have one insider mail called the sun in maryland electric cooperative from my understanding one of the more responsible actors in this in this drama but i would assume that the responsible folks would step up within the within whatever the association is to make the case that that others need to clean up their act and improve their own sort of self regulation but i think mr cooper bringing this issue to light as he has pointed to examining whether there ought to be more oversight and regulation from third parties including government oversight and i'll be part of the disk today i want to thank him for for making all of us look carefully at this issue and i yield back my time mr welch  have two excellent co ops in vermont in there of that category that my colleague mr sarbanes was talking about they take the democratic duty seriously the service on the board is as much a sacrifice it's not a bonanza and they're doing tremendous work on  energy providing real leadership in the state of remodel electric co op and the washington electric co op and mr chairman if there's no objection i'd like to introduce their newsletters into the record but those of us who are that objection they'll be those of us who support co ops have the major responsibility to root out when it's being abused because if we're going to allow there to be continued support to do the good work we have to make certain there's no latitude to make this into a rip off and i really applaud congressman cooper and giant energy companies in america are trying to take advantage of co op strong balance sheets and tax exempt borrowing authority to get co ops to issue billions of dollars worth of bonds for new power generation particularly coal fired units they want to co ops to generate more power to increase pollution and issue these bonds the last time co ops fell for such a sales pitch was in the one nine hundred seventy s and eighty's and many co ops went bankrupt as a result i think option make energy conservation their first priority and then once they've helped reduce customer bills focus on other ventures also we all know that sunshine is a best disinfectant without full disclosure caught democracy is a sham well did you know that in official biography of the official lending arm to co opt the c s c they state explicitly that it was formed to tell the wall street how rich co ops are so that at the same time tell us how poor they are that you know that the color of the pack associated with an array is almost as much money to congress as boeing corporation so why are they spending all this money to defend motherhood and apple pie organization is it just a narcotic to make sure that we are watchdogs stay asleep so thank you mr chairman you have the best staff on the hill caught customers get electricity day but they don't have power and they're being kept in the dark and you have missed cooper mr welch unless our witnesses want to yield the rest of their time to mr cooper we're going to hear from you and i'm pleased to welcome them in february two thousand and eight he was a general manager of a publicly owned austin energy and i want to thank all of you for traveling to be with us today and i'd like to know the again the absence of two invited witnesses mr benny fuel berg was a longtime general manager better knowledge is not present today because he is evading service of the committee subpoena his attorney advised committee staff that he would assert his fifth amendment right against incrimination if he did appear mr bud burnett was a longtime president a predator nawas he's also evading service of the committee subpoena his attorney advised committee staff that he would assert his fifth amendment right against the record will indicate that each of the witnesses answered in the affirmative prepared statements will be in the record and in that in its entirety what i'd like to ask each of you to do is to limit your oral presentation to around five minutes we will have a clock that will indicate green and then the last minute will turn yellow and then when the time is up it will turn red and if you see red on the clock we would welcome you to summarize your testimony mr fraser why don't we start with you about that i'm usually not on this side of the table so i had to learn the microphone mr chairman i'm i'm extremely honored to be here in your committee today with other members thank you for being  here specially represented march and he served with distinction in texas and we're very proud of senator march in the service he's given to the great state of texas and it's thanks for being here members i currently serve as chairman of the texas community on business and commerce that gives me oversight over the electric industry also along with the represented road roden rose is a member of the pardon alice electric cooperative i'd like to  emphasize part of all that i have been and continue to be a strong supporter of the rule electric cooperatives that kwapis brought electricity to many parts of texas in the nation that no one else wanted to s the beauty of the electric co op system is that cooperatives are designed so that member owners can determine how best to run the system through the election of a board of directors the members don't like the policies are being set by the board can and they should vote them out of office and not the ninety five the texas legislature allowed kwapis to opt out of retail right regulation by a majority vote of the members and a bass majority of the sixty six distribution coop did that but the wires and the transmission lines continue to be regulated by the state of texas the public utilities commission i want to be clear that i believe that the best way to control it can top co op is through the democratic  members however the members of pardon out of selective cooperatives over the last year rice many concerns that they did not have a voice in their coopted many of these customers are also mine and and rose constituents late last spring the constituents begin contacting the office to complain about the close nature of the board of directors specifically concerns were raised over the nomination election process the lack of transparency by the board of directors and senior management by prohibiting members from even attending board members meetings or accessing quantum information the fire of the cooperate to return excess profits by paying capital credit to in the extreme levels members were suing themselves say wrongdoings of the coopted been a board a settlement to the lawsuit has been reached but it is currently under appeal this lawsuit the watchful eye of the media and legislative crews scrutiny by representative rose and myself have led also to an ongoing criminal investigation that is being led by the district attorney but with the assistance of the texas attorney general's office it is apparent that the inability to elect anyone except the board's hand picked candidates allowed part now selectric to become a self governed in a tea with no way to be controlled with no one to look over the shoes their shoulders abuses occurred first of all as you mentioned mr chairman the president of the board not on a receipt the parks of being a boat board member he also paid himself one hundred ninety thousand dollars a year and you'll isn't him an employee miking him eligible for retirement benefits but he also had no real duties are also a severe lack of knowledge of what was going on in the co op he currently to die after leaving is receiving ten thousand dollars per month in retirement benefits and we've just discovered in our s filings that as he was leaving he was paid an additional six hundred thousand dollars tarm a package that they had voted in in two thousand and one again without our knowledge the general manager many feel bard was being paid three hundred ninety thousand and you'll saori in addition the board secretly voted to give him an additional two million dollars into part compensation over a fire pit five year period and then they gave him another three hundred seventy five thousand dollars what they called a signing bonus in order to sign two million dollar bonus contract last year been a fuel buyer of his last year's company my one point four million none of this additional pie was compensation and bonuses we know the p c board had paid themselves excessive sours benefits totaling over one million per year all board members including non voting members were given free last time health insurance for themselves independents that were say for a three three thousand dollar physicals for the members and spouses at the cooper health clinic spa in dallas the board also created policies that when you left the board you  become eligible for fifteen hundred dollars per month retirement as a marital status and three last time insurance for not on the member but all dependents the board senior management and their spouses and girls and girlfriends would clarify traveled bars class to destinations all over the world they stayed in luxury hotels as you said which called four seasons and the lack when travelling all coopted business with no approval process mr chairman as you said we have been in a five seven hundred thousand dollars in credit card bills that were paid without any approval process whether those expenses were legitimate coopted business  additionally almost all cooperative expenditure were not competitively bid and the value of those expenditures is not known and is currently under audit compound of these abuses board members were not publicized or open to with the election process if the members won happy they should be able to vote him out of office the five years to have true and honest elections and cooperate part analysis as a raise in the senate committee of business and commerce is that have happened this year we just had i and election were five new members were elected and i will conclude that and i will open up for questions after the rest testimony thank you thank you very much mr fraser mr rose mr chairman ribs and marshawn it's a pleasure to be with you i'm sorry that we have to be with you today since two thousand and three i have represented johnson city in the park now select a co operative headquarters in the texas house of representatives it is impossible to represent this district and not recognize p e c s rich history and foundational role and central texas as an elected official representing thousands of members and employees of this organization it's my duty to ensure its long term success and that is why i'm here before you today as a co op navigates these turbulent times i'm committed to reforms that strike a balance between statutory oversight and local control the e c members need and deserve that is open and transparent we can do that with the right reforms at the state level and senator fraser and i working closely together over this last year and as we approach next session are committed to do just that with the cost of energy continuing to rise at an alarming rate our constituents rely on us to guarantee that the price we pay for gas at the pump and for the electricity we used to heat and cool our homes is reasonable and fair we must provide those we represent the security of knowing that they are not that they are not paying unwarranted prices for basic necessities and when we find that those of in that those we have entrusted to deliver these essential services have wasted p e c members resources for their own gain it is the role of government to step in and fix this problem bloated overhead lavish expense accounts full time employees who never showed up for work all were common practice at the old p c the p c board and senior management have clearly taken advantage of its employees and members p t c employees are doing their job and customers have excellent service at a cost that is considered suitably lower than investor owned utilities in the state of texas we must in the p c board senior management and senior management high salaries and lavish spending in order to protect right payers in our co op we need to implement laws that regulate co op boards and at the same time protect customers from high electricity costs i believe that statutory changes are the only way to ensure that p t c keeps its electric rates low and shares its profits with its members today and in the future this starts by overseeing the navigon audit of p c that was mandated as part of the settlement proceedings of the lawsuit of which the senator spoke we must learn what went wrong in order to craft legislation that prevents mismanagement in the future the results of the navigon audit are expected in august and nothing short of a complete retrospective look at past practices and transactions as well as an analysis of appropriate benchmarks and standards to apply the pc's operations prospect of life nothing short of both will be acceptable should navigant fall short i will statutorily require an audit to be conducted by the state auditor's office when the legislature reconvenes in january two thousand and nine mr chairman public power only works when it is transparent and without transparency there is no meaningful local control during the next legislative session i am prepared to file legislation that will that will require all electric cooperatives in texas to comply with the open meetings and open records laws to submit annual audit to the p u c for their review the public utilities commission for their review and ensure a fair and open elections at all co ops in texas the intent of this legislation to promote transparency and informed member participation in all co ops in texas i believe this is the only way to fully prevent mismanagement and fraud guarantee low rates for our members and ensure the long term success of one of central texas greatest assets thank you for allowing us to be here today thank you very much mr rose mr watson chairman waxman ranking member davis appreciate the opportunity to offer a member's perspective on the questionable and abusive practices at the pardon alice electric cooperative i will describe how those abuses led to a member uprising and reforms in spite of the problems i want to leave no doubt as to my strong support for electric distribution co ops and public power as a p c member i had attended a annual meetings and i asked for increased efforts toward greater energy conservation and increased reliance on renewable energy greater transparency and openness those please produce no meaningful results in january two thousand and seven the senate tony l expressed news ran an article detailing p e c director compensation as disclosed on the form nine ninety from the year two thousand there is this report triggered a series of events that i believe can rightly be called a member uprising we began to argue nies other newspapers began to investigate and report on the p e c a class action lawsuit was filed alleging abusive practices elected officials were b c g back constituents and began demanding more information and reforms among the abusive practices uncovered at p e c where excessive compensation and benefits for directors and senior management a close nominating and election process leading to a self perpetuating bo with an average tenure of twenty two years closed at board meetings absolute refusal to return capital credits to members refusal to provide information on a wholly owned subsidiary invasion and an utter lack of transparency and openness through the lawsuit discovery we later learned of still more serious lapses in fiduciary responsibility and ethical conduct in january two thousand and seven a small group of members decided to take coordinated and decisive action to establish co op member control a core co op principle we continue to attempt to work within the existing framework i call former general manager benny field bird and i asked to appear before the board nominating committee seven members attended and presented three can the dates all were highly qualified but the committee renominated the directors whose terms were expiring so they were unopposed on the proxy ballots mailed to members next a group of members attended the march two thousand and seven board meeting and presented i'd buy a lot of amendment to change the nominating and election process again we were ignored in may two thousand and seven the class action lawsuit was filed throughout the summer and fall we continued to voice our demands by now those demands included the resignation of all directors in november two thousand and seven after plainness deposition of senior co op management and directors several rapid developments occurred the general manager mr fuel bird and the president of the board mr barnett announced their retirements new nominating and voting procedures were adopted the return to members of seven point three million dollars of capital credits was announced in january two thousand and eight mr juan garza was hired as a new general manager the local district attorney launched a criminal investigation the board meetings were open to members for the first time in march two thousand a eight settlement of the class action lawsuit was announced in may despite almost three hundred objections protesting the terms of that settlement the judgment was entered that judgment is now on appeal most members i think believe strongly in electric co ops and public power we are convinced that the efforts of activated members such as myself and mr higgins the press especially claudia grizzle us of the austin american statesman and jody lehmann of the harsh you baby can elected officials such as senator fries are and representative rose the lawsuit have combined to begin the process of establishing control our co op by its members quite frankly we were asleep at the switch for far too long mr garza has committed to work for many of the reforms we have long sought including bringing p e c under the provisions of the texas open  records act however i endorse it being embedded in the legislation transparency and openness combine with feral actions leading to reduced director tenure could have prevented many of the abuses we suffered at pardon alice much remains to be done and we intend to remain active even vigilant working with mr garza and the five newly elected directors we will push until we have a co op that is truly responsive to its members at that compli fully with the co op principles thank you for this opportunity to tell part of our story i will be pleased to answer any questions that the members might have thank you very much mr wat mr chairman and members i am carlos hagan's from austin texas and when you look at the name of our co op you would naturally try to pronounce it better now us those of you who knew president johnson can was a big mistake now to trust that general manager and our board we don't know yet what all they've done to us or how much it's going to cost us it took that expensive class action lawsuit to get where we are now to find out that we had serious problems and and the pending settlement of that lawsuit is awful what can you do for our co op well i do have another ops i do have a suggestion first what went wrong here with our co op we had a general manager who became so powerful he was able to hand pick the board get along board members who who just merely did as they were told apparently they the board members ignored their fiduciary obligations to the co op owners and they apparently did not know they were not the general managers employees or he was a man chorus they were quick to help themselves though to the lucrative compensation and perks but gave us little to no oversight of our co op my wife and i have been members of the herd analysis electric co op for thirty four years now our co op has grown immensely in those years but we've been completely satisfied with the service and the rights all that time we do get reliable service so we're like the majority of the owners we lead fairly busy lives and we thought we had no reason to worry about our co ops operations board members seemed to be among the pillars of their communities so trusting them seemed to be a reasonable thing to do we were all a small group of owners had their suspicions about what was going on especially when they got totally brushed off by the general manager and the board they persisted and finally filed this lawsuit and that shed some light on what was going on at our co op this is clear the board members are guilty of self dealing and pretty much being asleep at the wheel when it comes to their oversight responsibilities this is what the lawsuit did for us all the attention and publicity about the he gave us some reforms mainly letting the membership actually vote for its own board members so is everything ok now not at all the lawsuit is far too expensive it's costing about four million as to the settlement of that lawsuit it was forced on the membership i challenge any of you to read through this settlement agreement and then stand up and say well not so bad it is really bad more than two hundred members took time to strenuously object to the provisions in this settlement the court ruled that three of our members the plaintiffs in the lawsuit were competent and a to speak for all of two hundred twenty three thousand members it's fiction to claim that they even came close to representing the views of the rest of us in the settlement the members forgive anyone and everyone and their attorneys for anything they have they may have done it see whether their deeds are known and we specifically forgive even any oral agreements that may have been made and any trusts that may have been set up ma suspicions right away what might all this forgiveness cost us we don't have a clue we don't know some people try to defend the settlement on the basis that it gave us good reforms at p c that's not exactly what gave us those reforms  discovery and the lawsuit and the subsequent published of the the spotlight of the press revealing the misdeeds and who the culprits are i doubt that this is a widespread problem among other co ops it's probably just ours and we don't really want all the other co ops and their members to be burdened because our manager and board messed up co op owners are also of course customers and so that's that's the idea that ought to be protected and preserved i really believe that we've been punished enough at our p c so we don't want a bunch of other regulations come down that burden us further and punish  any more so what is the solution we have a general manager grew so powerful he could run our co op like it was his personal fiefdom took that expensive an awkward lawsuit to penetrate his barriers need a better to i think if we'd had any authority at all under our own bylaws a way to go to to get through there and make some changes we could have reined these people in a whole lot sooner with a whole lot less fuss and cost in our bylaws all the power resides in our board all of it if the board chose to do so right now legally and quickly they could do away with all the reforms that have gone before so we really need some tools and that's what i recommend that is a minimum that the bylaws of co ops be required to give members some ultimate control you have to be careful about how you structure those bylaws but they have to be members have to have some tools they can be as vigilant as all get out but they have to have the tools that allow them to do something about it so that's my recommendation and one more thought mr chairman thank you very much for allowing me to speak we like new general manager one garza he's getting our co op back on course but it's not bad easy the problem is for at least one more year he's working for this board the majority of them who got us into this mess so he's not really the guy  that you need to ask those tough questions to those two and others are out there hiding someplace you really need to bring humanitarian and make a mansour some of these questions thank you very much  am deeply deeply honored to be here thank you so much for inviting us president johnson taught school and got to love my hometown and even though he did teach there we never were able to teach him that the proper way to pronounce personalit that's general manager of personality i have been selected to lead the nation's largest electric cooperative serving over two hundred twenty five thousand members which is two hundred one thousand when i started just in february p c has a rich and proud heritage of providing reliable electric service members historically p z has focused on providing outstanding customer service strong system reliability financial stability and has resulted in the p c being rated number one in the country in customer service the number of five of all utilities in the country in overall cost him or satisfaction by j d power throughout the service territory as i have toured it since i've been appointed i hear about the quality of the employees at see they are the backbone of this company and they carry out the mission of the corporation in a manner that makes me proud indeed to be their general manager of the people on this panel as specially senator frazier and represent the rose they have been directly involved in helping to bring about dramatic and long lasting changes to p c i know they're here today because they're interested in the future well being of the co operative for the past eighteen months personality electric has been faced with the challenge of responding to the concerns of its members regarding openness transparency and governance issues however i am here today to testify that these challenges have resulted in significant changes at p c in short the co operative system of local member control i believe has worked under the leadership of mystery b prize  c s board has made these major changes our election system was revised to be more democratic and open this past saturday we had fifty eight candidates vying for five board positions over thirty thousand members voted in that election the positions of coordinated which is a paid chairman's position the director emeritus and the honorary director positions have all been eliminated and abolished all reps side now includes an array of business and governance information including board meeting agenda r s ninety filing and other critical information we have implemented a travel policy that includes expenses of the board being reviewed by a newly created expense an audit committee and made public and i want to add that even though i was at the game last night the paid for that on my pocket and i was so used to be kept metro system the monthly board meetings are now open to the public videotape and posted online to allow for  greater member board station a board compensation committee had been appointed to make recommendations for justin adjusting compensation which will be retroactive to march tenth once was when the settlement was first announced of the lawsuit on march tenth a settlement agreement of the laws of broad our members was reached judge dietz who presided approved the agreement in april b c will comply with the terms of the settlement agreement even though it is currently under appeal by a couple of our members as part of the settlement agreement and as a condition of my employment navigant consulting and cox miss matthews in cooperation with the public utility commission of texas are conducting an investigation into the co operative operations over the last ten years and the results will be reported to our members on the issue of capital credit it is important to note that capital credit are not held in a fun rather they have been invested in electric c s corresponding ratio is about thirty five percent and for all but the last two years is that it has hovered at or below thirty percent this factor dispel the myth that p c has been hoarding dollars and not paying capital members and full disclosure of the decision annually the p c has made dramatic and long lasting changes as we strive to adhere to the new policy of openness and transparency we will also strive to be a national model for the principles upon which to co operative was originally formed we will continue to strengthen our relationship with our members elected officials and other interested parties we hold ourselves accountable to the new standards our members have said because they are the reason p c exist as member owners they have the right to a voice in the process and we have a sacred obligation to ensure that their election i want this committee to know that the co op system member control works at least i believe that has been our experience at the scene thank you mr chairman thank you mr garza we're now going to go to the members questions at five minutes each and i'll start off with myself what you've described is really astounding here was a co op co op the name sounds so like everybody's part of it and it's going to serve everybody's interests and they are delivering the power as it doesn't seem to me any question about that they're doing their job of getting electricity to their customers but it's a closed system very much like any undemocratic institution around the world i think mr mugabe could probably learn some things from mr fuel bird that's a closed system now i could go through all these things that you've outlined the expenses for travels self dealing in pensions the choc'late girlfriends travelling around the lives getting physicals it is just plain self dealing and i'm sure in their minds they rationalize that they've been working there for so long and they're delivering the electricity and why not a few little perks and who good to ever know because they're never going to let it out publicly it took a lawsuit it took courage courageous and crusading journalists it took members of the legislature to try to get information about forgive my pronunciation the pattern now and even then as mr higgins points out we don't know that it might not revert back until some of the board members who perpetuate all this are replaced or at least they have their on notice that what they do is going to be made public  it's what we've heard on this committee over and over again we've heard from investors who tell us that the board of directors set the salary and compensation of their executives and they walk away with huge bonuses even when the corporations go in the tank and people are losing their money who own the corporation and the people who are losing their jobs who work for the corporation and the c e o s walk away with a huge amount of money it seems to me that president bush should be going back to texas to try to democratize the co ops be a chance for more success there i think than some of the places where we're making throwing more money into the lawsuit and didn't really resolve all the issues your honor it was my considered opinion that that it was the the the lawsuit was draining the energy of the of the co op and the focus away from doing our job and i felt that we needed to bring this as quick a halt as we could the lawyers the minimum price for those lawyers with something like five hundred dollars an hour and every hour just keeps mounting the cost to pay to the lawyers the insurance companies paying for portion two point six million dollars two point four million dollars and the co op i'm just i'm just a chairman not an honor thank you well that sounds like public financing of lawsuits a lot of people say well we shouldn't allow these lawsuits because so much money goes into attorney's fees well or no because there's a record shaking your head that is absolutely that's the only way that we were going to learn what was going on there with you had also forced the estimation out do you think if we had a requirement in all of these co ops around the country we'll  what what the investors and the owners of the co op should know you think that would be helpful absolutely you need two things you need at least some of the members that are vigilant paying attention and trying to find out what's going on but they need the tools to work with in order to do anything about it and we did not the tools here and that's what i'm a strong advocate for is give us the tools to work with we don't have them yet really we have some reforms but they can be reversed i'd like to get from you in more detail some of your recommendations for if you think the federal government might do by way of legislation and i say that with with that i want to make very clear we don't want to put we don't want to regulate these but we don't want to put extra burdens on financially we were talking about that i just like to make sure that there's an openness in co op so that when the pillars of the community tell our members that they're certainly running on us collapse not like those personalities people we don't know if that's true or not and one other thing there when you when you look at how much they you read that whatever amount that is we don't know but whatever it is when you spread it among two hundred twenty three thousand or more people then or households then it may not be it's not going to make or break any individual audit to the public utility commission and i think we also need a minimum standards of governance so the good people can run for the board and have a fair shot at being elected in less those three things occur i don't think we have real local control if we have real local control we have over two hundred thousand highly qualified very intelligent very able members of this co op who are going to be able to make sure that goes well so the navigon audit it's important for us to monitor it's important for us to see just what happened so that we can figure out what is needed in the way of reform that navigon audit stopped short of disclosing everything it needs from past practices and policies and then i believe the state ought to step in and i agency and we've got to the states got to know what they're doing which path we're not we don't have we haven't had the bill to do that so it's going to paint a lot of what happens between now and november but we have as you know the authority in texas to do i do but i just want to you have the ability essentially to regulate this in any corporation and if you choose to you can create all the transparency that you want to within state law is that correct need because you lack the authority within the state of texas to create the transparency you need we appreciate the input of this committee looking at it but texas has all the authority we need and actually moving forward and mike ensure that we have that we exercise that authority so there's nothing in the regulatory spectrum that texas does not help this  that was created by the state and we believe we have sufficient authority to do anything we need even to the point of for regulation if that was so today the the things we should realize are don't mess with texas have sufficient authority we are not asleep at the wheel we are of aggressively going after the us and we will address and we're i'm i'm making sure we had this happen once i want to make sure it's not happening other places we have sixty six immediately and start raising the issue so that there can be an investigation and i don't know that when indiana i'm going to check after having heard your testimony but the place of appeal was not we didn't have a place for them to go for appeal and i agree with test test test as my check does one two three four five six seven eight nine ten test mike check  the hour of eleven fifty having come and gone i'd like to reconvene the meeting i'm sorry it took a little longer than i'd hoped it would are you aware that mr english the head of the association who will be testifying in the next panel has at least out lay claim to me and i think this is a an official position of the association that right we're accountable to our members which essentially is a public to me that pretty much defines public power but i understand there's another argument here but representative rose mr watson and perhaps some others  stoutly stressed in their testimony that they believe in their co op they believe in public power and yet you belong to a trade association that says you're not public power and that's correct why do you dues to an organization that doesn't absolve your beliefs because we come from the same roots as the rest of the co ops in the country and this is the opposite you say your public power they say you're not who's right well i believe that i'm right but you're paying your right payers money to an organization that says you're wrong if you go beyond that fundamental difference of opinion and i understand it's a difference when you look at as you say there's a fundamental disagreement so why do you belong to for the purpose of sharing information on how to best serve our members and especially sharing technical information on how to best design and implement  the most modern innovations that we can use to serve our members would you belong to a communist organization that had good engineering capabilities absolutely that but one which denies the existence of public power for ok even though it's a fundamental difference i consider it something at that is outweighed by the value that they bring in terms of the exchange of technological know center the clarification you're trying to make i actually agree with the concept that they are not public power because they are a distribution really there are a sale and billing operations as a co op if they were fundamental difference of opinion another fundamental issue and i don't want to settle all settlement down there but i'm a little worried that all may have been hoodwinked and perhaps suckerpunch by this because everyone wants full disclosure right to bribe i appreciate that but i have oversight over the industry and the industry this is a co op distribution company and i congressman burton's question it was revealed that there was no one to complain to in texas state government i'm because you all had your jurisdiction apparently but this other fundamental disagreement we need to get into is this everyone's for disclosure why hasn't anyone told you that's been a federal tax law since nine hundred seventy two a long time that every electric co op shall keep open books and records accessible to members at any time congress or read reeling from one hundred seventy two we need to do is enforce existing federal was something called the task force report on capitol credits that had been prepared under the auspices of the n r a i called the n r a and talked to about six or seven people attempting to get a copy of that report and they would not give it to me they asked me are you a board member and i said no i'm merely the person that pays your salary i'm a member of a co op that is a member of the n r a and yet they stonewall me on attempting to get that now public power finally did get it through the bluebonnet electric co op in texas of which i'm also a member but i disagree with the senator fraser i believe it is public power although we representatives here i've observed texas government for many many years i'm seventy one years i worked in the government when i was in law school regulatory taxes are all too problems we've often demonstrated that in fact we cannot do that in texas representative rose and i appreciate all the work that you've done on this issue i read your article on the plan right here last night and i will say this the center and i both agree that it is important for us to have meaningful local control of the co op level and ultimately that is the best check and balance on decisions at the board and senior management level in co ops i do believe we can require open meetings and open records i do believe we can require an annual report to the p c and i do believe we can set minimum standards for governance if we rejected formally requested that earlier this calendar year i believe the more light we can shine on these past practices the better for our co op and our membership so that we can figure out exactly what's needed in the way of reform as we move forward today telling every customer what is in his or her capital account no why not i don't know it's required by law and they're not so this is private property that american citizens are not allowed to know that well that is not being reported to us on an annual basis which is my understanding that of what the internal revenue code requires after all the turmoil and critical we have four holdover board members from the old regime who have the nerve to think that they can constitute a compensation committee to correct the mistakes they made themselves who are undermining in my garza's efforts to open up this i'm doubtful now whether there's a majority on the board as it currently exists to voluntarily come into the open records act which is what we'd all been hoping for pending pursue some further questions mr watson you've expressed your view that you don't think state law in texas as good as it may be that's being offered by the mr fraser and mr rose is going to be enough is that is that a correct statement well i'm not certain it's going to be enough it's easier to kill or kill a legislative proposal in the state of texas and it is to pass one and it's possible that these are two highly skilled legislators influential legislators and so it's quite possible that the good legislation i'm sure they will draft and introduce will in fact when gets way through committees and  stalling and go to other committees calendars committee and so forth and so on it's a very convoluted process and so i'm trying not to be too pessimistic about it however i'm not sure  that that will fully take care of it it worries me the practice is and i've said this for almost two years now i believe jeopardized the tax exempt status of the p e c hoarding and building up permanent equity which is not permitted not complying with the disclosure about property ownership as congressman cooper pointed out and so some of these may be more do something at the same time legislature tours in other areas states with their own co ops will probably have a different view about added regulation so it's a huge barrier to overcome to get to the point that legislation is in fact and acted to become the law to regulate all the co ops does anybody on the panel know how many states that have also have laws like that being proposed by mr president mr rose we don't know that  well i must share my concern also that even when you have regulatory agencies that are supposed to be watching over the industries to be regulated they often become captive of the of the industries themselves  although at least you have some place to go when you have a complaint with a regulatory agency a root cause of the problems that occurred a novice appear to be the undemocratic process it has or selecting as board members in theory the board of directors is elected by the members and members are able to hold the board accountable through the electoral process but that's not what's happening at better knowledge until recently incumbent directors selected  nominating committee which in turn indoors the preferred slate of incumbent directors in some cases family members of the incumbent directors were placed on the nominating committee so the son or brother of a director would be on the nominating committee and surprise that director would be nominated for another term only the slate of candidates approved by the nominating committee appeared on the ballot so there was a ballot which is one name for each open position it was all but impossible anyone but hand picked members to be elected to the board mr was it when you and other members tried to get some new candidates on the ballot what happened when we appeared before the nominating committee in march of two thousand and seven we presented three  candidates that we asked be placed on the ballot we didn't cite dull place your own other people on the ballot by the way it's my understanding that those seven appointees one from each of the seven voting directors that constituted that committee were paid a stipend for serving on that committee and i looked at all seventeen directors seven voting directors and ten advisory directors every single one of those seventeen people were originally appointed to the board by the board in other words a vacancy occurred during a term i think that's why they arranged it and a new member was appointed by the board who then became the income but when the election rolled around not they would have mattered because there was never any competition but i absolutely refused in fact when we were leaving the committee hearing that day at the headquarters  a position in other words setting up oh my goodness an election that actually had two people or three and he said no but it had never been done in his memory and his memory went back about forty years and we said we'll do it this time please and of course they didn't do it as i understand it you say forty years i thought that was my information was no one successfully challenge the slate picked by the board's nominating committee for thirty straight years maybe longer and went right challenge the official slate the sitting directors exercise thousands of proxy votes to defeat them they are even prize giveaways for members who sign their vote over to the board's proxy committee the prizes which were donated by ago the center and i both became engaged because we had members and constituents and ourselves were all armed by what was going on and this is a statement of the obvious but just to be clear unless you unless your name is on the proxy ballot that as mr watson says nobody other than the hand picked nominating committee designated candidates were in the proxy ballot in the mail box on september fourth of last year i wrote to the p c and requested five changes reforms one of them was to reform the election process so that folks could access that proxy ballot members could access the proxy about by petition some co ops do that today in texas i want to  board for having made that change and what resulted in fifty eight candidates running this time when i received the ballot in the mail as a member i had those names on my ballot nike cast as a male and that i tended to dating but as a male and voter i could use any of them so i think as we look toward governance changes next session senator and i've been talking about it we're going to work on it as we approach the january session we have to have a signature base talk about another texas co op outside of fort worth got tired of being a co op so we decided to go in the hotel and golf courses borrowed a billion dollars billion with a b went bankrupt this is in the jurisdiction of the great state of texas and your opinion on that is that proper co op behavior you want to sanction for now us going into the hotel golf course business investigation fifty percent of the co ops that have gone and other businesses have exceeded the fifteen percent threshold that's a fifty percent error rate that's a very high percentage and for any one of our billion dollar and put at risk the good faith of their customers who signed up for electricity business not hotel business golf courses that's amazing but let's look at some others outside of your state the co op outside of atlanta ca that sub contracted out its entire operation every truck every light pole to a for profit subsidiary secretly owned by co op managers so if you think you have a scandal of personality get out of a chocolate and celine dion seems a little bit in comparison to this master plan and it's been underway it's still under way for the last ten years using capital credits to invest in power generation at least it's my opinion that co ops in texas should not be doing that and that's not a good use of capital credit money what about our friends in alabama who did not have a board of directors election for their co op for thirty eight years so as great as the texas legislature is they all don't have jurisdiction outside of sight and these problems seem to be mounting in a number of areas but it all depends on an legislature was asleep we were asleep and those few intrepid reporters sometimes relying on inside to rebel blow the whistle and help shine the light where needed be sh and look at one party on one side of the on the other party on the other side of the majority and minority reports and all those things i wish it wasn't that way it's not that way in texas and one thing that i might suggest that we all would agree on on both sides of this would be that the federal government and force the laws that exist on the books and to the extent that we've got spending more of their capital and resources outside of their core mission about what we can do in the state of texas and we talked about this a good bit that i just mentioned we've got to make sure that every call up in the state of texas files open meetings open records we've got to make sure that every carbon tax is submitted at least an annual audit report to the public utility commission every year part of that might be very clear statement about the capital credit accumulation in that and that's something that i'd like to consider as we move forward next session but also finally the third point we've got to make sure that there's minimum standards  represented the p e c for seventy years probably one of their lawyers mr field bard reported in public or in the press had said there was a loophole in the internal revenue code that allowed him not to put employee compensation which is clearly called for on the farm and in the instructions and so i asked the lawyer i said are you glad now that you advise that way and he sort of gave me a sheepish look but i understood at the time that about forty percent of all texas co ops were cycling to accurately and correctly report on the form nine ninety now that's the only instrument which is publicly available to members such as myself to learn about the compensation in parks that are being paid to co op employees key employees and the board so you talk to the internal revenue service i understand that within the last year they've let it be known that they intend to begin finally looking at non profits and enforcing the requirements for nine  merely enforce provisions i'm afraid that you may punish the people who have already been punished if they start if they put our nonprofit status in jeopardy so they need to be enforce oversee ours i think and i'm not sure what the senator from texas could say about it but it looks to me like this is a state issue and not really a federal issue but i would like to ask the senator a question if i could from one of the press releases after you attended a cooperative meeting at the united cooperative services you lot of the group and said the cooperative spirit of rule texans created this system which electrified rule texas is the same spirit that allows the majority of cooperatives to continue to operate efficiently and effectively for their members senator would you say that you have acknowledged that  business and then went bankrupt so there must be at least one other tech co op that's had significant problems unless you view in taxes a billion dollars and not be a lot of money and represent about what we're representing what's happening during current period which is the last two years the answer you're talking about was not in the current period i don't believe and we're looking at what has happened in the last current period and of the  it would it will suit us to just focus on the question is there one co op who's acted poorly i think as we move forward we've got to make sure that each texan who lives in a co op and is a member of the co op has certain basic assurances and i've said it before but i'll say it again i would challenge anybody to disagree with the notion that open meetings and open records on appropriate co ops i challenge anybody to disagree with the notion that we ought to have a democratic election that's fair for the but i'd also challenge anybody to say that we ought not have our co ops report to the public utility commission a basic accounting of their books and perhaps also  or a snapshot of capital credits and where that where that go up is that standpoint and no disrespect congressman westmoreland but knee jerk and stop neither one of those speeds is appropriate in this situation as we approach it from the texas legislature we've got to be mindful to keep this balance of statutory oversight and local control and i think those three reforms next session can do that  you your questions i want to thank this pal you've been very patient sitting here for quite a long time but very responsive to the questions that we've been asking and also sharing with us your insights about this i'm pleased to welcome to our committee hearing today a former member of this committee and a classmate of mine when i was first elected to congress on the school in english is the c e o of the national rural extra cooperative association which is the electric co op trade association and for years you represent the sixth district congressional district in oklahoma i'm pleased to have you here and before you even sit down my eyes will continue to stand to take the oath the swear to tell the truth the whole truth and nothing but the record will indicate that that was an affirmative and yes it was but i have been mistaken a couple of times in my lap or just a couple of times the the full statement that you submitted to us will be on the record we will have a clock to let you know in five minutes is up and we'd like you to be mindful of that and then we're going to pursue questions from  members of the panel there's a button on the base of that mike and i'll say it i believe it's already already on we're in business mr chairman and the let's hear from you all right again first of all let me just say i'm delighted to be back to this committee many fond memories here of this i know each time that i ever had a hearing here and this committee dealing with the electrical operatives always invited to administer the row utility service and i got thinking about that a little bit and it made sense to in the galley gee i guess i'm here in place of the administrator of the ro utility service and that i think says something and i would like to point out mr chairman i think you and i made a big big mistake twenty five years ago a big mistake if you look at the real utility service today we ended up through those years of cutting out two thirds of the staff at our us and if you look at many of the issues that we're talking about here today the rule utility service still has rules and regulations on the books to be able to deal with those issues but they don't have the staff and don't have the funding and they've just pretty much been neutered to be honest about it when we talk about regulation and so probably that's the reason we're raising questions and we have a some folks here that obviously are not operating in the way that their membership thinks that they should have operated i think that's become very very obvious so i think that's something that we've got to weigh and take into consideration is that maybe that's something the congress would want to do maybe go back and rectify that mistake and bring the role utility service up full funding and put them in a position to where in fact of every co op so i we've got a we've got an apparatus here that has fallen into disuse simply because of the fact that the folks don't have the resources and this was all part of the changes that took place democratic and republican administrations and democrat republican congresses and we've pretty much as i said neutered this agency second but what i would like to make mr chairman is the fact that and i've been struck by this for some time that that the directors of electric cooperatives and our elected officials and as we look at them as elected officials i would suspect that the members of this committee and certainly in the congress should feel a great deal of empathy was some of the the challenges and difficulties that they face are not dissimilar and i think that you and i have both seen as we've moved through the last thirty years or so that people really make up the institution it's not these two should itself this democratic process is ours is good it's good as far as the congress and our government is good as far as electric whopped is concerned it's the people that we get involved and so we run into some of those issues with regard to people and people will they damage everybody everybody gets painted with the same brush and i think that's important and you made mention of that the it would be unfair to just say everybody's the same and i think that's true and as we've seen that whenever individuals a stub their toe or perhaps don't move in a direction that the public thinks they should then the public brings about changes sometimes it takes time i've seen an awful lot of elected officials and body from time to time who probably already operate in the way that their consistence thought the should the sooner or later their constituents took action and they will that now think we've got the same thing here and these days everyone should be sent to do the fact of the smell test smell test and i know each and every elected official whether they're always mindful that particular these days know the congress particularly sensitive about i was when i was on the congress and you're always look at this leg ali how would this read on the front page of the newspaper what kind of headline will this make you might maybe you're not doing anything wrong but the appearance of impropriety is bad enough and that damages you if you're an elected official now think that's what we're talking about so whether you're an electric cooperatives director are a member of congress we face the same constituency these are the same people that elect us and whether we agree or disagree with the wisdom of their decision as to who they pick we've got to work together and that's true within the electrical optics program as well we all try to work together you do that in the congress and this is a struggle of how do we how do we deal with it and i think it really comes down to this question bottom line you know how do we appreciate you having the hearing and certainly appreciate the fact that we've had this little airing here with regard to one cooperative that got off track and obviously did some things wrong as i understand there may even be the consideration of criminal penalties against some lives that  committed some wrongs and i'll be straight very straightforward with you if there are any violations of the law we have to prosecute that ought to be true for members of congress it ought to be true it was a director that's one line second line i think we come into is this question of it may not be illegal but it may not be something that is very commendable and those are issues that i think are going to have to be taken care of by the local people that they represent just as they take care of any disagreements they might have their elected officials and i think we also come down to the bottom line mr chairman that we all want to fair and open process we want everyone in gauged in competition we want everyone doing the right thing and we want all of the voters well they're voting for members of congress or voting for directors or electric to be involved in that process thank you very much thank you very much a mystery most let me start off it seems to me that what you said was an oversimplification we face our constituents but it looks like some of co op board members don't face anybody their elections as we heard in this pattern of this case is rigged do you know if if the elections in other co ops are similarly undemocratic well i think what we've got to look at and keep in the election night after all glad that for the record i don't have that hand let me just say that i can say mr chairman that that in the last few years we've had over forty percent of all the electric co op  representatives all the board members have turned over so you've got over forty percent new board members that have come in the last few years really and i think if i recall correctly that somewhere in the neighborhood of two thousand and one now i was comparing that i believe with members of congress and i don't think we had near that kind of turnover even with the elections of two thousand and six so i don't think you've had a similar turnover within the congress and let me all know by itself doesn't really impress me little federal oversight any longer by the rural electricity electric agency it looks like in texas there wasn't oversight at all that we can tell then maybe then maybe was another way to have it but if we have the boards designed to be if they were designed if the costs were designed to be self governing through a democratic process i just think we've heard a good example of how that process does not work the petted alice case is an example its board election process was rigged they failed to have competitive elections for over thirty years maybe forty meanwhile the directors who were in charge were enriching themselves at the would you agree that the typical process it provides for accountability co ops fail that pretty well i would i would say mr chairman it is obviously the people down there were not happy with the situation obviously the system had to file a lawsuit sure took some enterprising reporters to go out and break the story finally some members of the legislature looked at it but there are a lot of places where the press is not so vigorous because of all the cutbacks in journalism there are a lot of places where people don't want to file lawsuits because it's so expensive and there are a lot of places where the legislators think that the heads of the co ops are just the powerful local people that they're very prominent and and maybe the maybe there's nothing going on because i haven't heard any chairman their right to do so i'm only defend the fact that they have a right to have as their representatives on their board who they may choose and i will certainly agree with you that the process should be free and open and we should encourage as many people to participate as possible and i will agree with you mr chairman that that that went on far too long without that those kinds of situations coming to bear  as you look at the transparency and other collapses in your trade association does anybody look at that or know about it well when you look at the rules and regulations in which they operate the bylaws in which they operate and what's bylaws provide but this comes back again mr chairman i make this point to people now here it does come down to people and i must say my view of the nature is if you give somebody the opportunity to go and take a lot of money and use it for their own purposes there's a limited ability to rationalize doing it that's part of human nature and that's why you need some checks on this abuse of power but i could respond the chairman i would make the point that's absolutely right we've seen it i saw it here when i was a member of this body we saw all those individuals taken advantage of situation we had rules and regulations and laws on the books we had new rules that were proposed and changed things that came about but we still have those individual come through and you've always got to be vigilant and as i say that those are the people i think that if there are criminal violations and we should prosecute there is no excuse not to and i think in fact we've got to recognize it is not an easy situation to go in and prevent someone from constituents is not true well as miles are standing and that's always the case and that's the delicate i think of the problem that we're facing here you've got two bodies of elected officials you've got the congress and you've got the directors of the local electric cooperative congressman or other local director at the local co op but there has to be no matter whether you're talking about government or whether you're talking about privately and electric cooperative under any circumstance let me  any corporation in this country even after sarbanes oxley and enron yes they are and each cooperative is required to make that available to any of their members to look at it and certainly it's available i utility service although underfunded and not really functioning as it should it's there as a check and balance and also you've got the federal government in the form of the i r s that takes a look at your paperwork and in really do you know if all electric memberships do they all have these annual meetings that i'm accustomed to go roughly nearly forty three percent of all the structure on the distribution side is own so you got twelve percent of population having to maintain and nearly forty three percent of all the distribution infrastructure of this country roughly the average size is about twenty one thousand give and take the smallest is less than two hundred and is the largest i believe a two hundred thirty i believe is the last time i heard as far as the number of members that they have at that cooperative service and i'm proud to say that george will probably our electric rights are probably fifteen or twenty percent below the national average and i'm glad to have the participation of all the power providers in the state of georgia and your organization is doing a good job well thank you very much and that's usually the kind of testimonials we're used to hearing about electrical ops all over the country so i'm happy to say that what you find in georgia is not unusual in the rest of the country and even the state of texas they gave us was this let me do it i've researched to understand some of these things now i know that your pac gives as much money to politicians as boeing corporation so that's got a lot of influence it's got a lot of influence in to pretty much draft whatever legislation you want to get exempted you know so there's no oversight but i'm delighted my friend from georgia is here because we were talking about cobb electric earlier and he was seeming to say that well things are fine you're doing a fine job everything's hunky dory well cobs as one of the most notorious examples in all of america because is it ok for a nonprofit electrico up to sub contract out its entire operation to a for profit subsidiary secretly owned by co op managers and still pretend to be a nonprofit that's a little bit like sub contracting out the entire pentagon to blackwater this is an amazing thing happened and this is a nonprofit if it's really run being entirely by a for profit what stand does the n r a have if you think that's ok behavior is that the question ok let me try to answer that you had a number of questions that were tied up in the first thing let me just say we're very proud of our pac and we have made contributions to we disagree big time on that now let me let me finish the question here the issue you come down to is i could have some very serious disagreements with the way the congress is has been contracting out a whole number of it be ok for every co op in america to subcontract out its entire operation to a for profit subsidiary secretly owned by co op management and still pretend to be a nonprofit is that tolerable behavior under an r e c a guideline let me just say this i would not personally recommend that that's not something i would do but i'm not elected representative of the membership in that particular area of the state of georgia and those people whatever business decisions they might have got to be held accountable and as i understand it it sometimes they are being held accountable because there are serious disagreement down there among that membership as you well know raising these various issues there may even be legal questions involved and that's been taken for the courts and that's the process that needs to be followed now what glenn english thinks and what the directors in the state of georgia think i don't have their constituency nine and when i was a member of this body people in western oklahoma may not have agreed with what the people in tennessee thought and you and i didn't always vote same way and that same thing here mr inglis so there was no co op misbehavior that was the so bad that would prevent them from being members of and as long as a local vote ratify the decision statements when you know that doesn't make much sense to ask me questions the point that i would make is this electric cooperatives are very proud of the fact that our bond rating on wall street is very good work said to be in great financial condition and in fact in some cases we're better condition than some of those folks that some of the big power companies of this nation if you look at the cost of power because of the infrastructure that we have because of the fact th only seven co op members per mile versus thirty five for an investor owned utility we've got a huge amount of infrastructure we have to keep up and we have some of the poorest people in this country that we must serve percentage wise i would dare say that we have a larger percentage than anyone else in this nation and so from that standpoint i would point out that yes electrical operators are some of the poorest representatives of the poorest members us country and they're owned by those folks thank you mr chairman mr english i'm here as a longtime member of the team i will pass sheik rural electric cooperative located in brooklyn iowa which is run by my good friend darrell healin who went to church with me when i was growing up in high school and i got to tell you that there's a real big disconnect going on between my experience and perception of how our e c s are run and operated in iowa and some of the information that mr cooper has shared with the committee about other parts of the country and i guess the the the opening comment that i would make is a comment that i would share with anyone in your position as a head of any type of a trade association or professional association and that is  oftentimes where there's smoke there's fire and i think that all of those great role electric cooperatives that i represent in iowa those seventy five thousand constituents of mine who depend upon our e c s to take care of them to take care of their power needs to be there for them in the ice storm disaster that we faced in february of two thousand and seven where they responded with admirable dispatch all over my district when we went through this terrible tornado that we just had the largest tornado in the united states this year and the r f c s were out in full first force taking care of my constituents the flooding that we're dealing with right now it's the type of constituent service that i would be proud of to have my staff performing but i also know that you are only as good as your weakest link as a trade association and some of these concerns we're talking about are very disturbing so what i'd like to do is ask you at the outset from your perception and the perception of the member co ops you represent what should be the number one guiding principle of how those co op service members that they take care of first of all let me say and as i said before unfortunately as members of congress are well aware you get tarred with the same brush this is that's just part of it and your deal with a lot of people what we're supposed to be governed by are those seven cooperative principles that's the basis on which we have our tax exempt status with the internal revenue service that's the basis on which we make our claims that we are indeed different and the basis on which we are a consumer organization but at the same time we fully recognize and understand that when you bring people into the process seven thousand directors a thousand managers your chances of run into somebody who doesn't quite operate in a manner that we would like to see then we all get tarred with that brush this is a trade association we have no authority we can we can encourage our members we can provide our members with education we can provide our members with what their peers but as far as being able to come down and mandate and say you shall do such and such we're not a corporate headquarters that was a point that i was making the chairman early on whenever we gutted the rule utilit service and we did it over a number of years after nine hundred eighty that took care of a lot of that regulatory basis on which i think members of this committee seemed to be searching for that was the regulation in the materials you provided the committee there is something called the board leadership certificate which looks like a number of continuing education types of programs that are available to member co ops to help them become the best and most effective type of cooperative that we expect from our co ops in iowa can you give us some sense of what type of participation you get from your member co ops in those types of leadership training opportunities and is it having the desired effect that the cooperative would expect that first of all what we would encourage our members do is get their credentials we were looking for credential directors that's their first step after they get elected and we have good participation that we have over half of the cooperatives and keep in mind we have over forty percent new directors in the last several years and moving through that process we do in fact offer a higher advanced training which gets in the power supply and a number of other more complicated issues and we encourage our directors displayed in that as well but our real focus and the focus i think on the hearing that we're talking about today comes on the grounds of the old director and quite frankly having a good dose of common sense and recognizing and understanding that whatever behavior you're going to be following and i think any amount of education will have on the exam all that we've seen before us today that comes down to just plain bottom line common sense and recognizing understanding that you have to be held to a higher standard and you're going to be under scrutiny and you better be prepared to answer for and that's what they're being required to do is answer for and you also supplied us with these form nine ninety s return of organization exempt from any forms which do require organization detailed information on executive board of directors compensation are you personally aware of what type of oversight the internal revenue service has been performing on monitoring these forms to ensure their accuracy their completeness and to achieve the desired transparency that this law is supposed to well  think i can say about that is this is a new form and is to a new level of to a degree that we've never seen before and as no other business is being required to do i can only assume of this that the i r s plans a much higher level of involvement and the proper filling out of form nine that is we've had the past has everyone built it out exactly as they should and as we heard with some of the testimony before  understand mr cooper has an experience in tennessee and that's sort of the rich nation of it but give me some little history on that well i know most cooper knobhead are this agreement with regard to this issue and i think it started with the issue in tennessee i think it's fair to say and has to do with the fact that that cooperatives in tennessee are unique and different from cooperatives elsewhere in the country for instance they buy their power from t and with a long standing contract that t v has head it is prohibit the payment of capital credits what t v co ops are expected to do is to reduce their rate and other words to charge less for the power as opposed to disagreed with that and he wants me to participate and tell him the cooperatives and you should pay those gap of credit perhaps he wants me to tell t v a that they shouldn't shouldn't require this contract or whatever distributing money that that is an access capital credit that is a part of the requirements that you have for electric cooperatives through this process and again you're back to the form nine ninety s and  requirements that they provide this information and make it available now the issue that i think we're into as well here before us today is this question of how much it is available and  one billion that he talks about in the way of equity that most of that is tied up in buildings and infrastructure and things of that sort if you're talking about actual kwapis cross the country have on hand you're talking about roughly three point eight billion dollars now this is a very intense industry from a resource standpoint and this is about forty five days operating expenses which on average on co ops around the country and it's modern standing that that's pretty much in line legislature is focusing on the governance and open meetings and i think they're looking elsewhere how they can ensure that the kind of situation that took place it won't happen again as you heard testify they seem to feel that this is a local ma and that they have it under control i've got to admit i personally have not run into situations like we had in part analysis and so it is rather unique i think and how are the c say when i was a member of this body there were times that i question the judgment of another part of the country but no one sitting on this panel all right other comments about this sort of you know tennessee you know i think the challenge is tennessee unique and different in a way we do have t v we're thankful for that but pattern alice the subject of this hearing the largest co op in america had never paid a in seventy years despite having a major surplus so if the largest co op in america could behave like ours in tennessee that got me worried now regarding the tennessee case co ops in tennessee have so much political power valley have embarrassing amounts of money on hand and b are raising rates at the same time in violation of this one senate and the contract that we've talked about so we have a double whammy in our area but it's the rest of the country too like in the form of capital credits to the customer is this situation a texas cooperative and usually it's unique i mean it is it's most unusual it's most  unusual the overwhelming majority of of our members refund capital credits really the judgment in the case that has to be made and again this gets back to that business of the decision of the local board they want to have one hundred percent equity that's that's probably going way beyond what they know it's going way beyond what the average co op has which is about forty forty one percent now but that's a decision on their part goes i've got very conservative directors and it's their to their directors idea we don't want any day it and we want to make sure that we can cover whatever cost we are without going out and borrow a lot of money that local decision that's that's a very conservative board and as long as that's made available to to the membership of that committee they are up to that they represent then obviously that's a local decision we have others that have far less but it's a local decision by elected representatives who've been elected by their membership to make such judgments just as members of congress have been elected to make judgments with regard to the budget and deficit and everything that members of congress deal with it need to pay attention to the business has taken place to cooperate they need by attention what's going on here in congress and they need participate in elections members of congress the election on an off year for members of congress i remember correctly about thirty six percent and the election nationwide for directors of electrical optics about thirty one percent i think we both would agree that it all to be three quarters are better we ought to have far more participation in the democratic process of government and certainly in the process  and it's a rather large electric every year just bring folks and to make sure that they come into this like they will even give away a new car it's a drawing that's come to you've got to be at the maybe you come in you sign up as a member and they have a drawing they give away scholarships to the local folks i know some others give away old pickups at the co op might have some of you may have experienced it and others they give away a friend but you trying to get folks in to participate in this process contrary to what i think the impressions been created day that no one no co op wants people show up at their meeting well that's not true and it's completely contrary to the experiences i've had it in the last fourteen years and work in the lecture kwapis girls has got to go to great lengths on that and so i think that there's no question we would like to see far greater participation and i'm sure that you would too in your district people going to the polls no doubt about it and we expect and i'm sure they will the calls are smart folks  is to engage him in and something known as our energy our future which is to make three points we're trying to get them to talk to you all in the first point is that to make sure that they are aware not just electric wapas but the whole electric utility industry pretty much how out of capacity we've built up excess capacity late seventy's early eighty's were out of that second thing is to understand from a standpoint of technology that far greater investment needs to be made in technology so that we can meet in a climate change objective that the congress may split and if we don't then we're probably going to run into a situation where we're not going to have enough power we're going to have rates that are going to be excessive and that's a train wreck none of us want to see the third point is the fact that we also need to understand that electric right those people that we serve and i would suggest a lot of the folks that you serve there's a real question in the future of whether electric power in this country is going to be affordable to all americans low income people may not be able to live with the promise that was created in one nine hundred thirty six with the creation of r e i and affordable electric power thank you mr all members have completed round of questions and in fact the comment about the pac is almost laughable that because you've got a pac you can get anything you loan appear if i was true big labor and trial lawyers would be getting a thing they wanted and if i recall correctly that's bribery is it not well  y prosecuted bribes and that right let me say this that i've never seen a voter turnout method like that i'm used to use whether it's health screenings  i'm from but let me ask you this mr cooper mentioned the cobb e m c case were there any laws broken there well that's that's the issue that i think there is between some members the court and that's what kind of system we have a we're a country of laws right there i feel like there's been a law broken then you have a remedy in the court system exactly and that's exactly where this is taken i'm i'm assuming that's what i was always taught and so i'm assuming that if there are laws being broken somewhere that they're being taken to court and with the situation and i'm not familiar with the situation in tennessee but from what i heard is a contractual agreement between the t v in the electric membership corporation the question about why they can't do these rebates or   if they did the judge came down and said this is a contract issue and and so there's been some type of the matter in the case that we're having a hearing on today well i think that would be a little activities that go up if the c e o for instance is carrying out activities not think you could probably stretch what was happening down in and they would have the authority to remove the c e o so they have a regulatory power during that period of time and i'm talking about most of those going into the early eighty's were borrowers they dropped off because of the limitations that you had stamp was they could not get a timely don't so you get big co ops such as the part now situation in which we're growing very rapidly and they said you know our u s has been cut back so far we can't get this in time to meet the needs provided the electric power for our membership they got out so the whole point is if we had if you and i had maintained those levels and kept our us regulate like that should in there throughout the eighty's and ninety's i doubt that we'd be here today s regulation if it were ever in force preclude a co op from taking money from the co op and investing in hotels and other enterprises will that's another little thing i'm fortunately that's i've got to take a big share lap although you get a little piece of the big share comes back in one thousand nine hundred eighty seven on the agriculture committee chairman of the subcommittee conservation credit we came up figured out hey we have no money for program we're out of looks i mean that's when we're having tight budgets and all that stuff so what we did at that time is well we've got all these electric was scattered all around the country the getting our u s law and we'll ask him to do more soledad when we made the cooper i thank the chair not only for holding this hearing but for your extraordinary patience i think the main and r e c a argument is well there may be one bad apple we'd had this hearing last year they probably would have agreed even to one bad apple but at least today we know there's one bad apple that's called for analysis don't put words in our mouth that from the limited research i've been able to do and i wish there were more data which there are more transparency i wish there were more disclosure because i believe these are public power entities founded in the new deal owned by the people and information should be widely available but the best i can tell it's not one bad apple it is at least ten percent of the nine hundred thirty cops in the country and it may be a lot more than that i hope that's not true i'm sorry my friend from georgia had to leave but remember ops tell you exactly the private property that you and i thought this was a country built on private property outside of the enery ca's own material to point out that small co ops are charging their customers an extra two hundred twenty dollars a year two months of light bills just so that they can remain small all this is completely legal that worries me so i think it would be a complete mistake for this committee or for members to dismiss her analysis as a rare aberration for example pioneer the co op in alabama hadn't had a board of directors election and thirty eight years you're talking about how there's great attendance at elections of how many decades does it take not to have a board of directors election before that should affect their co op status are you willing to accept people at a half century or a hundred years of no directors election there's got to be some minimal standard to join the n r a well there's an awful lot of accusations in there and first the first one i would say is if you're saying bad apples as i'm voted out any group you've got bad apples you've got bad apples in the congress and we've had him all the way through i'm start taking them all in the name of and i would dare say that we do not have any greater percentage of problems along those lines and you've got congress met the regulator at our u s he's a very nice gentleman his name is jim andrews he's a former head of well that's not right either this is a family organization that's not right either he's president of the board of directors and are a few years it's owned by the membership and it's privately owned they made by public power like they do from t v but they are not public power perhaps you can explain that to your members like person alice and representative no one's here do the thing the management part is a very small one it's a very precious one there is a great bond of intimacy between co op members because it's a very important institution in america it's a little bit like a church that's going a little far but word travels fast usually if something's going on and co op country people hear about it i would like to know when you first found out you personally that there were serious problems and  no single member that's going to dictate what our association is governed by our resolutions and what was your largest member he was a large member but no as far as he was the largest distribution co opt in the country he was the largest member from the standpoint he was not the largest do but when did you first find out there were serious problems of personality when i first heard about serious problems whenever i heard about the newspaper articles that were coming out about it when did you first find out there were serious problems  well heard about the controversy at ca because i think that has not been settled by the courts nor by the membership as to whether their disagreement again go back to the point what we're talking about here are policies that were adopted by the board of directors that the membership disagreed with what we talked about with regard to what you and i i think would agree is excessive staying at the ritz carlton so and so forth i don't do that but the point that it comes down to is that was board policy that allowed that that was the that was the direction of the directors they allowed that to happen the accountability comes with regard to those directors with the membership as it should and those are the people that have taken action and those are the people took action alabama and those are the knowledged in this hearing the fact that if you look at the n r e c s real website the secret password protected one they offer a lot of legal or quasar legal advice for example through the electric co op bar association and other entities there are labrat slideshows for example that tell you how to fill out the ninety form and the earlier panel they talk about how in texas what some forty percent of those forms are miss ile out so i think those trade association to the extent it tries to give legal advice should take some responsibility for practices board practices and other practices that may not adhere to the high ethical standards that i think the average co op member back home wants their co op to hear too because these were not ever intended to be average these were supposed to be idealistic organisations that did the most to serve the consumer interest by counsel has advised me that mr cooper is currently under investigation by the federal bureau of investigation board on authorized access and downloading information from a password protected website and that's in i had authorization to use the web site from someone who gave me their password and information the only people that could give you all to myself or  some matters yet to be resolved and we'll continue to pursue it to an urban guy like me is a very interesting and surprising turn of events so  one issue before the committee today is whether congress should change the way pay is calculated in alaska hawaii and the territories the office of personnel management has suggested that switching from the older cost of living  system to a more modern locality pay system could provide more equal treatment between all federal employees one interesting thing about increasing the increasing favor of the use of locality pay as it confirms that market based measurements that respond to private sector changes appear to work to work once again better for citizens than government based just ticks are congressionally mandated across the board page estimates regardless of the market or performance factors this is a lesson that i believe needs to be applied to other parts of government as well i understand that there are some differences between the senate legislation and senate thirt good morning chairman davis and members of the subcommittee thank you for the opportunity to appear before you today to discuss the white paper titled imperfect storm the looming human capital crisis in california which was prepared in july two thousand and six by the greater los angeles and san francisco bay area federal executive board of using this testimony are my own and do not represent the views of the administration the department of homeland security or the federal executive board although she is not testifying today i would like to acknowledge diana louie my counterpart from san francisco in one thousand nine hundred eighty s u v s in new york city in los angeles published reports on the recruitment and retention crisis experienced in those high cost cities these reports captured the attention of policymakers in washington d c and the result was the passage of the federal the creation of locality pay was a major breakthrough but it did not solve the problems identified twenty years ago stories we hear in california's high cost cities are not the reality for the federal worker in most parts of the country it's surprising the federal employees of the g s thirteen an eleven and twelve level qualify for hud section eight rental assistance program about employees who sleep in their cars while they save up to get into an apartment employee's to get their dental work done in mexico and employees who share an apartment based on their shift assignment but the gas price hikes we're seeing an increase in the number of employees who sleep on a coworker sofa or in a camper in a nearby park because they can't afford both rent and the gas to drive to work each day they do all this so they can stay in california because of family obligations or to keep their jobs while they desperately a way to transfer to a lower cost city the key here is that they do their jobs well while they quietly struggle to survive that is dedication the failure of the current locality pay formula to cause to consider cost of living and extremely high housing costs has resulted in tremendous variation in the quality of life for the federal worker in many parts of the country the federal workers adequately compensated however in high cost cities that is not the case i am not an economist or statistician so i cannot tell you why or exactly how the current locality pay for military these inequities i can only testify that it does we learned t are five aspects of the current locality pay system that prevents equity the creation of the rest of us not including cost of living in the formula the composition of the locality pay areas not closing the pay gap and not including the state tax rate based on o p s response we know that they believe that a federal agencies would fully implement the human resource flexibility is available to them to the recruitment retention problems could be eliminated however that does not appear to be the reality in the field  anticipation of today's hearing diane and i conducted a quick e mail survey of our members to assess what has changed in the two years since we conducted our study we had about a seventeen percent response rate we found that most agencies continue to experience the same recruitment  retention challenges and in many cases the situation has worsened many of the nation's most critical infrastructure existing california's high cost cities to protect them in the millions of in these major cities the full compliment of the federal  is needed to keep them safe and secure however there is no incentive within the existing federal pay system for employees to serve in these high cost cities if the locality formula were changed to consider the cost of living it would negate the need to explore other options  ease the financial strain on the federal workforce and high cost cities in the event of this whole cell formula change our report highlighted an alternative even with the current housing market housing is still not affordable for many federal employees at all grade levels in los angeles and san francisco it takes sixty seven to eighty five percent of the average federal employee salary to afford a median priced home d o d has a proven model to reduce the impact of personnel transfers to high cost cities in addition to their base pay active duty personnel are given a basic allowance for housing commensurate with their rank based on the housing cost of their assigned city another factor that creates recruitment retention problems at the other end of the page chart is pay compression the amounts of issue are not trivial for each of the past several years several g s fifteen employees in san francisco and l a have been prevented from receiving thousands of locality dollars in most parts of the united states a federal employee is well compensated and able to live the lifestyle of a typical middle class family it is heart wrenching to see the financial and quality of life sacrifices that federal employees in california's high cost cities must make in order to survive because they have chosen to work for an employer who by statute is unable to compensate them fairly and equitably in comparison to their out of state peers in essence they are penalized for serving in california the public deserves as our survey has clearly confirmed when a current or prospective employee is trying to decide whether to move or to stay in california i guarantee they don't look at cost of labor they look at cost of living the hearing of this title is the title of this hearing is in search of equity an examination of locality pay i applaud the committee for looking into this matter because i can assure you current locality pay system is far from equitable understanding employer cost index is the basis of the cost of labor and they use a national compensation survey to find like positions to compare to the federal sector the intention of septa was to be get within five percent of the non federal sector we have no illusions that we'll ever get to the to be comparable with the private sector nor is that what we see the cost of living is based on the consumer price index which is the actual expenditures that a household must stand in order to survive it includes housing it includes fuel costs and i know in the los angeles area a number of private sector companies actually give their employees every six months a cost of living adjustment and depending on what's going on with the cost of living it either goes up or goes down and is something federal employees are not something those employees feel like they understand when their salary goes down because their expenses of gone down and so it doesn't hurt as badly when the salary is based on cost of living because that's something that we live with every day cost of labor there are so many variables illegal immigration is something that we believe is suppressed the salaries in the california area the size of the locality pay area makes it so that you're comparing salaries and occupations and radically different economies for instance prepared appeared before the federal council twice and asked that they make our locality pay area smaller and even though the federal salary council admitted that if we just looked at the coastal counties that the salaries are almost twenty percent higher in their national salaries compensation survey they've included the two inland counties and one of them is actually one of the lowest cost labor counties in the nation so it dilutes our locality a calculation based on cost of labor cost of living based on that county by county basis would be a lot more realistic a variable housing allowance was one of the best practices that we learned from the department of defense when we did our survey and the reason we proposed it is because there is existing doubt it was something that we thought could be done quickly as a stopgap measure in the absence of something like that if you're talking about a whole cell revamping of the pay system of course we would take the position that we would prefer the cost of living to be considered and if that's not a reality then just implementing a nationwide talking in to my coworkers my colleagues nationwide i couple of them have had me send copies of our survey because they have challenges i know boston is extremely expensive they're having struggles  west florida you know chicago is an expensive town and you know we're just a little ahead of the curve because our expenses have gone up so quickly but i do think that what we're seeing in california is  transparent everybody knows what you and i was calling some of the want ads and you know one of them was actually for a paralegal and i said you know i work for the you know such and such and i was just wondering you know what you charged or what you're paying for this position and  it was amazing how subjective it is in the private sector and there are so many variables depending on where you went to school you know where you live that's a hard number to get you know the bureau of labor statistics they collect information in the national compensation survey and i know that lawyers is one of the positions they look for and acknowledged when you look at the pay gap that in the los angeles area it's about forty four percent so on state somewhere in the like the san joaquin valley where it's cheaper to live they don't have as hard a time recruiting at that facility so even within the state there are some very high cost pocket that you know this is not a problem that you need to the federal government one of the advantages though is that in the private sector they've got all kinds of latitude but within the state of california they do typically pay better than their federal counterparts but they have some of their own internal firefighters with a number of administrative positions that we've looked at particularly with local government and again i think part of that is because california statewide they have sort of the same issue that we have w with the federal perspective you're worried about the national workforce and so a problem we're having in a small you know in a big city in one state is not as pressing and in the state of california they're dealing with the whole state workforce and they don't want to create inequities within the state so in some parts of the country the states absolutely they make more in other parts of the state i don't know that the comparison is that dramatic but i do know that with law enforcement firefighters they can make as much as three times more irvine police department a friend of mine just got her has her son just got out of college and he's a starting police officer absolutely no experience started at seventy five thousand dollars and that's the labor market we're competing with you know i was talking to the sheriff of los angeles county about our recruitment and retention challenges and he said i don't know how you do it we pay so much more and we're having a hard time getting talent and oftentimes at the end of the training that's one of the things they've looked at doing is maybe we need to tell them before they spend the money training and tell them where they're going to go because what's been happening is at the end of their training then they're told they can either go to l a or san francisco we benefit in l a because we're cheaper than san francisco but when you end up with people saying i wanted to get into the federal system i took this job i can't afford to live here so three bodies and i are going to share this apartment and they start immediately trying to transfer out to a low cost city a lower cost city we really are the training ground our problem is really more in the retention area we can keep the people at the end of their career in part because they may have some retirement restrictions for making that harder because that retirement system is more portable and we can give people the beginning of a career because when you're in your twenty's it's ok to share an apartment it's kind of cool living in california and to the point where they're an effect journeyman employee when they've developed all the training and they're actually going to make a significant contribution to the effectiveness of their organization they start thinking about getting married having children buying a house and then they look around that i can't do that here and they flee to lower cost cities and it's that portion in the middle that i would argue is the most essential we're having the hardest time keeping and also in level a number of agencies have because of pay compression have had a hard time getting people to maybe even somewhat overpaid in some parts of the country commensurate with the cost of living you know i personally have family that live in some pretty rural areas and when i say their standard of living and they make considerably less than  shown the number one variable for young people to decide whether they want to come work for the government over the years we've heard you know we want to be the employer of choice and i'm a twenty four year career federal employee and you know you all have taken very good care of us  areas because we can't use our leave because we have an average of an eighteen percent vacancy rate in most of our agencies and that's even excluding two agencies that reported in eighty five percent vacancy the average rate about a lot higher put in those numbers but i did not medals hierarchy of needs but you're not too concerned about those issues when you really are struggling to put a roof over your head and food on your table you're concerned about basic survival you can't think about optimal performance you the department of defense contracts as an organization cauldrons armor in fact runs i am or have the contract for multiple federal agencies that use housing allowances and it's not commonly used by anyone except the department of defense but there are some agencies for national security purposes have a requirement for a certain person to live in a certain city and it's above their grade level and i met with this gentleman from run simer and he was extremely confident in the surveys that they  a city every on the lowest and they give them and they've done it for several years and it solves the retention problems the department of defense is having until the last few years civilian employees active duty active duty and active duty and we have a chart in our report that although the active duty base pay is lower when it supplemented with the housing allowance they consistently make more on page ten of the written statement and  i personally was raised in a military family my father was a tech sergeant we had six kids and my mother never worked and we lived in high cost cities and we lived in low cost cities and our quality of life never changed it really was the great  report was that the rest of us become the new base you know let's not let's stop pretending that that's not the new base that really is the base our base pay with the exception of alaska hawaii in the territories that you guys will be talking about later  make the rest of us the new base and then add a house an allowance for the communities that it's required and what we speculated was based on our research was that there are going to be some cities that are going to need a housing allowance that  already be getting locality pay above the rest of us and there are other cities that might need a housing allowance we had another chart you know the cost of housing the financial planners recommend that you spend about thirty percent of your household income on health cost of housing we took the median price home we took the average employee based on a locality pay and in washington d c it takes thirty eight percent of the g s one step three federal employees to afford the median priced home and these are numbers we got from the  urban development in houston it takes seventeen percent nationwide it takes twenty three percent so if you look at the rest of us category they're right where they're supposed to be according to financial planners they're spending twenty three percent of their income washington d c is spending considerably more than they should houston is spending considerably less san francisco and los angeles we don't even bring home sixty seven or eighty five percent of our income i also found a report by the bureau of labor statistics  two thousand and four in los angeles the average household spent eighteen percent of their income on gas when gas was two dollars and fourteen cents so if you look at r g s nine who are trying to afford housing not just buying a house but even renting and it's taking sixty seven percent of their couple of your subcommittee members are i noticed are on the house armed services committee readiness subcommittee which deals with housing issues for active duty military and because we have been successful that is that that is an analogy that's very that that's very important of course while we can see the distinction between active duty personnel and federal workers we have also argued successfully that that distinction is and blurred not disappeared i was it was my right when i came to congress locality pay was to be instituted i was very much a part of that and  that's what they do just what we promised every year and what we promised every year is ridiculous and the american people wouldn't allow it if if in fact  percent because of the emergency that had been documented in los angeles san francisco and new york with regards to recruitment retention and i never heard of the federal executive board but when everybody in los angeles knows that he's got them locality that's the perception and that's part of why we have all this information because whether we were speaking it or not we were getting this information and at that time it felt pretty good and when you look at eighteen years and we can feel it in our pocketbooks in california i hope that answered your question thank you well thank you very much chairman members of the subcommittee my name is chuck grimes and i'm here today on behalf of linda springer and director of the office of personnel management to discuss how locality pay is determined and recent proposals to extend locality pay in lieu of cost of living allowance to federal employees working on hawaii alaska puerto rico u s virgin islands and other u s territories and possessions over the years the focus of federal pay policy is a fall from simply keeping pace with the overall the labor market to effectively locality pay adjustment to narrow the gap between federal and non power federal salaries locality pay as a single percentage of just money within each locality pay area determined to have a federal nonfederal gap greater than five percent of the federal salary council recommends establishment of particular locality pay areas and the president approved areas there currently are thirty two locality pay areas including a catchall rest of the us or ross the bureau of labor statistics conducts an salary surveys and each locality pay area private sector and state local governments for white collar jobs similar to general schedule jobs on behalf of the president's page o p m staff compare the survey results to g s pay to get a pay gap for each area the president's pa e considers these pay gaps along with recommendations from the federal salary council and submits an annual report of recommendations to the president the president after considering the patient's report establishes locality pay percentages for each area based on the pay gaps however excluded the non federal non foreign areas from locality pay coverage leaving the fifty year old color program in effect the color program was originally designed to address recruitment and retention issues resulting from higher costs of living in the non foreign areas accordingly color rates are based on cost of living differences between each non foreign area in washington d c coal has tangible effects on employees take home pay and retirement annuity for instance some employees like the fact that co payments are not subject to federal income tax on the negative side given that cola payments are allowances they are not considered base pay for retirement purposes there is a growing perception that paying retirement of white collar civilian and federal employees and non foreign areas are gradually eroding in relation to those in the lower forty eight and may two thousand and seven the administration sent a proposal to congress to address these issues we are pleased that senators akaka and away stevens and murkowski have recently introduced s thirty thirteen the non foreign area retirement equity assurance act of two thousand during the phase in period decreases to call it would be limited to eighty five percent of the increase in locality in order to reduce the impact on take home pay have increased deductions for retirement contributions and tax liability s thirty thirteen would reduce the phase out of  and would set that offset of coal at sixty five percent of the increase to locality pay the athame proposal was phased locality pay in over two years with enough offset of seventy five percent in both the administration's proposal and us thirty thirteen the rest of the subject to their differing phase and rates would apply in all areas in the first year phase out while data are collected pay gap started term and recommendations for pay rates made the estimates proposal would implement the full rust rate in the first year and the full rate for hawaii  alaska in the second year we believe that why alaska would be established a separate locality pay areas by the federal salaries council in the president's puerto rico guam and the virgin islands would likely be covered by the russell county pay area we estimate rates for hawaii and alaska would be twenty point three eight percent and twenty seven point six eight percent respectively the current rate for us is thirteen point one eight percent we believe the administration's proposal addresses the issues in a responsible fashion with regard to cost as th thirteen the welcome is a step forward in resolving these issues would cost significantly more due to the shorter phase and period and reduced offset that f e m a proposal would cost even more the time is upon us to extend locality pay to the non foreign areas locality pay provides employees in the non foreign areas a retirement benefit comparable to employees in the continental united states additionally locality pay is increased about one percentage point a year over the last few years unlike cola which has a history of fluctuations with most areas areas currently trending downward mr chairman thank you for the opportunity to discuss this important issue with you today and for your support as we work towards a more market based pay system in our non foreign areas which will benefit both employees and agencies i would be happy to address any questions you may have thank you chairman for the opportunity to appear before this subcommittee to talk about how the forest service applies and other flexibilities to managing and retaining its workforce in talking about this subject to talk about how we apply workforce around a model that involves caring for the land serving people the national forests of america are highly dispersed we have one hundred fifty five national forests and twenty national grasslands and forty four states and in puerto rico we have other major branches of the forest service including a premier research and development branch that's involved in a wide variety of natural resource and related sciences sciences we have a private forestry program that supports non industrial private landowners as well as states and tribal areas we also have something that seldom known the forest service we through the department of labor administer twenty two job corps civilian conservation centers with around areas we have employees in very high cost resort towns and we have employees in areas that might consider to be the end of the earth and i think that geography and wide array of jobs series is one reason that we might be here today to talk about how we apply pay policies and flexibility as we have a variety of recruitment and retention challenges the force in the forest service if you're a graduate  you probably have an aspiration to work for the forest service for many years and once you're in the forest service you'll stay there for your entire career in all likelihood contrast that with contract specialists a very high demand  contract specialists have worked for multiple agencies counseling them and with other agencies and even in even the private sector overall the forest service has a very stable workforce since two thousand and five our rate has been eight workforce specific example that i think is relevant to this hansen's area is the special pay rate authority that we use to recruit and retain employees in targeted occupations where recruitment relocation and retention that allows us to provide incentives in those categories to attract or retain employees in geographic areas that are difficult to get employed in those are areas that are necessarily metropolitan some clear examples of the high cost areas like glenwood springs colorado jackson hole wyoming steamboat springs colorado there we will use  relocation bonus process to try and bring employees into the system i've got a couple of examples in the testimony that i can certainly talk to later should you have questions about that in closing let me just say that generally speaking we in the forest service are able to staff most of our organization effectively i think that's a combination of a reasonable pay rate and mission that we're all very very proud to be part of and that's caring for the land and serving people is one of the reasons i've been the forest service for thirty five years and it's one of the reasons that many of our long term years are there i do acknowledge certainly that there are areas where keeping that tight hold on the mission is offset by some of the challenges of locality costs such as in southern that it's taken a long time to address this problem and they're heartened by the fact that that a bill has been introduced there is a worry and among a number of employees that  workforce adequately adequately if you take firefighters where you have employees who whose roots are in southern california who are committed to a profession in firefighting just candidly  the forest service in terms of compensation would have a hard time competing with the california division of forestry or other local agencies now in southern california where we have employees who see a longer term career a natural resource management of which fire is a part of that and they're more flexible in their duty locations and were able to compete quite effectively in terms of keeping them in the organization we do acknowledge  compensation packages that they receive as part of a firefighting job in southern california is less what they're getting from the competitors so it's a balance between personal preference in terms of your long term value whether you're wedded to california or southern california and you want to fire what you want to natural resource career and those pay into those decisions certainly in our contingent of employees in high resort areas it's also tough it's inflexible when in fact the current system provides numerous flexibility we know these abilities are rarely used because of budget restraints so it's not that the system itself is either inflexible or antiquated it's just underfunded underfunding is also cities and putting washington baltimore new york francisco boston and chicago to name just a few employees in all these cities have difficulty maintaining a decent standard of living and buying even a median price the obvious answer is full funding for but in the absence of that recommends taking on the housing issue head on we recommend pilot programs in counties with median house prices that are at least twenty five percent above the median house price within the locality agency's could experiment with a variety of approaches including programs modeled after the federal teacher next door program that allows public school teachers to purchase homes in california extra credit teacher home purchase program that makes low interest mortgages and reduce down payments available to teachers in addition agency should be able to provide housing allowances equivalent to those provided to the military proposal for a pilot cars for federal employees and cities with prohibitive real estate prices is not a proposal to replace locality housing allowances we strongly oppose efforts to eliminate the guarantee of locality pay for federal employees working in these cities these experiments are necessary supplements to our annual salary adjustments based upon both the c i and locality data not replacement also strongly supports thirty thirteen the not adversely affected during the transition the senate bill also wisely makes the transition to locality pay voluntary for current employees we're pleased that employees who choose to forgo locality pay will be permitted to lock in the two thousand and eight cola rate however there are already approved increases in cola is awaiting the lengthy roll making process in a one b n o p m that might not be finalized in time to meet the deadline described in the legislation we've requested the language be added to allow the lock in to occlude amounts provided in pending increases and non form cole was workers in puerto rico whose call was scheduled to rise from thirteen to fourteen percent by next year at the latest to obtain the higher amount if they choose to remain in the cola system finally the senate bill provides an opportunity for both regular employees and those subject to mandatory retirement ages who become eligible to retire during the transition period to pay into the civil service retirement fund so there are newbies will not be affected by their late entry into the locality pay system they deserve the ability to pay into the system to make themselves whole and they have to be strongly supports the provisions of s thirty thirteen that allow them to do so we're also working with the senate committee to provide two additional protections to the bell the first would guarantee that no non foreign area will ever receive public we should not be able to tell you there are federal law enforcement before dawn to the city in which they work and sleep in their cars to catch up on their sleep before work because they live so far away and cannot afford a house close to the city they work in we should not be able to hire and train people for federal law enforcement that there are federal agents who leave in order to work for a state or local law enforcement agency so they can make a better salary and get better benefits there have been several bills in congress initiated and introduced by representative peter king in the last congress most recent bill h r forty nine  federal law enforcement local agencies because they cannot afford the cost of staying a federal agent it should be noted that some state local police department now recruiting from the rights of federal law enforcement so in included in a scenario that was mentioned earlier where private sector employers cost of living adjustments every six months if they are doing that then numbers would be increasing and it's salary number really a matter of priorities and how you decide to distribute the money in the budget everyone's talked for a long time about the impending retirement of the baby boom and and what it's going to take to recruit the next generation of federal employees and reference has also been made to the fact that people in that civil service retirement system had to have a tremendous incentive to stay with the federal government even though their salaries were far below the market because of the nature of the older federal retirement system for years allows a little more mobility and and i'm not sure that the government's going to be able to get away with paying salaries that are so far below the market  when it's when they try to recruit the next generation and we think that that as president kelly suggested and as we propose in our in our testimony the idea of using these housing allowance ideas to be restrained we're not proposing an equivalent housing allowance for every federal employee employed every single place in the entire united  states we really thought that in places where where median house prices far exceed the median with pay locality housing allowances would be justified and affordable